**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


___________________




**FORM
      10-QSB**


_______________________




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




For
      the
      quarterly period ended September 30, 2007




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




For
      the
      transition period from
              
to




Commission
      file number 0-50912






**HAMMONDS
      INDUSTRIES, INC.**






(Exact
      Name Of Registrant As Specified In Its Charter)




Nevada
            88-0225318(State
                of Incorporation)
            (I.R.S.
                Employer Identification No.)601
                Cien Street, Suite 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
      September 30, 2007, the Registrant had 42,605,400 shares of common stock
      outstanding.












**TABLE
      OF CONTENTS**




**Item**
            ****
            **Description**
            ****
            **Page****PART
                I - FINANCIAL INFORMATION**ITEM
                1.
            
            FINANCIAL
                STATEMENTS.
            
            3ITEM
                2.
            
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
                OPERATION.
            
            22ITEM
                3.
            
            CONTROLS
                AND
                PROCEDURES.
            
            25**PART
                II - OTHER INFORMATION**ITEM
                1.
            
            LEGAL
                PROCEEDINGS.
            
            26ITEM
                2.
            
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            
            26ITEM
                3.
            
            DEFAULT
                UPON
                SENIOR SECURITIES.
            
            26ITEM
                4.
            
            SUBMISSION
                OF MATERS TO A VOTE OF SECURITY
                HOLDERS.
            
            26ITEM
                5.
            
            OTHER
                INFORMATION.
            
            26ITEM
                6.
            
            EXHIBITS
                AND
                REPORTS ON FORM 8-K.
            
            27
















**PART
      I - FINANCIAL INFORMATION**






ITEM
      1. FINANCIAL STATEMENTS


Condensed
                Consolidated Financial StatementsUnaudited
                Condensed Consolidated Balance Sheets - September 30, 2007 and December
                31, 2006 (Audited)Unaudited
                Condensed Consolidated Statement of
                Operations - Three and nine months ended September 30, 2007 and
                2006Unaudited
                Condensed Consolidated Statement of Cash Flows - Nine months ended
                September 30, 2007 and 2006Notes
                to
                Unaudited Financial Statements













**HAMMONDS
                INDUSTRIES,
                INC.**Consolidated
                Balance
                SheetsSeptember
                30, 2007 and December 31, 2006





**September
                30, 2007**
            
            
            **December
                31, 2006**(Unaudited)
            
            
            (Restated)(Audited)AssetsCurrent
                assets:Cash
            
            $
            1,339,047
            
            
            $
            396,505Trading securities
            
            
            143,916
            
            
            
            -Accounts
                receivable, net
            
            
            1,699,307
            
            
            
            1,328,215Current portion of notes receivable
            
            
            -
            
            
            
            229,418Inventories, net
            
            
            1,737,376
            
            
            
            1,309,612Prepaid expenses and other assets
            
            
            97,200
            
            
            
            118,543Total current assets
            
            
            5,016,846
            
            
            
            3,382,293Long-term
                notes receivable, less current portions
            
            
            -
            
            
            
            160,892Property
                and equipment, net
            
            
            961,409
            
            
            
            782,032Intangible
                assets, net
            
            
            5,584,219
            
            
            
            6,038,870Other
                assets
            
            
            55,397
            
            
            
            20,310Total assets
            
            $
            11,617,871
            
            
            $
            10,384,397Liabilities
                and Stockholders' Equity (Deficiency)Current
                liabilities:Accounts payable and accrued expenses
            
            $
            1,432,009
            
            
            $
            1,333,831Short-term note payable
            
            
            92,887
            
            
            
            276,410Current installments of long-term debt
            
            
            13,220
            
            
            
            17,493Total current liabilities
            
            
            1,538,116
            
            
            
            1,627,734Long-term
                debt, less current installments
            
            
            2,721,953
            
            
            
            2,464,050Due
                to American International Industries, Inc.
            
            
            1,591,563
            
            
            
            1,931,056Deferred
                tax liability
            
            
            503,200
            
            
            
            503,200Total liabilities
            
            
            6,354,832
            
            
            
            6,526,040Stockholders'
                equity (deficiency):Preferred stock, $0.001par value, authorized 5,000,000
                shares:3,769,626
                issued and outstanding at September 30, 2007, and1,666,666 issued and outstanding at December 31, 2006
            
            
            377
            
            
            
            167Additional paid-in capital - preferred stock
            
            
            4,811,573
            
            
            
            1,290,731Additional paid-in capital - beneficial conversion
            
            
            3,272,060
            
            
            
            1,290,898Additional paid-in capital - warrants
            
            
            -
            
            
            
            1,419,222Common stock, $0.0001 par value, authorized 195,000,000
                shares:42,605,400
                shares issued and outstanding at September 30, 2007, and36,135,000 shares issued and outstanding at December 31,
                2006
            
            
            4,261
            
            
            
            3,614Additional paid - in capital
            
            
            6,480,969
            
            
            
            4,967,778Accumulated deficit
            
            
            (9,306,201
            )
            
            
            (5,114,053
            )Total stockholders' equity
            
            
            5,263,039
            
            
            
            3,858,357Total liabilities and stockholders' equity
            
            $
            11,617,871
            
            
            $
            10,384,397See
                accompanying notes to consolidated financial statements.


Back
          to Table of Contents


**HAMMONDS
                INDUSTRIES,
                INC.**Consolidated
                Statements of
                OperationsFor
                three and nine months ended September 30, 2007 and 2006(Unaudited)





**Three
                Months**
            
            
            **Three
                Months**
            
            
            **Nine
                Months**
            
            
            **Nine
                Months****ended**
            
            
            **ended**
            
            
            **ended**
            
            
            **ended******
            
            **September
                30, 2007**
            
            
            **September
                30, 2006**
            
            
            **September
                30, 2007**
            
            
            **September
                30, 2006**(restated)
            
            
            
            
            
            (restated)Revenues
            
            $
            3,083,286
            
            
            $
            1,527,863
            
            
            $
            7,120,461
            
            
            $
            4,688,692Costs
                and expenses:Cost of sales
            
            
            2,075,445
            
            
            
            1,321,205
            
            
            
            5,402,135
            
            
            
            3,577,990Selling, general and administrative
            
            
            1,427,085
            
            
            
            952,917
            
            
            
            3,266,702
            
            
            
            2,416,312Total operating expenses
            
            
            3,502,530
            
            
            
            2,274,122
            
            
            
            8,668,837
            
            
            
            5,994,302Operating
                loss
            
            
            (419,244
            )
            
            
            (746,259
            )
            
            
            (1,548,376
            )
            
            
            (1,305,610
            )Other
                income (expenses):Finance expense for issuance of preferred stock
            
            
            (386,334
            )
            
            
            -
            
            
            
            (386,334
            )
            
            
            -Interest income
            
            
            4,001
            
            
            
            3,764
            
            
            
            16,452
            
            
            
            11,204Interest expense
            
            
            (103,904
            )
            
            
            (307,088
            )
            
            
            (352,267
            )
            
            
            (388,042
            )Unrealized gain on trading securities
            
            
            118,427
            
            
            
            -
            
            
            
            43,916
            
            
            
            -Other income (expense)
            
            
            (27
            )
            
            
            124,094
            
            
            
            198
            
            
            
            124,094Total other expenses
            
            
            (367,837
            )
            
            
            (179,230
            )
            
            
            (678,035
            )
            
            
            (252,744
            )Net
                loss before income tax
            
            
            (787,081
            )
            
            
            (925,489
            )
            
            
            (2,226,411
            )
            
            
            (1,558,354
            )Provision for income tax
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -Net
                loss from operations before minority interest
            
            
            (787,081
            )
            
            
            (925,489
            )
            
            
            (2,226,411
            
            
            
            (1,558,354
            )Net
                loss
            
            
            (787,081
            )
            
            
            (925,489
            )
            
            
            (2,226,411
            )
            
            
            (1,558,354
            )Preferred
              dividendsRegular dividend
            
            
            (45,000
            )
            
            
            (20,000
            )
            
            
            15,425
            
            
            
            (20,000
            )Deemed dividend
            
            
            (1,981,162
            )
            
            
            (1,290,898
            )
            
            
            (1,981,162
            )
            
            
            (1,290,898
            )Net loss applicable to common shareholders
            
            $
            (2,813,243
            )
            
            $
            (2,236,387
            )
            
            $
            (4,192,148
            )
            
            $
            (2,869,252
            )Net
                loss per common share - basic
            
            $
            (0.07
            )
            
            $
            (0.07
            )
            
            $
            (0.11
            )
            
            $
            (0.12
            )Weighted
                average common shares - basic
            
            
            41,189,639
            
            
            
            30,743,696
            
            
            
            39,230,659
            
            
            
            23,710,092See
                accompanying notes to consolidated financial statements


Back
          to Table of Contents


**HAMMONDS
                INDUSTRIES, INC.**Consolidated
                Statements of Cash
                FlowsNine
                months ended September 30, 2007 and 2006(Unaudited)





**Nine
                Months**
            
            
            **Nine
                Months****Ended**
            
            
            **Ended******
            
            **September
                30, 2007**
            
            
            **September
                30, 2006**(restated)Cash
                flows from operating activities:Net loss
            
            $
            (2,226,411
            )
            
            $
            (1,558,354
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation and amortization of property and equipment
            
            
            123,821
            
            
            
            76,031Amortization of intangibles
            
            
            495,369
            
            
            
            307,469Unrealized gain on trading securities
            
            
            (43,916
            )
            
            
            -Stock based compensation
            
            
            448,500
            
            
            
            -Finance expense for issuance of preferred stock
            
            
            386,334
            
            
            
            -Management fee paid to American International Industries, Inc. with
                common stock
            
            
            105,000
            
            
            
            -Miscellaneous write off
            
            
            -
            
            
            
            (22,684
            )(Increase) decrease of operating assets:Accounts receivable
            
            
            (371,093
            )
            
            
            (403,298
            )Inventories
            
            
            (427,764
            )
            
            
            (539,813
            )Prepaid expenses and other current assets
            
            
            21,344
            
            
            
            (56,740
            )Other
            
            
            (35,087
            )
            
            
            17,795Increase (decrease) in operating liabilities:Accounts payable and accrued expenses
            
            
            113,602
            
            
            
            (9,997
            )Net cash used in operating activities
            
            
            (1,410,301
            )
            
            
            (2,189,591
            )Cash
                flows from investing activities:Costs of securing patents and trademarks
            
            
            (40,718
            )
            
            
            (25,193
            )Purchase of property and equipment
            
            
            (303,198
            )
            
            
            (20,203
            )Purchase of option to buy American International Industries, Inc.
                stock
            
            
            (100,000
            )
            
            
            -Notes receivable
            
            
            19,383
            
            
            
            20,395Amount due to American International Industries, Inc.
            
            
            31,435
            
            
            
            552,111Net cash provided by (used in) investing activities
            
            
            (393,098
            )
            
            
            527,110Cash
                flows from financing activities:Proceeds from issuance of common stock
            
            
            694,672
            
            
            
            -Proceeds from issuance of preferred stock
            
            
            1,981,162
            
            
            
            2,727,746Proceeds from short-term borrowing
            
            
            1,000,000
            
            
            
            16,315Proceeds from long-term borrowing
            
            
            284,551
            
            
            
            995,915Principal payment of short-term borrowings
            
            
            (1,183,523
            )
            
            
            (22,198
            )Principal payments of long-term borrowings
            
            
            (30,921
            )
            
            
            (1,739
            )Net borrowings under line of credit
            
            
            -
            
            
            
            110Net cash provided by financing activities
            
            
            2,745,941
            
            
            
            3,716,149Net increase (decrease) in cash
            
            
            942,542
            
            
            
            2,053,668Cash
                and cash equivalents at beginning of year
            
            
            396,505
            
            
            
            61,875Cash
                and cash equivalents at end of period
            
            $
            1,339,047
            
            
            $
            2,115,543Supplemental
                schedule of cash flow information:Interest paid
            
            $
            352,267
            
            
            $
            388,042Transfer of notes receivable to pay long-term note due to American
              International Industries, Inc.
            
            $
            370,927
            
            
            $Issuance of note payable for office equipment
            
            $
            -
            
            
            $
            4,855See
                accompanying notes to consolidated financial statements


Back
          to Table of Contents


**HAMMONDS
      INDUSTRIES, INC.**


Notes
      to
      Consolidated Financial Statements


September
      30, 2007






**(1)
      Summary of Significant Accounting Policies**




**Organization,
      Ownership and Business**




Hammonds
      Industries, Inc., f/k/a International American Technologies, Inc. (the
      "Company"), is a 39.5% owned subsidiary of American International
      Industries, Inc.




In
      2005,
      the Company acquired, through its parent company, 51% of the capital stock
      of
      Hammonds Technical Services, Inc. See Note 2 “Acquisition” below. 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.




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 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.




Each
      share of Series A and Series B convertible preferred stock is convertible into
      10 shares of common stock.




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 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.




**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
      exercises its right to occupy three of the four board of director seats. Since
      the Company is incurring losses and there is no minority interest, the parent
      recognizes 100% of the Company’s losses. All significant intercompany
      transactions and balances have been eliminated in consolidation.


Back
          to Table of Contents


**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 resultant the Company’s gain or loss being recognized as a component of
      other income or expense. As required by SFAS No. 141, has recorded the
      acquisition of Hammonds using the purchase method of accounting with the
      purchase price allocated to the acquired assets and liabilities based on their
      respective estimated fair values at the acquisition date. For more information
      on the acquisition of Hammonds, see note 2.




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




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




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




**Revenue
      Recognition**




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


Back
          to Table of Contents


**Income
      Taxes**




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




**Earnings
      (Loss) Per Share**




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




**Management's
      Estimates and Assumptions**




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




**Fair
      Value of Financial Instruments**




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




**New
        Standards Implemented**




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




In
      2006
      and 2007, the Financial Accounting Standards Board issued the
      following:


*-
      SFAS No. 155*: *Accounting for Certain Hybrid Financial
      Instrument*


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


*-
      SFAS No. 157: Fair Value Measurements*


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


*-
      SFAS No. 159: The Fair Value Option for Financial Assets and Financial
      Liabilities—Including an amendment of FASB Statement No. 115*


*-
      FIN
      No. 48: Accounting for Uncertainty in Income Taxes—an interpretation of FASB
      Statement No. 109*




Back
          to Table of Contents


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


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




**(3)
      Trading Securities**




In
      February 2007, the Company paid $100,000 for an option to buy 104,398 shares
      of
      American International Industries, Inc. stock for $5.00 per share from a former
      Hammonds' minority shareholder as part of a lawsuit settlement. American
      International Industries, Inc. paid a 20% dividend to its shareholders on
      September 19, 2007.  The terms of this option were adjusted to reflect
      the dividend, resulting in the option to buy 125,278 shares for $4.17 per
      share.  The Company estimated the fair value of this stock option at
      September 30, 2007, by using the Black-Scholes option-pricing model with the
      following weighted-average assumptions as follows:




**September
                30, 2007**Dividend
                yield
            
            
            0.00
            %Expected
                volatility
            
            
            39.49
            %Risk
                free interest
            
            
            6.25
            %Expected
                life
            
            5
                months




Back
          to Table of Contents


As
      a
      result, this option has been revalued at $143,916, and the unrealized gain
      of
      $43,916 has been recorded in other income (expense) through September
      2007.


**(4)
        Inventory**




Inventory
      at September 30, 2007 consisted of the following:




**September
                30, 2007**
            
            
            **December
                31, 2006**Finished
                goods
            
            $
            154,584
            
            
            $
            106,000Work
                in process
            
            
            430,165
            
            
            
            40,680Parts
                and materials
            
            
            1,322,141
            
            
            
            1,332,4461,906,890
            
            
            
            1,479,126Less:
                Obsolescence reserve
            
            
            (169,514
            )
            
            
            (169,514
            )$
            1,737,376
            
            
            $
            1,309,612






**(5)
      Long-term Notes Receivable**




Long-term
      notes receivable at September 30, 2007 consisted of the following:




**September
                30, 2007**
            
            
            **December
                31, 2006**Sale
                of former subsidiary, Marald, Inc., principal and interest due monthly
                through June 5, 2012
            
            $
            -
            
            
            $
            190,310Sale
                of former subsidiary, Marald, Inc., principal due October 5,
                2007
            
            
            -
            
            
            
            200,000Notes
                receivable
            
            
            -
            
            
            
            390,310Less
                current portion
            
            
            -
            
            
            
            229,418Notes
                receivable, less current portion
            
            $
            -
            
            
            $
            160,892




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




**(6)
      Property and Equipment**




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




**September
                30, 2007**
            
            
            **December
                31, 2006**Machinery
                and equipment
            
            $
            1,138,496
            
            
            $
            894,533Leasehold
                improvements
            
            
            156,031
            
            
            
            96,796Total
                property and equipment
            
            
            1,294,527
            
            
            
            991,329Less:
                Accumulated depreciation and amortization
            
            
            (333,118
            )
            
            
            (209,297
            )Net
                property and equipment
            
            $
            961,409
            
            
            $
            782,032




Back
          to Table of Contents


**(7)
        Intangible Assets**




Intangible
      assets at September 30, 2007 consisted of the following:




**As
                of September 30, 2007**Gross
                Carrying Amount
            
            
            Accumulated
                Amortization
            
            Average
                Weighted LivesPatents
            
            $
            4,509,498
            
            
            $
            752,757
            
            12
                yearsTrademarks
            
            
            1,149,199
            
            
            
            192,223
            
            10
                yearsSole
                Source Contract
            
            
            1,144,039
            
            
            
            273,537
            
            7
                yearsPatents,
                Trademarks, and Sole Source Contracts
            
            $
            6,802,736
            
            
            $
            1,218,517
            
            11
                years




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




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






**Aggregate
                Amortization Expense:**For
                year ending December 31, 2007
            
            $
            656,983For
                year ending December 31, 2008
            
            $
            642,567For
                year ending December 31, 2009
            
            $
            642,567For
                year ending December 31, 2010
            
            $
            642,567For
                year ending December 31, 2011
            
            $
            642,567




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 September 30, 2007**Gross
                Carrying Amount
            
            
            Accumulated
                Amortization
            
            Average
                Weighted LivesPatents
            
            $
            1,806,387
            
            
            $
            492,170
            
            12
                yearsTrademarks
            
            
            465,199
            
            
            
            112,423
            
            10
                yearsSole
                Source Contract
            
            
            464,039
            
            
            
            160,204
            
            7
                yearsPatents,
                Trademarks, and Sole Source Contracts
            
            $
            2,735,625
            
            
            $
            764,797
            
            11
                years




Back
          to Table of Contents


On
        August
        1, 2006, the Company acquired the 49% minority interest of Hammonds Technical
        Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
        Systems, Inc. owned by Carl Hammonds, in consideration for the issuance of
        16,000,000 restricted shares of common stock at a price of $0.25 a share.
        The
        additional cost of $4,000,000 has been allocated to patents, trademarks,
        and
        sole source contract for the additive injection system and is being amortized
        in
        a manner equivalent to the amortization used on the intangible assets acquired
        in the initial purchase of 51% of Hammonds. Additionally, the Company incurred
        costs related to the securing of additional patents totaling $26,393 in 2006
        and
        $40,718 during 2007. The following table contains a summary of the intangible
        assets acquired in 2006 and 2007:




**As
                of September 30, 2007**Gross
                Carrying Amount
            
            
            Accumulated
                Amortization
            
            Average
                Weighted LivesPatents
            
            $
            2,703,111
            
            
            $
            260,587
            
            12
                yearsTrademarks
            
            
            684,000
            
            
            
            79,800
            
            10
                yearsSole
                Source Contract
            
            
            680,000
            
            
            
            113,333
            
            7
                yearsPatents,
                Trademarks, and Sole Source Contracts
            
            $
            4,067,111
            
            
            $
            453,720
            
            11
                years




**(8)
      Short-term Notes Payable To Banks**




**September
                30, 2007**
            
            
            **December
                31, 2006**Note
                payable with interest at 10.75%, interest payments due quarterly,
                with a
                principal balance due on December 10, 2007
            
            $
            90,459
            
            
            $
            90,459Note
                payable to former owner of equity interest in Hammonds payable on
                July 20,
                2005 with accrued interest at prime plus 4%
            
            
            -
            
            
            
            173,300Other
                notes with various terms
            
            
            4,855
            
            
            
            12,651$
            95,314
            
            
            $
            276,410




**(9)
      Long-term Debt**




**September
                30, 2007**
            
            
            **December
                31, 2006**Note
                payable to a bank, interest due monthly at prime plus 1%, principal
                payment due August 26, 2008, secured by assets of the Company's
                subsidiary
            
            $
            1,992,189
            
            
            $
            1,992,189Note
                payable to a bank, due in monthly installments of interest only at
                prime
                plus 1%, with a principal balance due on August 26, 2008
            
            
            400,000
            
            
            
            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
            
            
            227,630
            
            
            
            -Note
                payable to a bank, with interest at 8.25%, due in monthly installments
                of
                principal and interest of $842.44 through April 7, 2012, secured
                by assets
                of the Company’s subsidiary
            
            
            38,473
            
            
            
            -Note
                payable to a bank, due in monthly installments of principal and interest
                of $2,119.65 through April 3, 2011
            
            
            76,881
            
            
            
            89,3542,735,173
            
            
            
            2,481,543Less
                current portion
            
            
            (13,220
            )
            
            
            (17,493
            )$
            2,721,953
            
            
            $
            2,464,050


Back
          to Table of Contents


Principal
        repayment provisions of long-term debt are as follows at September 30,
        2007:




2007
            
            $
            13,2202008
            
            
            2,448,2172009
            
            
            61,4812010
            
            
            67,4442011
            
            
            56,9082012
            
            
            87,903Total
            
            $
            2,735,173




**(10)
      Preferred Stock**




In
        August
        and September 2006, the Company sold to VOMF 833,333 shares of Series A
        Preferred Stock and 833,333 shares of Series B Preferred Stock, respectively
        (the “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 August 2006 Private Financing Transaction 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.
 
 American
        International Industries’ ownership interest in the Company was 51% prior to the
        Private Financing Transactions with VOMF, which interest decreased  to
        39.5% after VOMF’s exercise of all of the Series A, B and C
        Warrants,  The ownership interest will decrease further if and
        when VOMF converts its 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 and the fair value
      of the warrants to be realized is through the issuance of shares. The Company
      has sufficient authorized and unissued shares available to settle the contracts
      after considering all other commitments that may require the issuance of
      stock.


Back
          to Table of Contents


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




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




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




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




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




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




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




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




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


Back
          to Table of Contents


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




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




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




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




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




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




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




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




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




Back
          to Table of Contents


The
        Company has determined that a beneficial conversion feature exists for the
        issuance of the Convertible Preferred C Stock, because the fair value of
        the
        issuance exceeded the proceeds by $10.6 million, based on a market price
        of
        $0.60 vs. the exercise price of $0.10 per share. Based on our review of EITF
        98-5, Accounting for Convertible Securities with Beneficial Conversion Features
        or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application
        of
        Issue No. 98-5 to Certain Convertible Instruments, the amount of proceeds
        received for the Series C Convertible Preferred Stock should be assigned
        to the
        embedded conversion feature with a corresponding amount recorded as a "deemed
        dividend" to the preferred shareholders. This is based on paragraph 6 of
        EITF
        98-5, which states that "the discount assigned to the beneficial conversion
        feature is limited to the amount of the proceeds allocated to the convertible
        instrument."  We allocated the proceeds of $1,981,162 to the embedded
        conversion feature and recorded a deemed dividend to the preferred
        shareholders.


The
        modification of the exercise price to $0.10 per share for the Warrants requires
        a comparison of the fair values of the warrants immediately before and after
        the
        modification. As a result of this comparison, we have calculated a fair value
        increase of $386,334 for this modification. Since additional value was given
        to
        the holders of these warrants, $386,334 has been recognized and recorded
        as
        finance expense in accordance with SFAS No. 123R, Share-Based
        Payment.
  We
        valued
        the warrants using the Black-Scholes model, using the following
        assumptions:
  **Stock
                  Price on Date of Reduction**
              
              
              **Volatility**
              
              
              **Risk-Free
                  Interest Rate**Warrants
                  A, B, & C – September 20, 2007
              
              $
              0.60
              
              
              
              106.18
              %
              
              
              6.25
              %
  The
        Black-Scholes model yielded the following valuations for the
        warrants
  **Exercise
                  Price / Term**
              
              **Fair
                  Value**Warrants
                  A, B, & C – September 20, 2007
              $0.10
                  / 0.03 years
              
              $
              10,518,678Warrants
                  A, B, & C – September 20, 2007
              Original
                  Terms
              
              
              10,132,344Fair
                  value reduction
              
              
              $
              386,334


**(11)
      Concentration of Credit Risk**




Financial
      instruments that potentially subject the Companies to credit risk are primarily
      accounts receivable – trade and notes receivable. The Company grants credit to
      customers throughout the United States. Generally, the Companies do not require
      collateral or other security to support customer receivables. During the nine
      months ended September 30, 2007, Hammonds Water Treatment Systems (HWT) and
      Hammonds Technical Services (HTS) each had one customer that represented
      more than 10% of total sales.




Customer
                A
            HWT
            
            
            25
            %Customer
                B
            HTS
            
            
            20
            %




**(12)
      Income Taxes**




The
      following table sets forth a reconciliation of the statutory federal income
      tax
      for the quarters and nine months ended September 30, 2006 and September 30,
      2007.




**Three
                months ended**
            
            
            **Nine
                months ended****September
                30, 2007**
            
            
            **September
                30, 2006**
            
            
            **September
                30, 2007**
            
            
            **September
                30, 2006**Loss
                before taxes
            
            $
            (787,081
            )
            
            $
            (925,489
            
            
            $
            (2,226,411
            )
            
            $
            (1,558,354
            )Income
                tax benefit computed at statutory rate
            
            $
            (267,608
            )
            
            $
            (314,666
            
            
            $
            (756,980
            )
            
            $
            (529,840
            )Increase
                in valuation allowance
            
            
            267,608
            
            
            
            314,666
            
            
            
            756,980
            
            
            
            529,840Tax
                benefit
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -


Back
          to Table of Contents


Deferred
      Income Taxes




The
      tax
      effects of the temporary differences between financial statement income and
      taxable income are recognized as deferred tax asset and liability as of
      September 30, 2007 is set below.




**September
                30, 2007**Deferred
                tax assets:Net
                operating loss - current period
            
            $
            1,981,506Total
                deferred tax asset
            
            
            1,981,506Valuation
                allowance
            
            
            (1,981,506
            )Net
                deferred asset
            
            $
            -








**September
                30, 2007**Deferred
                tax liability:Fixed
                asset temporary difference
            
            $
            138,775Intangible
                asset temporary difference
            
            
            364,425Net
                deferred tax liability
            
            $
            503,200




The
      Company's parent has various net operating loss carryforwards in excess of
      $9,300,000
      which expire from 2024 to 2025. The loss is limited under Internal
      Revenue Code Section 382.




**(13)
      Segment Information**




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




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




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




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




Back
          to Table of Contents


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




**Three
                months ended September 30,**
            
            
            **Nine
                months ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Hammonds
                Technical Services
            
            $
            1,962,312
            
            
            $
            591,696
            
            
            $
            3,938,724
            
            
            $
            2,343,592Hammonds
                Fuel Additives
            
            
            281,292
            
            
            
            316,778
            
            
            
            824,714
            
            
            
            916,141Hammonds
                Water Treatment
            
            
            839,682
            
            
            
            619,389
            
            
            
            2,357,023
            
            
            
            1,428,959$
            3,083,286
            
            
            $
            1,527,863
            
            
            $
            7,120,461
            
            
            $
            4,688,692Cost
                of Sales:Hammonds
                Technical Services
            
            $
            1,139,776
            
            
            $
            526,772
            
            
            $
            2,741,522
            
            
            $
            1,674,986Hammonds
                Fuel Additives
            
            
            179,080
            
            
            
            213,795
            
            
            
            519,008
            
            
            
            597,258Hammonds
                Water Treatment
            
            
            756,589
            
            
            
            580,638
            
            
            
            2,141,605
            
            
            
            1,305,746$
            2,075,445
            
            
            $
            1,321,205
            
            
            $
            5,402,135
            
            
            $
            3,577,990Income
                (Loss) from operations:Hammonds
                Technical Services
            
            $
            8,275
            
            
            $
            (610,953
            )
            
            $
            (1,103,253
            )
            
            $
            (1,250,844
            )Hammonds
                Fuel Additives
            
            
            43,229
            
            
            
            (61,136
            )
            
            
            107,177
            
            
            
            (47,311
            )Hammonds
                Water Treatment
            
            
            38,807
            
            
            
            (7,481
            )
            
            
            88,228
            
            
            
            76,780Corporate
            
            
            (509,555
            )
            
            
            (66,689
            )
            
            
            (640,528
            )
            
            
            (84,235
            )$
            (419,244
            )
            
            $
            (746,259
            )
            
            $
            (1,548,376
            )
            
            $
            (1,305,610
            )Identifiable
                assets:Hammonds
                Technical Services
            
            
            
            
            
            
            
            
            
            $
            9,735,099
            
            
            $
            5,044,077Hammonds
                Fuel Additives
            
            
            
            
            
            
            
            
            
            
            300,464
            
            
            
            422,287Hammonds
                Water Treatment
            
            
            
            
            
            
            
            
            
            
            560,901
            
            
            
            733,352Corporate
            
            
            
            
            
            
            
            
            
            
            1,021,407
            
            
            
            6,232,130$
            11,617,871
            
            
            $
            12,431,846




**(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,**
            
            **Amount**2007
            
            $
            420,0002008
            
            
            420,0002009
            
            
            420,0002010
            
            
            420,0002011
            
            
            420,000Thereafter
            
            
            2,100,000$
            4,200,000




Back
          to Table of Contents


**(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 September 30, 2007, the Company
      owed
      the parent $1,591,563. On August 24, 2007, the Company issued 1,850,000
      shares of restricted stock valued at $388,500 in bonuses to the officers and
      key
      employees of the Company, and 500,000 shares of restricted stock to American
      International Industries, Inc. valued at $105,000 as a management
      fee.




**(16)
      Subsequent Events**




On October
      15, 2007, the Company issued 7,142,857
      shares of restricted common stock at $0.14 per share to its parent for the
      conversion of a $1,000,000 promissory note.  After this transaction,
      American International Industries, Inc. ownership of Hammonds' common
      stock increased to 56.2% from 39.5% at September 30,
      2007.




**(17)
        Restatement**
 
 In
        response to a letter from the SEC in connection with the review of the Company’s
        Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
        reexamined the treatment of the valuation of the preferred stock issued by
        Hammonds.  As a result of our reexamination and the analysis of
        professional literature related to this very technical and complicated issue
        as
        explained in note 10 above, we have restated the financial statements as
        of
        September 30, 2006 and December 31, 2006. Because of the complexity of the
        issue, our letter response to the SEC, including the restatement, has been
        submitted to the SEC. Upon receipt from the SEC of its acceptance of the
        restatements, the Company will file an amended 10KSB for the year ended December
        31, 2006.  The differences are summarized below:
 
 **Three
                  Months Ended September 30, 2006****As
                  previously reported**
              
              
              **Restatement
                  adjustments**
              
              
              **As
                  restated**Net
                  loss applicable to common shareholders
              
              $
              (945,489
              )
              
              $
              (1,290,898
              )
              
              $
              (2,236,387
              )Deemed
                  dividend
              
              $
              -
              
              
              $
              (1,290,898
              )
              
              $
              (1,290,898
              )Net
                  loss per share applicable to common shareholders – Basic and
                  diluted
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              (0.07
              )
 
 **Nine
                  Months Ended September 30, 2006****As
                  previously reported**
              
              
              **Restatement
                  adjustments**
              
              
              **As
                  restated**Net
                  loss applicable to common shareholders
              
              $
              (1,578,354
              )
              
              $
              (1,290,898
              )
              
              $
              (2,869,252
              )Deemed
                  dividend
              
              $
              -
              
              
              $
              (1,290,898
              )
              
              $
              (1,290,898
              )Net
                  loss per share applicable to common shareholders – Basic and
                  diluted
              
              $
              (0.07
              )
              
              $
              (0.05
              )
              
              $
              (0.12
              )
 
 **December
                  31, 2006****As
                  previously reported**
              
              
              **Restatement
                  adjustments**
              
              
              **As
                  restated**Additional
                  paid-in capital - preferred stock
              
              $
              -
              
              
              $
              1,290,731
              
              
              $
              1,290,731Additional
                  paid-in capital - beneficial conversion
              
              $
              -
              
              
              $
              1,290,898
              
              
              $
              1,290,898Additional
                  paid-in capital - warrants
              
              $
              -
              
              
              $
              1,419,222
              
              
              $
              1,419,222Additional
                  paid-in capital
              
              $
              7,677,731
              
              
              $
              (2,709,953
              )
              
              $
              4,967,778Accumulated
                  deficit
              
              $
              (3,823,155
              )
              
              $
              (1,290,898
              )
              
              $
              (5,114,053
              )


Back
          to Table of Contents


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




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




Organization,
      Principal Activities and Basis of Presentation




Hammonds
        Industries, Inc., formerly International American Technologies, Inc., a Nevada
        corporation, is publicly traded under the symbol "HMDI" on the NASD Bulletin
        Board, an NASD-sponsored and operated inter-dealer automated quotation system
        for equity securities not included on The NASDAQ Stock Market. The Company
        was
        incorporated on August 18, 1986 and is a 39.5% owned subsidiary of its
        parent, American International Industries, Inc., publicly traded under the
        symbol "AMIN" on the NASDAQ Capital Market. The Company is consolidated with
        its
        parent, American International Industries, Inc. because the parent exercises
        the
        right to elect three of the four members of the Company’s board of directors and
        because the parent controls the Company’s financing.
  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)
        the
        Company's parent, 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 145,000 restricted shares were exchanged
        for two minority equity interests in Hammonds owned by third parties, which
        minority interests were canceled. Pursuant to the February 2005 Agreement,
        which
        closed on April 28, 2005, Hammonds became a majority-owned subsidiary of
        the
        Company. 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.
  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. from Carl L. Hammonds, Hammonds' founder and CEO, in consideration
        for the issuance of 16,000,000 restricted shares of the Company’s common stock
        based upon a value of $0.25 per share. The additional cost of $4,000,000
        has
        been allocated to patents, trademarks, and Hammonds’ sole source contract for
        its 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.
  In
        August
        2006, the Company entered into a Series A Convertible Preferred Stock Purchase
        Agreement with Vision Opportunity Fund Limited, an institutional investor
        ("VOMF"), pursuant to which the Company sold to VOMF 833,333 shares of a
        newly
        authorized Series A Convertible Preferred Stock for consideration of
        $1,500,000 or $1.80 per share, and issued 8,333,333 Series A and 8,333,333
        Series B Warrants, both exercisable to purchase the Company’s common stock at
        $0.18 per share. In September 2006 the Company sold to VOMF 833,333 shares
        of
        Series B Convertible Preferred Stock for
        consideration of $1,500,000 or $1.80 per shareand issued VOMF 8,333,333
        Series C Warrants exercisable at $0.50 per share. Each share of Series A
        and
        Series B Convertible Preferred Stock is convertible into ten shares of the
        Company’s common stock. See "Liquidity and Capital Resources" below regarding
        VOMF’s exercise of 3,970,400 Series C Warrants in March 2007 and VOMF’s exercise
        of the remaining 21,029,599 Series A, B and C Warrants in September
        2007.
 Back
            to Table of Contents
 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 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 underlying the Warrants. 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 and   for
        which the Company received net proceeds of $981,162 and VOMF cancelled a
        short-term promissory note in the amount of $1,000,000, representing a loan
        made
        by VOMF to the Company on August 17, 2007.





The
      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, 2006. 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 10QSB 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
      and Nine Months Ended September 30, 2007 Compared to Three and Nine Months
      Ended
      September 30, 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 and nine months ended September 30, 2007 and 2006.




*Revenues*.
      Hammonds’ generated revenues for the three months ended September 30, 2007 of
      $3,083,286, compared to $1,527,863 for the three months ended September 30,
      2006, representing an increase of $1,555,423, or 102%. Revenues for the
      nine months ended September 30, 2007 were $7,120,461, compared to $4,688,692
      for
      the same period in 2006, representing an increase of $2,431,769, or 52%. The
      increase was due to higher demand for Hammonds Water Treatment products and
      increased sales of Hammonds Technical Services’ transport mounted injection
      systems. Hammonds projected backlog of orders at September 30, 2007 is $4.8
      million, compared to a backlog of orders of $5.0 million at September 30,
      2006.




*Cost
      of Sales.*Cost of sales for the three months ended September 30, 2007 was
      $2,075,445, compared to $1,321,205 for the same period of the prior year. Cost
      of sales for the nine months ended September 30, 2007 was $5,402,135, compared
      to $3,577,990 for the same period of the prior year. We expect our cost of
      sales
      to increase in the future to the extent that our revenues increase.




*Selling
      and Administrative.*Selling and administrative expenses increased to
      $1,427,085 for the three months ended September 30, 2007, from $952,917 for
      the
      three months ended September 30, 2006. Selling and administrative expenses
      were
      $3,266,702 for the nine months ended September 30, 2007, compared to $2,416,312
      for the nine months ended September 30, 2006. The increase was primarily due
      to
      increased sales and marketing expenses associated with Hammonds’ new line of
      omni direction utility vehicles (ODVs), the on-going sales and marketing efforts
      associated with all of its product lines, and the increase in amortization
      costs
      of the patents and trademarks.




*Loss
      from Operations.*Loss from operations, excluding interest expense and other
      income (expense), for the three month period ended September 30, 2007, was
      $419,244 compared to a loss of $746,259 for the same period in the prior year.
      Loss from operations, excluding interest expense and other income (expense),
      for
      the nine months ended September 30, 2007, was $1,548,376 compared to a loss
      of
      $1,305,610 for the nine months ended September 30, 2006.




*Other
      Income (Expense).*Other expense increased to $367,837 for the three month
      period ended September 30, 2007, from $179,230 for the three month period ended
      September 30, 2006. Other expense increased to $678,035 for the nine month
      period ended September 30, 2007, from $252,744 for the nine month period ended
      September 30, 2006. The increase was primarily due to added interest expense
      due
      to the increase in the size of working capital loans and finance expense for
      the
      issuance of preferred stock (See note 10).


Back
          to Table of Contents


*Net
      Income (Loss).*Net Loss decreased to $787,081 for the three month period
      ended September 30, 2007, compared to a net loss of $925,489 for the three
      month
      period ended September 30, 2006. Net Loss increased to $2,226,411 for the nine
      month period ended September 30, 2007, compared to a net loss of $1,558,354
      for
      the nine month period ended September 30, 2006. The increase in net loss for
      the
      nine-month period ended September 30, 2007 is primarily attributable to costs
      associated with Hammonds’ introduction of its new line of ODVs.





Hammonds
      recently purchased capital equipment, including a CNC controlled plasma steel
      cutting system, a state-of-the-art painting facility, multiple material handling
      cranes throughout the production area, an automated production saw and a new
      mill for the machine shop. In addition, Hammonds installed new compressed air
      systems, new production flow testing stands, hydrostatic test stations, and
      expanded plant lighting and power distribution to support additional welding
      and
      assembly stations.  The cost of the new equipment, machinery and systems
      was $40,670 and $109,847 during the three and nine-month periods ended September
      2007. The Company expects that the new machinery will significantly
      increase production capability and efficiency. In addition, Hammonds is
      implementing manufacturing and cost saving procedures in order to improve
      productivity.




**Liquidity
      and Capital Resources**




At
      September 30, 2007 and December 31, 2006, we had total assets of $11,617,871
      and
      $10,384,397, respectively. We had current liabilities at September 30, 2007
      and
      December 31, 2006 of $1,538,116 and $1,627,734, respectively. We had positive
      working capital of $3,478,730 at September 30, 2007, compared to $1,754,559
      at
      December 31, 2006.




Net
        cash
        used in operations was $1,410,301 during the nine months ended September
        30,
        2007, compared to $2,189,591 for the same period of the prior year. The cash
        used was derived primarily from the net loss of $2,226,411, offset by
        depreciation and amortization of $619,190, stock- based
        compensation of $448,500, finance expense associated with the issuance and
        sale of Series A, B and C Convertible Preferred Stock of $386,334, and a
        management fee paid in restricted shares of common stock to the Company's
        parent
        of $105,000.  Accounts receivable and inventories decreased by $371,093 and
        427,764, respectively and accounts payable declined by $113,602.
 
 The
        Company entered into Stock Purchase Agreements with VOMF with the strategic
        objectives of:  raising working capital for Hammonds’ production
        lines, increase production capacity to meet increasing orders, developing
        relationships with institutional investors, and providing liquidity for the
        Company.


Net
      cash
      used in investing activities was $393,098 during the nine month period ended
      September 30, 2007, compared to cash provided of $527,110 for the same period
      of
      the prior year. The cash used was for purchases of property and equipment of
      $303,198 and an option to buy American International Industries, Inc. stock
      for
      $100,000 as part of a lawsuit settlement.




During
      the nine-month period ended September 30, 2007, we generated net cash from
      financing activities of $2,745,941 compared to net cash provided from financing
      activities of $3,716,149 during the nine-month period ended September 30, 2006.
      The net cash provided by financing activities was primarily due to proceeds
      of
$1,981,162
      from the issuance of 2,102,960 shares of Series C Convertible Preferred Stock
      in
      connection with the exercise by VOMF of all outstanding Series A, B and C
      Warrants in September 2007, net
      proceeds of $694,672 from the issuance of 3,970,400 shares of common stock
      upon the exercise by VOMF of Series C Warrants in March 2007, and proceeds
      from borrowings of $1,284,551, offset by payments on debt of
      $1,183,523.




We
        believe that the net proceeds from our August and September 2006 private
        financing transactions, including the March and September 2007 exercise of
        Warrants, together with positive cash flow from operations, funding provided
        under our bank line-of-credit and funding available from our parent, will
        provide us with adequate funding to execute our planned expansion of our
        manufacturing capacity and our sales and marketing efforts to meet increasing
        orders in each of Hammonds' product lines. We believe that we have sufficient
        cash to implement our growth plan.
  On
        July
        25, 2007, the Company and VOMF entered into an agreement pursuant to which
        VOMF waived the cash dividends accrued on the Series A and B Convertible
        Preferred Stock through September 30, 2007, totaling $150,425. This adjustment
        is recorded in the September 30, 2007 financial statements presented in this
        report. Additionally, VOMF agreed that future accrued dividends may be paid,
        at
        the Company’s option, in cash or in restricted shares of the Company’s common
        stock. See note 10 to the Consolidated Financial Statements for additional
        information on the formula to be used in determining the number of shares
        of common stock that may be issued in the event that the Company elects to
        pay
        dividends by the issuance of common stock.


Back
          to Table of Contents


ITEM
      3. CONTROLS AND
      PROCEDURES




*Evaluation
      of disclosure controls and procedures*. As of September 30, 2007, the
      Company's chief executive officer and chief financial officer conducted an
      evaluation regarding the effectiveness of the Company's disclosure controls
      and
      procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act.
      Based upon the evaluation of these controls and procedures, our chief executive
      officer and chief financial officer concluded that our disclosure controls
      and
      procedures were effective as of the end of the period covered by this
      report.




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




Back
          to Table of Contents


**PART
      II - OTHER INFORMATION**




ITEM
      1. LEGAL
      PROCEEDINGS




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






ITEM
      2. UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




On
        June
        1, 2007, the Company issued 100,000 shares of restricted stock valued at
        $40,000
        as a bonus to Sherry L. Couturier, the Company’s new Chief Financial
        Officer. On July 20, 2007, the Company issued 50,000 shares of restricted
        stock
        to John W. Stump III valued at $20,000 as a director's bonus.  On August
        24, 2007, the Company issued 1,850,000 shares of restricted stock valued
        at
        $388,500 in bonuses to the officers and key employees of the Company, and
        500,000 shares of restricted stock to American International Industries,
        Inc.
        valued at $105,000 as a management fee.
 
 On
        September 21, 2007, in connection with the exercise by VOMF of the remaining
        Series A, B and C Warrants, the Company issued 2,102,960 shares of newly
        designated Series C Convertible Preferred Stock to VOMF in lieu of 21,029,599
        shares of common stock underlying the Series A, B and C Warrants. The Company
        received net proceeds of $981,162 and VOMF cancelled a short-term promissory
        note in the amount of $1,000,000, representing a loan made by VOMF to the
        Company on August 17, 2007.
  On October
          15, 2007, the Company issued 7,142,857
          shares of restricted common stock at $0.14 per share to its parent for the
          conversion of a $1,000,000 promissory note.  After this transaction,
          American International Industries, Inc. ownership of Hammonds' common
          stock increased to 56.2% from 39.5% at September 30,
          2007.
 
 The
        Company believes that the issuances of these restricted shares was exempt
        from
        registration pursuant to Section 4(2) of the Act as privately negotiated,
        isolated, non-recurring transactions not involving any public solicitation.
        Appropriate restrictive legends are affixed to the stock certificates issued
        in
        such transactions.


ITEM
      3. DEFAULTS UPON SENIOR SECURITIES




None.






ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS




None.






ITEM
      5. OTHER INFORMATION




None.






Back
          to Table of Contents


ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K




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




**Exhibit
                No.**
            **Description**31.1
            Certification
                of 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 the following  Forms 8-K: on  August 1, 2007 with
        disclosure under Item 5.02 "Departure of Director or Principal Officers;
        Election of Director; Appointment of Principal Officers", Item 8.01 “Other
        Events” and Item 9.01 "Financial Statements and Exhibits"; on
        September  9, 2007, Item 2.03 “Creation of a Direct Financial
        Obligation on an Obligation under an Off-Balance Sheet Arrangement of a
        Registrant” and Item 9.01 “Financial Statements and Exhibits”; and on September
        26, 2007, Item 3.02, “Unregistered Sales of Equity Securities”, Item 8.01,
“Other Events” and Item 9.01, “Financial Statements and
        Exhibits”.


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: 
      November 7, 2007






/s/
      Sherry L. Couturier


CFO


Dated:  November
      7, 2007