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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**___________________**FORM 10-QSB**_______________________

**ý                                QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly period endedJune 30, 2007

 

** ̈                                TRANSITION REPORTPURSUANT 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 RegistrantAs 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'sTelephone Number, Including Area Code: (281) 334-9479

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No ** ̈**Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  ̈ No x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.
| Large accelerated    filer  ̈ | Accelerated filer  ̈  | Non-accelerated    filer x |
|----------------------------------|-------------------------------|--------------------------------|

At June 30, 2007,the Registrant had 40,205,400 shares of common stock outstanding.

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

ITEM1. FINANCIAL STATEMENTS Back to Table of Contents

Condensed Consolidated Financial Statements
   Unaudited Condensed Consolidated Balance Sheets - June 30, 2007 and    December 31, 2006 (Audited)7
   Unaudited Condensed Consolidated    Statement of Operations - Three and six months ended June 30, 2007 and 20068
   Unaudited Condensed Consolidated Statement of Cash Flows    - Six months ended June 30, 2007 and 20069
   Notes to    Unaudited Financial Statements
 
**HAMMONDS    INDUSTRIES, INC.**Consolidated Balance SheetsBack to Table of ContentsJune 30, 2007 and    December 31, 2006  **June 30, 2007****December 31, 2006**   (Unaudited)(Restated)(Audited)  
AssetsCurrent assets:
      Cash$205,883$396,505   Trading securities25,490-   Accounts    receivable, net1,339,2721,328,215   Current portion of    notes receivable217,381229,418   Inventories, net1,440,5701,309,612   Prepaid expenses    and other assets84,968118,543        Total current assets3,313,5643,382,293   Long-term notes receivable,    less current portions158,477160,892Property and equipment, net893,813782,032Intangible assets, net5,710,4606,038,870Other assets48,60520,310          Total assets$10,124,919$10,384,397
Liabilities    and Stockholders' Equity (Deficiency)  Current liabilities:   Accounts payable    and accrued expenses$1,466,067$1,333,831   Short-term note    payable95,314276,410   Current    installments of long-term debt25,21817,493        Total current liabilities1,586,5991,627,734  Long-term debt, less current    installments2,721,1692,464,050Due to American International    Industries, Inc.2,099,8271,931,056Deferred tax liability503,200503,200        Total liabilities6,910,7956,526,040  Stockholders' equity    (deficiency):   Preferred stock,    $0.001par value, authorized 5,000,000 shares:    1,666,666    issued and outstanding167167   Additional paid-in    capital - preferred stock1,290,7311,290,731   Additional paid-in    capital - beneficial conversion1,290,8981,290,898   Additional paid-in    capital - warrants1,153,5561,419,222   Common stock,    $0.0001 par value, authorized 195,000,000 shares:        40,205,400 shares issued and outstanding at June 30, 2007, and        36,135,000 shares issued and outstanding at December 31, 20064,0213,614   Additional paid -    in capital5,967,7094,967,778   Accumulated    deficit(6,492,958)(5,114,053)     Total    stockholders' equity (deficit)3,214,1243,858,357        Total liabilities and stockholders' equity (deficit)$10,124,919$10,384,397     See    accompanying notes to consolidated financial statements.**HAMMONDS INDUSTRIES, INC.**Consolidated Statements of OperationsBack to Table of ContentsFor    three and six months ended June 30, 2007 and 2006(Unaudited)  **Three Months****Three Months****Six Months****Six Months****ended****ended****ended****ended****  ****June 30, 2007****June 30, 2006****June 30, 2007****June 30, 2006**    Revenues $2,417,776$1,835,659$4,037,175
$3,160,828Costs and expenses:    Cost of sales 1,867,4481,215,6723,332,6902,256,785   Selling, general    and administrative 968,899778,1921,833,6171,463,395        Total operating expenses 2,836,3471,993,8645,166,3073,720,180   Operating loss(418,571)(158,205)(1,129,132)(559,352)   Other income (expenses):    Interest income 6,1753,66012,4507,440   Interest expense(147,377)(30,347)(248,364)(80,954)   Unrealized loss on    trading securities(33,730)-(74,510)-   Other income    (expense)40-226-     Total    other expenses(174,892)(26,687)(310,198)(73,514)   Net loss before income tax(593,463)(184,892)(1,439,330)(632,866)   Provision for    income tax----Net loss from operations before    minority interest(593,463)(184,892)(1,439,330)(632,866)Net loss(593,463)(184,892)(1,439,330)(632,866)Preferred dividends105,425-60,425-        Net loss applicable to common shareholders $(488,038)$(184,892)$(1,378,905)
$(632,866)  Net loss per    common share - basic$(0.01)$(0.01)$(0.04)$(0.03)   Weighted    average common shares - basic40,093,76520,135,00038,234,93420,135,000     See    accompanying notes to consolidated financial statements**Hammonds Industries, Inc.**Consolidated Statements of Cash FlowsBack to Table of ContentsSix months ended June 30, 2007 and 2006(Unaudited)  **Six Months****Six Months****Ended****Ended****  **
**June 30, 2007**
**June 30, 2006**  Cash flows from operating    activities:    Net loss
$(1,439,330)
$(632,866)   Adjustments    to reconcile net loss to net cash used in operating activities:           Depreciation and amortization of property and equipment79,20371,649          Amortization of intangibles333,250123,258          Unrealized loss on trading securities74,510-          Stock based compensation40,000-          (Increase) decrease of operating assets:             Accounts receivable (11,057)(297,745)             Inventories (130,958)(368,034)             Prepaid expenses and other current assets33,575(44,918)             Other(28,295)625          Increase (decrease) in operating liabilities:             Accounts payable and accrued expenses192,66149,174                Net cash used in operating activities (856,441)(1,098,857)  Cash flows from investing    activities:    Patents and    trademarks(4,840)(25,193)   Purchase of    property and equipment(190,984)(13,738)   Purchase of option    to buy American International Industries, Inc. stock(100,000)-   Notes receivable14,45313,478   Amount due to    American International Industries, Inc.168,771390,446               Net cash provided by (used in) investing activities 
(112,600)
364,993   Cash flows from financing    activities:    Proceeds from    issuance of common stock694,672-   Proceeds from    short-term borrowing-137,974   Proceeds from    long-term borrowing284,551642,969   Principal payment    of short-term borrowings(181,096)-   Principal payments    of long-term borrowings(19,708)-               Net cash provided by financing activities 
778,419
780,943                 Net increase (decrease) in cash (190,622)47,079Cash and cash equivalents at    beginning of year
396,505
61,875Cash and cash    equivalents at end of period
$
205,883
$
108,954   Supplemental schedule of cash    flow information:   Interest paid$248,364$80,954  See accompanying    notes to consolidated financial statements**HAMMONDS INDUSTRIES, INC.Notes to Consolidated Financial StatementsBack to Table of ContentsJune 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 40.6% owned subsidiary of American InternationalIndustries, Inc. 

In 2005, the Company acquired, through its parent company, 51% of thecapital stock of Hammonds Technical Services, Inc. On August 1, 2006, the Company acquiredthe 49% minority interest of Hammonds Technical Services, Inc., Hammonds Fuel Additives,Inc., and Hammonds Water Treatment Systems, Inc. in consideration for the issuance of16,000,000 restricted shares of common stock, valued at a price of $.25 a share, the priceof the common stock at the date of the transaction. As a result of this transaction, theCompany owns 100% of each of the Hammonds subsidiaries. 

On August 8, 2006 the Company entered into a stock purchase agreementwith Vision Opportunity Fund Limited ("VOMF"), an institutional investor,pursuant to which the Company sold 833,333 shares of series A convertible preferred stockfor $1,500,000 and issued a series A warrant exercisable for a period of 5 years topurchase 8,333,333 shares at $0.18 per share and a series B warrant exercisable for 2years to purchase an additional 8,333,333 shares at $0.18 per share. 

On September 29, 2006 the Company entered into a stock purchaseagreement with VOMF pursuant to which the Company sold 833,333 shares of series Bconvertible preferred stock for $1,500,000 and issued a series C warrant exercisable for 5years to purchase 8,333,333 shares at $0.50 per share. 

Each share of series A and series B convertible preferred stock isconvertible at 10 shares of common stock. 

In connection with the agreement of VOMF to exercise up to 4,000,000Series C Warrants in March 2007, the Company reduced the exercise price from $0.50 pershare to $0.18 per share through December 31, 2007, following which the exercise pricereverts to $0.50 per share. On March 27, 2007, VOMF exercised 3,970,400 Series C Warrantsat a price of $0.18 per share with net proceeds of $694,672 to the Company. 
**Principles of Consolidation 

The consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiaries: Hammond Technical Services, Inc., Hammonds FuelAdditives, Inc., and Hammonds Water Treatment Systems, Inc. In accordance with FIN 46(r),American International Industries, Inc., our parent, consolidates Hammonds even though itsownership is less than 51%, because the parent exercises its right to occupy two of thethree board of director seats. Since the Company is incurring losses and there is nominority interest, the parent recognizes 100% of the Company’s losses. Allsignificant intercompany transactions and balances have been eliminated in consolidation. 
**Cash and Cash-Equivalents 

The Company considers cash and cash-equivalents to include cash on handand demand deposits with banks with an original maturity of three months or less. 
**Accounts Receivable 

Accounts receivable consist primarily of trade receivables, net of avaluation allowance for doubtful accounts. 
**Allowance for Doubtful Accounts 

The Company extends credit to customers and other parties in the normalcourse of business. The Company regularly reviews outstanding receivables and provides forestimated losses through an allowance for doubtful accounts. In evaluating the level ofestablished reserves, the Company makes judgments regarding its customers' ability to makerequired payments, economic events and other factors. As the financial condition of theseparties 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 uponspecific usage and future utility. A charge to results of operations is taken when factorsthat would result in a need for a reduction in the valuation, such as excess or obsoleteinventory, are noted. 
**Property, Plant, Equipment, Depreciation, Amortization and Long LivedAssets 

Long-lived assets include: 

Property, Plant and equipment – Assets acquired in the normalcourse of business are recorded at original cost and may be adjusted for any additionalsignificant improvements after purchase. We depreciate the cost evenly over theassets’ estimated useful lives. Upon retirement or sale, the cost of the assetsdisposed of and the related accumulated depreciation are removed from the accounts, withany resultant the Company’s gain or loss being recognized as a component of otherincome or expense. As required by SFAS No. 141, has recorded the acquisition of Hammondsusing the purchase method of accounting with the purchase price allocated to the acquiredassets and liabilities based on their respective estimated fair values at the acquisitiondate. For more information on the acquisition of Hammonds, see note 2. 

Identifiable intangible assets – These assets are recorded atacquisition cost. Intangible assets with finite lives are amortized evenly over theirestimated useful lives. 

At least annually, we review all long-lived assets for impairment. Whennecessary, we record changes for impairments of long-lived assets for the amount by whichthe present value of future cash flows, or some other fair value measure, is less than thecarrying 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 ofthe Hammonds companies are included in the consolidated statements of operations from dateof acquisition. 
**Revenue Recognition 

Revenue is recognized when the earning process is completed, the risksand rewards of ownership have transferred to the customer, which is generally the same dayas 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 orallowances. 
**Income Taxes 

The Company is a taxable entity and recognizes deferred tax assets andliabilities for the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities and theirrespective tax basis. Deferred tax assets and liabilities are measured using enacted taxrates expected to be in effect when the temporary differences reverse. The effect on thedeferred tax assets and liabilities of a change in tax rates is recognized in income inthe year that includes the enactment date of the rate change. A valuation allowance isused to reduce deferred tax assets to the amount that is more likely than not to berealized. 
**Earnings (Loss) Per Share 

The basic net earnings (loss) per common share is computed by dividingthe net earnings (loss) by the weighted average number of shares outstanding during aperiod. Diluted net earnings (loss) per common share is computed by dividing the netearnings (loss), adjusted on an as if converted basis, by the weighted average number ofcommon shares outstanding plus potential dilutive securities. 
**Management's Estimates and Assumptions 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amounts of revenuesand expenses. Actual results could differ from these estimates. 
**Fair Value of Financial Instruments 

The Company estimates the fair value of its financial instruments usingavailable market information and appropriate valuation methodologies. However,considerable judgment is required in interpreting market data to develop the estimates offair value. Accordingly, the Company estimates of fair value are not necessarilyindicative of the amounts that the Company could realize in a current market exchange. Theuse of different market assumption and/or estimation methodologies may have a materialeffect on the estimated fair value amounts. The interest rates payable by the Company onits notes payable approximate market rates. The Company believes that the fair value ofits financial instruments comprising accounts receivable, notes receivable, accountspayable, 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 AccountingPrinciples Board Opinion No. 20, *Accounting Changes*, and SFAS No. 3, *ReportingAccounting Changes in Internal Financial Statements*, and changes the requirements forthe accounting for and reporting of a change in accounting principle. SFAS No. 154requires retrospective application of changes in accounting principle to priorperiods’ financial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS No. 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginning afterDecember 15, 2005. We adopted SFAS No. 154 on January 1, 2006. Any impact on theCompany’s consolidated results of operations and earnings per share will be dependenton the amount of any accounting changes or corrections of errors whenever recognized. 

In 2006 and 2007, the Financial Accounting Standards Board issued thefollowing: 
*- SFAS No. 155 : *Accounting for Certain Hybrid FinancialInstrument - 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 OtherPostretirement Plans - SFAS No. 159: The Fair Value Option for Financial Assets and FinancialLiabilities—Including an amendment of FASB Statement No. 115 - FIN No. 48: Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109*

Management has reviewed these new standards and believes that they haveno impact on the financial statements of the Company at this time; however, they may applyin the future. 
**(2) Acquisition 

On February 28, 2005, the Company acquired 51% of the capital stock ofHammonds Technical Services, Inc., a privately-owned Texas corporation, in considerationfor 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 lineof credit in the amount of $2,000,000; and (iii) the Registrant's parent, AmericanInternational Industries, Inc., issuing 145,000 restricted shares of common stock to theRegistrant 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 minorityequity interests in Hammonds owned by third parties, which minority interests werecanceled. The total purchase price to acquire the 51% in Hammonds was $2,455,700representing cash payments of $825,000, 145,000 shares of the parent’s restrictedcommon stock valued at $1,450,000 and the assumption of a note payable to one of theformer shareholders in the amount of $173,300 and liabilities in excess of assets in theamount of $7,400. Pursuant to the Agreement, which closed on April 28, 2005, Hammondsbecame a majority-owned subsidiary of the Registrant. In 2006, Hammonds Technical Serviceswas separated into three separate entities, Hammonds Technical Services, Inc., HammondsFuel 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"*) manufacturers engineered products and chemicals that serve multiple segments of thefuels distribution, water treatment and utility vehicle industries. Hammonds products aremarketed by a worldwide network of distributors, manufacturers representatives andoriginal equipment manufacturers. On February 28, 2005, Hammond Fuels Additives, Inc. wasmerged into Hammonds Technical Services, Inc. 

As required by SFAS No. 141, the Company has recorded the acquisitionusing the purchase method of accounting with the purchase price allocated to the acquiredassets and liabilities based on their respective estimated fair values at the acquisitiondate. 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
$
-
$
1,435,939
Property and equipment
418,603
408,162
826,765
Patents, trademarks and    contract
173,749
2,550,738
2,724,487
Other non-current assets
70,085
-
70,085
Current 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 104,398shares of American International Industries, Inc. stock for $5.00 per share from a formerHammonds minority shareholder as part of a lawsuit settlement. The Company estimated thefair value of this stock option at June 30, 2007, by using the Black-Scholesoption-pricing model with the following weighted-average assumptions as follows: 
**June 30,    2007Dividend yield
0.00%Expected volatility
26.42%Risk free interest
6.25%Expected life
8 months
As a result, this option has been revalued at $25,490, and theunrealized loss of $74,510 has been recorded in other income (expense) through June 2007. 
**(4) Inventory 

Inventory at June 30, 2007 consisted of the following: 
**June 30, 2007**December 31, 2006
Finished    goods
$
138,235
$
106,000
Work in    process
40,875
40,680
Parts and    materials
1,430,974
1,332,446
1,610,084
1,479,126
Less:    Obsolescence reserve
(169,514)
(169,514)
$
1,440,570
$
1,309,612**(5) Long-term Notes Receivable 

Long-term notes receivable at June 30, 2007 consisted of the following: 
**June    30, 2007**December    31, 2006Sale of former subsidiary, Marald, Inc.,    principal and interest due monthly through June 5, 2012
175,858
190,310Sale of former subsidiary, Marald, Inc.,    principal due October 5, 2007
200,000
200,000Notes receivable
375,858
390,310Less current portion
217,381
229,418Notes receivable, less current portion
$
158,477
$
160,892**(6) Property and Equipment 

A summary of property and equipment and related accumulated depreciationand amortization are as follows: 
**June 30, 2007**December 31, 2006
Machinery and equipment
$
1,054,280
$
894,533
Leasehold improvements
128,033
96,796
Total property and    equipment
1,182,313
991,329
Less: Accumulated    depreciation and amortization
(288,500)
(209,297)
Net property and equipment
$
893,813
$
782,032**(7) Intangible Assets 

Intangible assets at June 30, 2007 consisted of the following:
**As of    June 30, 2007
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Patents
$
4,473,620
$
660,227
12 years
Trademarks
1,149,199
163,493
10 years
Sole Source    Contract
1,144,039
232,678
7 yearsPatents, Trademarks, and Sole    Source Contracts
$
6,766,858
$
1,056,398
11 years
Intangible assets at December 31, 2006 consisted of the following: 
**As of    December 31, 2006
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Patents
$
4,468,780
$
466,154
12 years
Trademarks
1,149,199
106,033
10 years
Sole Source    Contract
1,144,039
150,961
7 yearsPatents, Trademarks, and Sole    Source Contracts
$
6,762,018
$
723,148
11 years
 

Aggregate    Amortization Expense
For year ending December    31, 2007
$
654,906
For year ending December    31, 2008
$
638,979
For year ending December    31, 2009
$
638,979
For year ending December    31, 2010
$
638,979
For year ending December    31, 2011
$
638,979
The Company’s patents, trademarks, and sole source contract for theadditive injection system resulted from the April 28, 2005 acquisition of 51% of HammondsTechnical Services and from the August 1, 2006 acquisition of the 49% minority interest ofthe Hammonds Companies. 

The following table contains a summary of the intangible assets acquiredfrom the acquisition of Hammonds Technical Services on April 28, 2005: 
**As of    June 30, 2007
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Patents
$
1,806,387
$
455,546
12 years
Trademarks
465,199
100,793
10 years
Sole Source    Contract
464,039
143,631
7 yearsPatents, Trademarks, and Sole    Source Contracts
$
2,735,625
$
699,970
11 years
On August 1, 2006, the Company acquired the 49% minority interest ofHammonds Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds WaterTreatment Systems, Inc. in consideration for the issuance of 16,000,000 restricted sharesof common stock at a price of $0.25 a share. The additional cost of $4,000,000 has beenallocated to patents, trademarks, and sole source contract for the additive injectionsystem and is being amortized in a manner equivalent to the amortization used on theintangible assets acquired in the initial purchase of 51% of the company. Additionally,the Company acquired patents totaling $26,393 in 2006 and 4,840 during in 2007. Thefollowing table contains a summary of the intangible assets acquired in 2006 and 2007: 
**As of    June 30, 2007
Gross Carrying Amount
Accumulated Amortization
Average Weighted Lives
Patents
$
2,667,233
$
204,681
12 years
Trademarks
684,000
62,700
10 years
Sole Source    Contract
680,000
89,047
7 yearsPatents, Trademarks, and Sole    Source Contracts
$
4,031,233
$
356,428
11 years
 **(8) Short-term Notes Payable To Banks**
**June    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
$
90,459
Note payable to former    owner of equity interest in Hammonds payable on July 20, 2005 with accrued interest at    prime plus 4%
-
173,300
Other notes with various    terms
4,855
12,651
$
95,314
$
276,410**(9) Long-term Debt 

Long-term debt consisted of the following: 

 
**June 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
$
1,992,189  
Note payable to    a bank, due in monthly installments of interest only at prime plus 1%, with a principal    balance due on August 26, 2008
400,000
400,000  Note payable to a bank, 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 subsidiary234,306-  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
40,184  
Note payable to    a bank, due in monthly installments of principal and interest of $2,119.65 through April    3, 2011
79,708
89,354
2,746,387
2,481,543
Less current    portion
(25,218)
(17,493)
$
2,721,169
$
2,464,050
Principal repayment provisions of long-term debt are as follows at June30, 2007: 

2007
$
25,218
2008
2,448,289
2009
61,559
2010
67,5292011
56,812
2012
86,980
Total
$
2,746,387**(10) Preferred Stock 

The Company entered into preferred stock agreements with VOMF, describedbelow, with the strategic objectives to raise working capital funds, bring in outsideinvestors, and provide liquidity for the Company’s common shares.

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

Each share of Series A and Series B Preferred Stock is convertible intoten shares of the Company's common stock. The Company received net proceeds ofapproximately $2,710,120 from the sale of Series A and Series B Preferred Stock and willreceive gross proceeds of $5,180,466 if all of the Series A and B Warrants and theremaining 4,362,922 Series C Warrants are exercised by VOMF. 

American International Industries’ ownership interest in theCompany will decrease if and when VOMF converts its Series A and Series B PreferredStock and/or exercises warrants issued in the VOMF August and September 2006 privatefinancing transactions into shares of common stock. 

The Company reviewed the following accounting standards to determine theappropriate accounting for these issuances:

- SFAS No. 133: *Accounting for Derivative Instruments and HedgingActivities- SFAS No. 150: *Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity*- EITF 00-19: *Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*- EITF 98-5: *Accounting for Convertible Securities with Beneficial ConversionFeatures 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 issuancesshould be classified as equity, because the only way for the value of the conversionfeature and the fair value of the warrants to be realized is through the issuance ofshares. The Company has sufficient authorized and unissued shares available to settle thecontracts after considering all other commitments that may require the issuance of stock.

The proceeds for these issuances are required to beallocated based on the relative fair values of the securities issued. We valued thewarrants 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 theclosing stock price over the prior year.

The Black-Scholes model assumes an active trading marketfor the underlying security. It does not price in the impact of potential large trades fora thinly traded stock. Since the Company’s common stock is thinly traded, realizationof the resulting fair value of the warrants that this model yields is unlikely, due to thelarge number of shares involved. Other financial models would yield different values, butare less accessible and costly to produce.

The proceeds from the preferred share issuances havebeen 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
$387,499.34
Warrants A    – Aug. 8, 2006
$0.18 / 5 years
$1,139,517.82
$317,924.97
Warrants B    – Aug. 8, 2006
$0.18 / 1 year
$ 709,497.05
$197,949.36
Totals
$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
$176,643.37
Warrants A    – Aug. 23, 2006
$0.18    / 5 years
$1,076,403.58
$155,568.71
Warrants B    – Aug. 23, 2006
$0.18    / 1 year
$ 826,663.96
$119,474.75
Totals
$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
$ 726,755.40
Warrants 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
$ 532,487.52
Warrants C    – Sept. 30, 2006
$0.50 / 5 years
$2,557,476.70
$ 557,598.02
Totals
$6,215,114.71
$1,355,060.50
As part of the Preferred B issuance, the Warrants B withan expiration term of 1 year, which were issued with the Preferred A stock, were cancelledand Warrants B with an expiration term of 2 years were issued. The Company accounted forthe change in expiration terms as part of the Preferred B issuance because we regard theconsideration given for this issuance to include the change in expiration terms.

The Company has determined that a beneficial conversionfeature exists. Based on our review of the "Emerging Issues Task Force" EITF98-5, Accounting for Convertible Securities with Beneficial Conversion Features orContingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No. 98-5to Certain Convertible Instruments, the amount of proceeds allocated to the Series A andSeries B Convertible Preferred Stock should be assigned to the embedded conversion featurewith a corresponding amount recorded as a "deemed dividend" to the preferredshareholders. This is based on paragraph 6 of EITF 98-5, which states that "thediscount assigned to the beneficial conversion feature is limited to the amount of theproceeds allocated to the convertible instrument."

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

Preferred A    – August 8, 2006
$    387,499.34
Preferred A    – August 23, 2006
$    176,643.37
Preferred B    – September 30, 2006
$ 726,755.40
Total deemed    dividend
$1,290,898.11
In connection with the agreement of VOMF to exercise upto 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 exerciseprice reverts to $0.50 per share. On March 27, 2007, VOMF exercised 3,970,400 Series CWarrants 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 thewarrants immediately before and after the modification. As a result of this comparison, wehave calculated a fair value reduction of $193,559.56 for this modification. Since noadditional value was given to the holders of these warrants, no expense has beenrecognized 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 valuationsfor the warrants

**Exercise    Price / Term**
**Fair    Value***************************************************************************** |