UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549


___________________




FORM
10-QSB/A


_______________________




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




For the
quarterly period ended March 31, 2007




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




For the
transition period from
              
to




Commission
file number 0-50912






HAMMONDS
INDUSTRIES, INC.




(Exact
Name Of Registrant As Specified In Its Charter)




Nevada
            88-0225318(State
      of Incorporation)
            (I.R.S.
      Employer Identification No.)601 Cien Street, Suite 235, Kemah,
      TX
            77565-3077(Address
      of Principal Executive Offices)
            (ZIP
      Code)




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






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




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




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




Large
      accelerated filer  ̈
            Accelerated filer ̈
            Non-accelerated
      filer x




At March
31, 2007, the Registrant had 40,105,400 shares of common stock
outstanding.





EXPLANATORY NOTE




In
response to a letter from the SEC in connection with the review of the Company’s
Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
reexamined the treatment of the valuation of the preferred stock issued by
Hammonds.  As a result of our reexamination and the analysis of
professional literature related to this very technical and complex issue, we
have restated the financial statements for the year ended December 31, 2006 and
for the quarter ended March 31, 2007.








TABLEOF CONTENTS




Item
            
            Description
            
            PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
            
            FINANCIAL
      STATEMENTS.
            
            
            3ITEM
      2.
            
            MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
      AND RESULTS OF OPERATION.
            
            
            3ITEM
      3.
            
            CONTROLS AND
      PROCEDURES.
            
            
            5PART
      II - OTHER INFORMATIONITEM
      1.
            
            LEGAL
      PROCEEDINGS.
            
            
            6ITEM
      2.
            
            CHANGES IN
    SECURITIES.
            
            
            6ITEM
      3.
            
            DEFAULT UPON
      SENIOR SECURITIES.
            
            
            6ITEM
      4.
            
            SUBMISSION OF MATERS
      TO A VOTE OF SECURITY HOLDERS.
            
            
            6ITEM
      5.
            
            OTHER
      INFORMATION.
            
            
            6ITEM
      6.
            
            EXHIBITS AND REPORTS ON FORM
      8-K.
            
            
            6
















PART
I - FINANCIAL INFORMATION






ITEM1. FINANCIAL STATEMENTS Back
to Table of Contents






The
Registrant's financial statements for the three-month periods ended March 31,
2007 and 2006 are attached to this quarterly report.






Financial
Statements






ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATION Back to
Table of Contents






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 40.7% owned subsidiary of its parent,
American International Industries, Inc., also publicly traded under the symbol
"AMIN" on the NASD Bulletin Board. the Company is consolidated with its parent,
American International Industries, because its parent exercises the right to
elect two of the three 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
Registrant's parent, American International Industries, Inc., issuing 145,000
restricted shares of common stock to the Registrant in consideration for a
$1,450,000 promissory note. These restricted shares were exchanged for two
minority equity interests in Hammonds owned by third parties, which minority
interests were canceled. Pursuant to the Agreement, which closed 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.






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 ("Series A Preferred Stock") for
consideration of $1,500,000 or $1.80 per share, and issued 8,333,333 Series A
and Series B Warrants exercisable at $0.18 per share. In September 2006 the
Company sold to VOMF 833,333 shares of series B convertible preferred stock
("Series B Preferred Stock") for the same consideration and issued 8,333,333
Series C Warrants exercisable at $0.50 per share. Each share of Series A and
Series B Preferred Stock is convertible into ten shares of the Company’s common
stock. See "Liquidity and Capital Resources" below regarding VOMF’s exercise of
Series C Warrants in March 2007.






Revenues
and expenses of Hammonds are included in the Company’s consolidated statements
of operations from May 1, 2005 through the period ended March 31, 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
Months Ended March 31, 2007 Compared to Three Months Ended March 31,
2006.






The
following is derived from, and should be read in conjunction with, our unaudited
condensed consolidated financial statements, and related notes, as of and for
the three months ended March 31, 2007 and 2006.






Revenues. Hammonds revenues
for the three months ended March 31, 2007 were $1,619,399, compared to
$1,325,169 for the three months ended March 31, 2006, representing an increase
of $294,230. The increase in revenues was due to an increase in revenues from
Hammonds Water Treatment by $367,871, or 126%, as a result of increased demand
for its water treatment products. In addition, during the three month period
ended March 31, 2007, Hammonds projected backlog of orders has increased to
approximately $8,000,000, representing a substantial increase from
2006.






Cost of Sales. Cost of
sales for the three months ended March 31, 2007 was $1,465,241, compared to
$1,041,113 for the same period of the prior year. The increase was primarily
associated with the increased revenues for Hammonds Water
Treatment.






Selling and Administrative.
Selling and administrative expenses increased to $864,719 for the three months
ended March 31, 2007, from $653,303 for the three months ended March 31, 2006.
The increase was primarily due to increased sales and marketing expenses
associated 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. Our
loss from operations, excluding interest expense and income, for the three month
period ended March 31, 2007, was $710,561 compared to a loss of $369,247 for the
same period of the prior year.






Other Income (Expense). Other
expense increased to $135,306 for the three month period ended March 31, 2007,
from $78,727 for the three month period ended March 31, 2006. The increase was
primarily due to added interest expense due to the increase in the size of
working capital loans.






Net Income (Loss). Net Loss
increased to $845,867 for the three month period ended March 31, 2007, compared
to a net loss of $447,974 for the three month period ended March 31, 2006. The
increase in net loss is primarily attributable to costs associated with
Hammonds’ introduction of its new line of ODVs.






Hammonds
recently purchased $240,000 in 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 to tools, Hammonds
installed new compressed air systems and expanded plant lighting and power
distribution to support additional welding and assembly stations. New production
flow testing stands and hydrostatic test stations will be installed by the end
of May 2007 and, when operational, the new equipment will significantly increase
production capability and efficiency. In addition, Hammonds is implementing
manufacturing and cost saving procedures in order to generate increased revenues
with greater cost efficiencies.






Liquidity and Capital
Resources






At March
31, 2007 and December 31, 2006, we had total assets of $10,482,882 and
$10,384,397, respectively. We had current liabilities at March 31, 2007 and
December 31, 2006 of $1,611,035 and $1,627,734, respectively. Our accumulated
deficit at March 31, 2007 and December 31, 2006 was $4,714,022 and $3,823,155,
respectively. We had positive working capital of $1,952,038 at March 31, 2007,
compared to $1,754,559 at December 31, 2006.






Net cash
used in operations was $493,912 during the three months ended March 31, 2007,
compared to $447,267 for the same period of the prior year. The cash used was
derived primarily from the net loss of $845,867 and an increase in inventories
of $272,344, offset by a decrease in accounts receivable of $271,574, an
increase in accounts payable of $98,196, depreciation and amortization of
$204,176, and an unrealized loss on trading securities of $40,781.






Net cash
used in investing activities was $87,396 during the three month period ended
March 31, 2007, compared to cash provided of $571,581 for the same period of the
prior year. The cash used was from an increase of $90,271 in amounts due to our
parent, American International Industries, Inc., offset by purchases of an
option to buy American International Industries, Inc. stock for $100,000 as part
of a lawsuit settlement, property and equipment of $79,991, and patents and
trademarks of $4,840.






At March
31, 2007, we had net cash provided from financing activities of $755,884
compared to net cash used in financing activities of $149,906 at March 31, 2006.
The net cash provided by financing activities was mainly due to net proceeds
from issuance of 3,970,400 shares of common stock upon the exercise by VOMF of
Series C Warrants at an exercise price of $0.18 per share resulting in gross
proceeds of $714,672 and net proceeds of $694,672, and proceeds from long-term
borrowings of $243,247, offset by payments on debt of $182,035.






We
believe that the net proceeds from our August and September 2006 private
financing transactions, including the March 2007 exercise of Series C Warrants,
together with anticipated positive cash flow from operations starting in
mid-2007, funding provided under our bank line-of-credit and funding available
from our parent, that we will have adequate funding to execute our planned
expansion of our manufacturing capacity and our sales and marketing efforts to
meet our increasing orders in each of Hammonds' product lines. We believe that
we have sufficient cash to implement our growth plan. The Company plans to use
funds, if any, generated from the exercise of Series A, C or C Warrants for our
working capital.






ITEM3. CONTROLS AND PROCEDURES Back to
Table of Contents






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


In
response to a letter from the SEC in connection with the review of the Company’s
Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
reexamined the treatment of the valuation of the preferred stock issued by
Hammonds.  As a result of our reexamination and the analysis of
professional literature related to this very technical and complex issue, we
have restated the financial statements for the year ended December 31, 2006 and
for the quarter ended March 31, 2007.
  The
Company’s Chief Executive Officer and Chief Financial Officer have reassessed
our disclosure controls and procedures for the quarter ended March 31,
2007.  Based on the reassessment, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures were therefore not, as of March 31, 2007, effective to provide
reasonable assurance that the information required to be disclosed by us in
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that information required to be disclosed by
us in the reports we file or submit under the Securities Exchange Act of 1934,
as amended, is accumulated and communicated to our management, including our
principal executive and financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.




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






PART
II - OTHER INFORMATION






ITEM1. LEGAL PROCEEDINGS Back to
Table of Contents






During
the first quarter of 2007, the Company settled two lawsuits with two former
minority shareholders of Hammonds as follows: (i) the payment of $300,000 to one
shareholder in payment of $200,000 principal and interest on a note payable and
$100,000 for an option to purchase from such person a total of 104,398 shares of
common stock of American International Industries, the parent, at $5.00 per
share; and (ii) the other shareholder returned 8,800 shares of the parent’s
common stock. 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.






ITEM2. CHANGES IN SECURITIES Back to
Table of Contents






In
connection with VOMF’s agreement to exercise of 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, the Company issued 3,970,400 restricted shares to
VOMF upon its exercise of Series C Warrants at a price of $0.18 per share. The
net proceeds of $694,672 were used for working capital.






ITEM3. DEFAULTS UPON SENIOR SECURITIES Back to Table of Contents






None.






ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Back to Table of Contents






None.






ITEM5. OTHER INFORMATION Back to Table of Contents






None.






ITEM6. EXHIBITS AND REPORTS ON FORM 8-K Back to Table of Contents






(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.
            Description31.1
            Certification
      of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 200231.2
            Certification
      of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 200232.1
            Certification
      of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of
    200232.2
            Certification
      of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002




(b)
Reports on Form 8-K During the Period Covered by this Report: None






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:
March 18, 2008






/s/ Sherry L.
Couturier


CFO


Dated:
March 18, 2008












FinancialStatementsBack to Table of Contents




Condensed
      Consolidated Financial StatementsUnaudited Condensed
      Consolidated Balance Sheets - March 31, 2007 and December 31, 2006
      (Audited)
            9Unaudited Condensed
      Consolidated Statement of Operations - Three months ended March 31, 2007
      and 2006
            10Unaudited Condensed
      Consolidated Statement of Cash Flows - Three months ended March 31, 2007
      and 2006
            11Notes to Unaudited
      Financial Statements
            12





HAMMONDS
      INDUSTRIES, INC.ConsolidatedBalance Sheets Back to
      Table of ContentsMarch
      31, 2007 and December 31, 2006March
      31, 2007
            
            
            December
      31, 2006(Restated)
            
            
            (Restated)(Audited)AssetsCurrent
      assets:Cash
            
            $
            571,081
            
            
            $
            396,505Trading securities
            
            
            59,219
            
            
            
            -Accounts
      receivable, net
            
            
            1,056,641
            
            
            
            1,328,215Current portion of notes receivable
            
            
            222,255
            
            
            
            229,418Inventories, net
            
            
            1,581,956
            
            
            
            1,309,612Prepaid expenses and other assets
            
            
            71,921
            
            
            
            118,543Total current assets
            
            
            3,563,073
            
            
            
            3,382,293Long-term
      notes receivable, less current portions
            
            
            160,892
            
            
            
            160,892Property
      and equipment, net
            
            
            824,452
            
            
            
            782,032Intangible
      assets, net
            
            
            5,877,105
            
            
            
            6,038,870Other
      assets
            
            
            57,360
            
            
            
            20,310Total assets
            
            $
            10,482,882
            
            
            $
            10,384,397Liabilities and Stockholders' Equity
      (Deficiency)Current
      liabilities:Accounts payable and accrued expenses
            
            $
            1,477,027
            
            
            $
            1,333,831Short-term note payable
            
            
            100,512
            
            
            
            276,410Current installments of long-term debt
            
            
            33,496
            
            
            
            17,493Total current liabilities
            
            
            1,611,035
            
            
            
            1,627,734Long-term
      debt, less current installments
            
            
            2,685,158
            
            
            
            2,464,050Due
      to American International Industries, Inc.
            
            
            2,021,327
            
            
            
            1,931,056Deferred
      tax liability
            
            
            503,200
            
            
            
            503,200Total liabilities
            
            
            6,820,720
            
            
            
            6,526,040Stockholders'
      equity (deficiency):Preferred stock, $0.001par value, authorized 5,000,000
    shares:1,666,666 issued and outstanding
            
            
            167
            
            
            
            167Additional 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
            
            
            1,153,556
            
            
            
            1,419,222Common stock, $0.0001 par value, authorized 195,000,000
      shares:40,105,400 shares issued and outstanding at March 31, 2007,
      and36,135,000 shares issued and outstanding at December 31,
    2006
            
            
            4,011
            
            
            
            3,614Additional paid - in capital
            
            
            5,927,719
            
            
            
            4,967,778Accumulated deficit
            
            
            (6,004,920
            )
            
            
            (5,114,053
            )Total stockholders' equity (deficit)
            
            
            3,662,162
            
            
            
            3,858,357Total liabilities and stockholders' equity (deficit)
            
            $
            10,482,882
            
            
            $
            10,384,397See
      accompanying notes to consolidated financial statements.





HAMMONDS
      INDUSTRIES, INC.ConsolidatedStatements of Operations Back to
      Table of ContentsFor
      three three months ended March 31, 2007 and 2006Three
      Months
            
            
            Three
      Monthsended
            
            
            endedMarch
      31, 2007
            
            
            March
      31, 2006Revenues
            
            $
            1,619,399
            
            
            $
            1,325,169Costs
      and expenses:Cost of sales
            
            
            1,465,241
            
            
            
            1,041,113Selling, general and administrative
            
            
            864,719
            
            
            
            653,303Total operating expenses
            
            
            2,329,960
            
            
            
            1,694,416Operating
      loss
            
            
            (710,561
            )
            
            
            (369,247
            )Other
      income (expenses):Interest income
            
            
            6,276
            
            
            
            3,780Interest expense
            
            
            (100,987
            )
            
            
            (50,607
            )Unrealized loss on trading securities
            
            
            (40,781
            )
            
            
            -Other income (expense)
            
            
            186
            
            
            
            (31,900
            )Total other expenses
            
            
            (135,306
            )
            
            
            (78,727
            )Net
      loss before income tax
            
            
            (845,867
            )
            
            
            (447,974
            )Provision for income tax
            
            
            -
            
            
            
            -Net
      loss from operations before minority interest
            
            
            (845,867
            )
            
            
            (447,974
            )Net
      loss
            
            
            (845,867
            )
            
            
            (447,974
            )Preferred
      dividends
            
            
            (45,000
            )
            
            
            -Net loss applicable to common shareholders
            
            $
            (890,867
            )
            
            $
            (447,974
            )Net
      loss per common share - basic
            
            $
            (0.02
            )
            
            $
            (0.02
            )Weighted
      average common shares - basic
            
            
            36,307,626
            
            
            
            20,135,000See
      accompanying notes to consolidated financial statements





Hammonds
      Industries, Inc.ConsolidatedStatements of Cash FlowsBack to
      Table of ContentsThree
      months ended March 31, 2007 and 2006Three
      Months
            
            
            Three
      MonthsEnded
            
            
            EndedMarch
      31, 2007
            
            
            March
      31, 2006Cash
      flows from operating activities:Net loss
            
            $
            (845,867
            )
            
            $
            (447,974
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation and amortization of property and equipment
            
            
            37,571
            
            
            
            103,563Amortization of intangibles
            
            
            166,605
            
            
            
            -Unrealized loss on trading securities
            
            
            40,781
            
            
            
            -(Increase) decrease of operating assets:Accounts receivable
            
            
            271,574
            
            
            
            (159,642
            )Inventories
            
            
            (272,344
            )
            
            
            (198,875
            )Prepaid expenses and other current assets
            
            
            46,622
            
            
            
            (29,400
            )Other
            
            
            (37,050
            )
            
            
            (300
            )Increase (decrease) in operating liabilities:Accounts payable and accrued expenses
            
            
            98,196
            
            
            
            285,361Net cash used in operating activities
            
            
            (493,912
            )
            
            
            (447,267
            )Cash
      flows from investing activities:Patents and trademarks
            
            
            (4,840
            )
            
            
            -Purchase of property and equipment
            
            
            (79,991
            )
            
            
            (70,865
            )Purchase of option to buy American International Industries, Inc.
      stock
            
            
            (100,000
            )
            
            
            -Notes receivable
            
            
            7,164
            
            
            
            7,229Amount due to American International Industries, Inc.
            
            
            90,271
            
            
            
            635,217Net cash provided by (used in) investing activities
            
            
            (87,396
            )
            
            
            571,581Cash
      flows from financing activities:Proceeds from issuance of common stock
            
            
            694,672
            
            
            
            -Proceeds from long-term borrowing
            
            
            243,247
            
            
            
            -Principal payment of short-term borrowings
            
            
            (175,899
            )
            
            
            -Principal payments of long-term borrowings
            
            
            (6,136
            )
            
            
            (149,906
            )Net cash provided by (used in) financing activities
            
            
            755,884
            
            
            
            (149,906
            )Net increase (decrease) in cash
            
            
            174,576
            
            
            
            (25,592
            )Cash
      and cash equivalents at beginning of year
            
            
            396,505
            
            
            
            61,875Cash
      and cash equivalents at end of period
            
            $
            571,081
            
            
            $
            36,283Supplemental
      schedule of cash flow information:Interest paid
            
            $
            100,987
            
            
            $
            50,607See
      accompanying notes to consolidated financial statements










HAMMONDS
INDUSTRIES, INC.


Notesto Consolidated Financial Statements


Back to Table of Contents


March 31,
2007






(1)
Summary of Significant Accounting Policies (Restated)






Organization,
Ownership and Business






Hammonds
Industries, Inc., f/k/a International American Technologies, Inc. (the
"Company"), is a 40.7% 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. 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 $.25 a share, the price of the 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 5years to
purchase 8,333,333 shares at $0.18 per share and a series B warrant exercisable
for 2 years to purchase an additional 8,333,333 shares at $0.18 per
share.






On
September 29, 2006 the Company entered into a 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 C exercisable for 5
years to purchase 8,333,333 shares at $0.50 per share.






Each
share of series A and series B convertible preferred stock is convertible at 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 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.






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 two of the three 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.






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 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.






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






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) the
Registrant's parent, American International Industries, Inc., issuing 145,000
restricted shares of common stock to the Registrant 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 closed 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") manufacturers
engineered products and chemicals that serve multiple segments of the fuels
distribution, water treatment and utility vehicle industries. Hammonds products
are marketed by a worldwide network of distributors, manufacturers
representatives and original equipment manufacturers. On February 28, 2005,
Hammond Fuels Additives, Inc. was merged into Hammonds Technical Services,
Inc.






As
required by SFAS No. 141, the Company has recorded the acquisition using the
purchase method of accounting with the purchase price allocated to the acquired
assets and liabilities based on their respective estimated fair values at the
acquisition date. The purchase price of $2,455,700 had been allocated at
follows:




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




A summary
of the intangible assets acquired is included in note 6.






(3)
Trading Securities






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




March
      31, 2007Dividend
      yield
            
            
            0.00
            %Expected
      volatility
            
            
            38.68
            %Risk
      free interest
            
            
            6.25
            %Expected
      life
            
            11
      months




As a
result, this option has been revalued at $59,219, and the unrealized loss of
$40,781 has been recorded in other income (expense) in March 2007.






(4)
Inventory






Inventory
at March 31, 2007 consisted of the following:




March
      31, 2007
            
            
            December
      31, 2006Finished
      goods
            
            $
            105,054
            
            
            $
            106,000Work
      in process
            
            
            100,680
            
            
            
            40,680Parts
      and materials
            
            
            1,545,736
            
            
            
            1,332,4461,751,470
            
            
            
            1,479,126Less:
      Obsolescence reserve
            
            
            (169,514
            )
            
            
            (169,514
            )$
            1,581,956
            
            
            $
            1,309,612




(5)
Long-term Notes Receivable






Long-term
notes receivable at March 31, 2007 consisted of the following:




March
      31, 2007
            
            
            December
      31, 2006Sale
      of former subsidiary, Marald, Inc., principal and interest due monthly
      through June 5, 2012
            
            
            183,147
            
            
            
            190,310Sale
      of former subsidiary, Marald, Inc., principal due October 5,
      2007
            
            
            200,000
            
            
            
            200,000Notes
      receivable
            
            
            383,147
            
            
            
            390,310Less
      current portion
            
            
            222,255
            
            
            
            229,418Notes
      receivable, less current portion
            
            $
            160,892
            
            
            $
            160,892




(6)
Property and Equipment






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




March
      31, 2007
            
            
            December
      31, 2006Machinery
      and equipment
            
            $
            943,525
            
            
            $
            894,533Leasehold
      improvements
            
            
            127,795
            
            
            
            96,796Total
      property and equipment
            
            
            1,071,320
            
            
            
            991,329Less:
      Accumulated depreciation and amortization
            
            
            (246,868
            )
            
            
            (209,297
            )Net
      property and equipment
            
            $
            824,452
            
            
            $
            782,032




(7)
Intangible Assets






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




As
      of March 31, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            4,473,620
            
            
            $
            563,170
            
            12
      yearsTrademarks
            
            
            1,149,199
            
            
            
            134,763
            
            10
      yearsSole
      Source Contract
            
            
            1,144,039
            
            
            
            191,820
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contracts
            
            $
            6,766,858
            
            
            $
            889,753
            
            11
      years




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




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








Aggregate
      Amortization ExpenseFor
      year ending December 31, 2007
            
            $
            654,906For
      year ending December 31, 2008
            
            $
            638,979For
      year ending December 31, 2009
            
            $
            638,979For
      year ending December 31, 2010
            
            $
            638,979For
      year ending December 31, 2011
            
            $
            638,979




The
Company’s patents, trademarks, and sole source contract for the additive
injection system resulted from the April 28, 2005 acquisition of 51% of Hammonds
Technical Services and from the August 1, 2006 acquisition of the 49% minority
interest of the Hammonds Companies.






The
following table contains a summary of the intangible assets acquired from the
acquisition of Hammonds Technical Services on April 28, 2005:




As
      of March 31, 2007Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            1,806,387
            
            
            $
            414,187
            
            12
      yearsTrademarks
            
            
            465,199
            
            
            
            89,163
            
            10
      yearsSole
      Source Contract
            
            
            464,039
            
            
            
            127,058
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contracts
            
            $
            2,735,625
            
            
            $
            630,408
            
            11
      years




On August
1, 2006, the Company acquired the 49% minority interest of Hammonds Technical
Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment
Systems, Inc. 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 the company. Additionally, the Company acquired patents totaling $26,393
in 2006 and 4,840 during the quarter ended March 31, 2007. The following table
contains a summary of the intangible assets acquired in 2006 and during the
quarter ended March 31, 2007:




As
      of December 31, 2006Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            Average
      Weighted LivesPatents
            
            $
            2,667,233
            
            
            $
            148,983
            
            12
      yearsTrademarks
            
            
            684,000
            
            
            
            45,600
            
            10
      yearsSole
      Source Contract
            
            
            680,000
            
            
            
            64,762
            
            7
      yearsPatents,
      Trademarks, and Sole Source Contracts
            
            $
            4,031,233
            
            
            $
            259,345
            
            11
      years




(8) Short-term Notes Payable To
Banks




March
      31, 2007
            
            
            December
      31, 2006Note
      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
            
            
            10,053
            
            
            
            12,651$
            100,512
            
            
            $
            276,410




(9)
Long-term Debt






Long-term
debt consisted of the following:




March
      31, 2007
            
            
            December
      31, 2006Note
      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 $4,050 through February 26, 2012, secured by
      assets of the Company’s subsidiary
            
            
            241,193
            
            
            
            -Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,119.65 through April 3, 2011
            
            
            85,272
            
            
            
            89,3542,718,654
            
            
            
            2,481,543Less
      current portion
            
            
            (33,496
            )
            
            
            (17,493
            )$
            2,685,158
            
            
            $
            2,464,050




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




2007
            
            $
            33,4962008
            
            
            2,440,8202009
            
            
            53,4502010
            
            
            58,7252011
            
            
            46,9382012
            
            
            85,225Total
            
            $
            2,718,654




(10)
Preferred Stock (Restated)






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






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. In
connection with the sale of the Series A convertible preferred stock, the
Company issued VOMF: (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 8,333,333 shares 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 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 in the
August 2006 Private Financing Transactions from August 2007 to August
2008.






Each
share of Series A and Series B 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 and will
receive gross proceeds of $5,180,466 if all of the Series A and B Warrants and
the remaining 4,362,922 Series C Warrants are exercised by VOMF.






American
International Industries’ ownership interest in the Company will decrease if and
when VOMF converts its Series A and Series B Preferred Stock and/or exercises
warrants issued in the VOMF August and September 2006 private financing
transactions into shares of common 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.






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




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




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






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






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




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








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








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




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






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






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




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




In
connection with the agreement of VOMF to exercise up to 4,000,000 Series C
Warrants in March 2007, the Company reduced the exercise price from $0.50 per
share to $0.18 per share through December 31, 2007, following which the exercise
price 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 RateWarrants
      C – March 19, 2007
            
            $
            0.35
            
            
            
            105.33
            %
            
            
            6.25
            %




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




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




The
material terms of these issuances are disclosed in the following
paragraphs.






Series A Convertible Preferred
Stock. The principal terms of the Series A Preferred Stock are as
follows:






Voting:
Except with respect to specified transactions that may affect the rights,
preferences, privileges or voting power of the Series A Preferred Stock and
except as otherwise required by Nevada law, the Series A Preferred Stock has no
voting rights. We shall not affect certain specified transactions, which include
authorizing or increasing the authorized or issued amount of any stock ranking
pari passu or senior to the Series A Preferred Stock with respect to the
distribution of assets on liquidation or the dissolution or winding up, without
the affirmative vote or consent of the holders, voting as a class, of at least
75% of the shares of the Series A Preferred Stock outstanding at the time.
Dividends: The holders of Series A Preferred Stock are entitled to receive out
of legally available assets dividends at the rate of 8% per annum, payable
semi-annually on June 30 and December 31. Dividends on the Series A Preferred
Stock are cumulative and are prior and in preference to payment of any dividend
or distribution on any junior stock. So long as any shares of Series A Preferred
Stock are outstanding, we will not declare, pay or set apart for payment any
dividend or make any distribution on any junior stock (other than dividends or
distributions payable in additional shares of junior stock), unless at the time
of such dividend or distribution we shall have paid all accrued and unpaid
dividends on Series A Preferred Stock. Conversion: The holder of Series A
Preferred Stock may, at their option, elect to convert all or any portion of the
shares of the Series A Preferred Stock into a number of shares of common stock
equal to the quotient of (i) the liquidation preference amount ($1.80) of the
shares of Series A Preferred Stock being converted plus any accrued but unpaid
dividends divided by (ii) the conversion price, which initially is $0.18 per
share, subject to certain adjustments. If, within 3 business days of our receipt
of a conversion notice, our transfer agent shall fail to issue to the holder the
proper number of shares of common stock subject to the conversion notice, or
fail to issue a new preferred stock certificate representing the number of
shares of Series A Preferred Stock to which such holder is entitled, we shall be
required to pay additional damages on each business day after such 3rd business
day that such conversion is not timely effected equal to 0.5% of the product of:
(i) the number of shares of common stock not timely issued and, in the event we
failed to timely deliver a preferred stock certificate, the number of shares of
common stock issuable upon conversion of the shares of Series A Preferred Stock
represented by such certificate; and (ii) the closing bid price of our common
stock on the last possible date which we could have timely issued such common
stock and/or such preferred stock certificate. If we fail to pay those
additional damages within 5 business days of the date incurred, then such
payment shall bear interest at the rate of 2.0% per month (pro rated for partial
months) until such payments are made. The conversion price of the Series A
Preferred Stock may be adjusted in the event of (i) common stock split or
reclassification; (ii) capital reorganization; (iii) distribution of dividends;
or (iv) the issuance or sale of additional shares of common stock or
equivalents.






Liquidation.
In the event of the liquidation, dissolution or winding up of our affairs, the
holders of outstanding shares of Series A Preferred Stock shall be entitled
to receive, out of our assets available for distribution to shareholders, an
amount equal to $1.80 per share or the liquidation preference amount of the
Series A Preferred Stock plus any accrued and unpaid dividends before any
payment shall be made or any assets distributed to the holders of the common
stock or any other junior stock. If our assets are not sufficient to pay in full
the liquidation preference amount plus any accrued and unpaid dividends payable
to the holders of outstanding shares of the Series A Preferred Stock and any
series of preferred stock or any other class of stock ranking pari passu, as to
rights on liquidation, dissolution or winding up, with the Series A Preferred
Stock, then all of said assets will be distributed among the holders of the
Series A Preferred Stock and the other classes of stock ranking pari passu with
the Series A Preferred Stock, if any, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. All distribution payments, shall be in cash, property valued at
its fair market value as determined by an independent appraiser or a combination
thereof.






Series B Convertible Preferred
Stock. The principal terms of the Series B Preferred Stock are identical
to those of the Series A Preferred Stock except that the dividends on the Series
B Preferred Stock shall be at the rate of 4% per annum.






(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. Hammonds Technical
Services (HTS), Hammonds Fuel Additives (HFA), and Hammonds Water Treatment
Systems (HWT) each had one customer that represented more than 10% of its total
sales.




Customer
      A
            HTS
            12%Customer
      A
            HFA
            15%Customer
      A
            HWT
            81%




(12)
Income Taxes






The
following table sets forth a reconciliation of the statutory federal income tax
for the quarters ended March 31, 2006 and March 31, 2007. The loss before taxes
was $447,974 in 2006 and $845,867 in 2007.




March
      31, 2007
            
            
            March
      31, 2006Income
      tax benefit computed at statutory rate for
            
            $
            (287,595
            )
            
            $
            (152,311
            )Permanent
      differences - non deductible expenses
            
            
            -
            
            
            
            -Increase
      in valuation allowance
            
            
            287,595
            
            
            
            152,311Tax
      benefit
            
            $
            -
            
            
            $
            -




The
Company will not file a consolidated income tax return.






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 March
31, 2007 is set below.




March
      31, 2007Deferred
      tax assets:
            
            $Net
      operating loss - current period
            
            
            255,960Total
      deferred tax asset
            
            
            255,960Valuation
      allowance
            
            
            (255,960
            )Net
      deferred asset
            
            $
            -








March
      31, 2006Deferred
      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
$13,000,000 which expire in 2026. 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.






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




March
      31,2007
            
            
            2006Revenues:Hammonds
      Technical Services
            
            $
            650,483
            
            
            $
            696,795Hammonds
      Fuel Additives
            
            
            309,008
            
            
            
            336,337Hammonds
      Water Treatment
            
            
            659,908
            
            
            
            292,037$
            1,619,399
            
            
            $
            1,325,169Cost
      of Sales:Hammonds
      Technical Services
            
            $
            660,818
            
            
            $
            564,711Hammonds
      Fuel Additives
            
            
            200,098
            
            
            
            236,150Hammonds
      Water Treatment
            
            
            604,325
            
            
            
            240,252$
            1,465,241
            
            
            $
            1,041,113





Loss
      from operations:Hammonds
      Technical Services
            
            $
            (761,401
            )
            
            $
            (409,176
            )Hammonds
      Fuel Additives
            
            
            40,162
            
            
            
            (5,951
            )Hammonds
      Water Treatment
            
            
            20,298
            
            
            
            51,629Corporate
            
            
            (9,620
            )
            
            
            (5,749
            )$
            (710,561
            )
            
            $
            (369,247
            )





Identifiable
      assets:Hammonds
      Technical Services
            
            $
            8,591,060
            
            
            $
            5,207,539Hammonds
      Fuel Additives
            
            
            335,746
            
            
            
            389,679Hammonds
      Water Treatment
            
            
            476,191
            
            
            
            135,470Corporate
            
            
            1,079,885
            
            
            
            339,777$
            10,482,882
            
            
            $
            6,072,465




(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,
            
            Amount2007
            
            $
            420,0002008
            
            
            420,0002009
            
            
            420,0002010
            
            
            420,0002011
            
            
            420,000Thereafter
            
            
            2,100,000$
            4,200,000




(15)
Related Party Transactions and Economic Dependence






The
Company has been and continues to be dependent upon the funding from its parent,
American International Industries, Inc. At March 31, 2007, the Company owed the
parent $2,021,327.




(16) Restatement
   In
response to a letter from the SEC in connection with the review of the Company’s
Form 10-QSB for Fiscal Quarter Ended September 30, 2006, the Company has
reexamined the treatment of the valuation of the preferred stock issued by
Hammonds. As a result of our reexamination and the analysis of professional
literature related to this very technical and complicated issue as explained in
note 10 above, we have restated the financial statements as of December 31, 2006
and March 31, 2007. The differences are summarized below:
   December
      31, 2006As
      previously reported
              
              
              Restatement
      adjustments
              
              
              As
      restatedAdditional
      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
              )
  March 31,
      2007As
      previously reported
                
                
                Restatement
      adjustments
                
                
                As
      restatedAdditional
      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
                
                $
                -
                
                
                $
                1,153,556
                
                
                $
                1,153,556Additional
      paid-in capital
                
                $
                8,372,006
                
                
                $
                (2,444,287
                )
                
                $
                5,927,719Accumulated
      deficit
                
                $
                (4,714,022
                )
                
                $
                (1,290,898
                )
                
                $
                (6,004,920
                )