UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549


___________________




FORM 10-Q


_______________________




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




For the
quarterly period ended September 30, 2008




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




For the
transition period from _________ to _________




Commission
file number 0-50912






HAMMONDS INDUSTRIES,
INC.






(Exact
Name Of Registrant As Specified In Its Charter)




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




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






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




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




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




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


At
November 14, 2008 the Registrant had 50,223,664 shares of
common stock outstanding.





TABLE OF CONTENTS
  Item
                
                Description
                
                PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
                
                FINANCIAL STATEMENTS
                
                3ITEM
      2.
                
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
      AND RESULTS OF OPERATION
                
                16ITEM
      3.
                
                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                
                18ITEM
      4T.
                
                CONTROLS AND PROCEDURES
                
                19PART
      II - OTHER INFORMATIONITEM
      1.
                
                LEGAL PROCEEDINGS
                
                19ITEM
      1A.
                
                RISK FACTORS
                
                19ITEM
      2.
                
                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                
                19ITEM
      3.
                
                DEFAULTS UPON SENIOR
    SECURITIES
                
                19ITEM
      4.
                
                SUBMISSION OF MATERS TO A VOTE OF SECURITY
      HOLDERS
                
                19ITEM
      5.
                
                OTHER INFORMATION
                
                19ITEM
      6.
                
                EXHIBITS AND REPORTS ON FORM 8-K
                
                19
       2
 PART
I - FINANCIAL INFORMATION
   ITEM 1. FINANCIAL STATEMENTS
  Financial
Statements
  Consolidated
      Financial StatementsUnaudited
      Consolidated Balance Sheets - September 30, 2008 and December 31,
      2007
              4Unaudited Consolidated
      Statements of Operations - Three and Nine Months Ended September 30, 2008
      and 2007
              5Unaudited Consolidated
      Statements of Cash Flows - Nine Months Ended September 30, 2008 and
      2007
              6Notes to Unaudited
      Consolidated Financial Statements
              7
 3


HAMMONDS INDUSTRIES, INC.Consolidated
      Balance Sheets(Unaudited)  September
      30, 2008
                
                
                December
      31, 2007AssetsCurrent
      assets:Cash
                
                $
                103,657
                
                
                $
                1,597,361Trading securities
                
                
                -
                
                
                
                28,314Accounts
      receivable, less allowance for doubtful accounts of$102,838
      and $104,169 at September 30, 2008 and December 31,
      2007, respectively
                
                
                1,010,809
                
                
                
                791,374Inventories, net
                
                
                2,090,270
                
                
                
                1,656,801Prepaid expenses and other assets
                
                
                85,637
                
                
                
                89,236Total current assets
                
                
                3,290,373
                
                
                
                4,163,086Property
      and equipment, net
                
                
                1,362,979
                
                
                
                1,132,472Intangible
      assets, net
                
                
                5,014,719
                
                
                
                5,457,365Other
      assets
                
                
                100,330
                
                
                
                62,315Total assets
                
                $
                9,768,401
                
                
                $
                10,815,238Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts payable and accrued expenses
                
                $
                2,243,796
                
                
                $
                1,326,808Short-term note payable
                
                
                310,999
                
                
                
                89,999Current
      installments of long-term capital lease obligations
                
                
                67,762
                
                
                
                29,967Current installments of long-term debt
                
                
                60,530
                
                
                
                56,058Due
      to American International Industries, Inc. - related
party
                
                
                773,063
                
                
                
                -Total current liabilities
                
                
                3,456,150
                
                
                
                1,502,832Long-term
      capital lease obligations, less current installments
                
                
                242,748
                
                
                
                123,100Long-term
      debt, less current installments
                
                
                2,615,379
                
                
                
                2,665,585Due
      to American International Industries, Inc. - related party
                
                
                -
                
                
                
                594,640Deferred
      tax liability
                
                
                156,535
                
                
                
                156,535Total liabilities
                
                
                6,470,812
                
                
                
                5,042,692Stockholders'
      equity:Preferred stock, $0.001par value, authorized 5,000,000
    shares:3,769,626 issued and outstanding
                
                
                377
                
                
                
                377Additional paid-in capital - preferred stock
                
                
                4,811,573
                
                
                
                4,811,573Additional paid-in capital - beneficial conversion feature
                
                
                3,272,060
                
                
                
                3,272,060Common stock, $0.0001 par value, authorized 195,000,000
      shares:50,023,664 and 49,748,257 shares issued and outstanding,
      respectively
                
                
                5,003
                
                
                
                4,975Common
      stock issuance obligation, 200,000 shares
                
                
                58,000
                
                
                
                -Additional paid-in capital - common stock
                
                
                7,584,227
                
                
                
                7,480,255Accumulated deficit
                
                
                (12,433,651
                )
                
                
                (9,796,694
                )Total stockholders' equity
                
                
                3,297,589
                
                
                
                5,772,546Total liabilities and stockholders' equity
                
                $
                9,768,401
                
                
                $
                10,815,238The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.
 Back to Table of Contents
 4


HAMMONDS
      INDUSTRIES, INC.Consolidated Statements of
      Operations(Unaudited)


Three
    Months
            
            
            Three
    Months
            
            
            Nine
    Months
            
            
            Nine
    MonthsEnded
            
            
            Ended
            
            
            Ended
            
            
            EndedSeptember 30,
      2008
            
            
            September 30,
      2007
            
            
            September 30,
      2008
            
            
            September 30,
      2007Revenues
            
            $
            1,802,229
            
            
            $
            3,083,286
            
            
            $
            6,428,157
            
            
            $
            7,120,461Costs
      and expenses:Cost of sales
            
            
            1,594,421
            
            
            
            2,075,445
            
            
            
            5,149,527
            
            
            
            5,402,135Selling, general and administrative
            
            
            1,102,374
            
            
            
            1,427,085
            
            
            
            3,487,746
            
            
            
            3,266,702Total operating expenses
            
            
            2,696,795
            
            
            
            3,502,530
            
            
            
            8,637,273
            
            
            
            8,668,837Operating
      loss
            
            
            (894,566
            )
            
            
            (419,244
            )
            
            
            (2,209,116
            )
            
            
            (1,548,376
            )Other
      income (expenses):Finance expense for issuance of preferred stock
            
            
            -
            
            
            
            (386,334
            )
            
            
            -
            
            
            
            (386,334
            )Interest income
            
            
            -
            
            
            
            4,001
            
            
            
            4,681
            
            
            
            16,452Interest expense
            
            
            (70,155
            )
            
            
            (103,904
            )
            
            
            (229,624
            )
            
            
            (352,267
            )Realized
      loss on trading securities
            
            
            -
            
            
            
            -
            
            
            
            (100,000
            )
            
            
            -Unrealized gain on trading securities
            
            
            -
            
            
            
            118,427
            
            
            
            71,686
            
            
            
            43,916Other income (expense)
            
            
            (29,700
            )
            
            
            (27
            )
            
            
            (29,571
            )
            
            
            198Total other expenses
            
            
            (99,855
            )
            
            
            (367,837
            )
            
            
            (282,828
            )
            
            
            (678,035
            )Net
      loss before income tax
            
            
            (994,421
            )
            
            
            (787,081
            )
            
            
            (2,491,944
            )
            
            
            (2,226,411
            )Income tax expense (benefit)
            
            
            927
            
            
            
            -
            
            
            
            (19,987
            )
            
            
            -Net
      loss
            
            
            (995,348
            )
            
            
            (787,081
            )
            
            
            (2,471,957
            )
            
            
            (2,226,411
            )Preferred
      dividendsRegular dividend
            
            
            (60,000
            )
            
            
            (45,000
            )
            
            
            (165,000
            )
            
            
            (135,000
            )Deemed dividend
            
            
            -
            
            
            
            (1,981,162
            )
            
            
            -
            
            
            
            (1,981,162
            )Forgiveness of dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            150,425Net loss applicable to common shareholders
            
            $
            (1,055,348
            )
            
            $
            (2,813,243
            )
            
            $
            (2,636,957
            )
            
            $
            (4,192,148
            )Net
      loss per common share - basic and diluted
            
            $
            (0.02
            )
            
            $
            (0.07
            )
            
            $
            (0.05
            )
            
            $
            (0.11
            )Weighted
      average common shares - basic and diluted
            
            
            49,962,114
            
            
            
            41,189,639
            
            
            
            49,867,756
            
            
            
            39,230,659The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


Back to Table of Contents
 5


HAMMONDS
      INDUSTRIES, INC.Consolidated Statements of Cash
      Flows(Unaudited)


Nine
    Months
            
            
            Nine
    MonthsEnded
            
            
            EndedSeptember 30,
      2008
            
            
            September 30,
      2007Cash
      flows from operating activities:Net loss
            
            $
            (2,471,957
            )
            
            $
            (2,226,411
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation and amortization of property and equipment
            
            
            202,259
            
            
            
            123,821Amortization of intangibles
            
            
            485,615
            
            
            
            495,369Realized loss on trading securities
            
            
            100,000
            
            
            
            -Unrealized gain on trading securities
            
            
            (71,686
            )
            
            
            (43,916
            )Stock based compensation
            
            
            104,000
            
            
            
            448,500Finance expense for issuance of preferred stock
            
            
            -
            
            
            
            386,334Management fee paid to American International Industries, Inc. with common
      stock
            
            
            -
            
            
            
            105,000Change in operating assets and liabilities:Accounts receivable
            
            
            (219,435
            )
            
            
            (371,093
            )Inventories
            
            
            (433,469
            )
            
            
            (427,764
            )Prepaid expenses and other current assets
            
            
            3,600
            
            
            
            21,344Other assets
            
            
            (38,015
            )
            
            
            (35,087
            )Accounts payable and accrued expenses
            
            
            751,987
            
            
            
            113,602Net cash used in operating activities
            
            
            (1,587,101
            )
            
            
            (1,410,301
            )Cash
      flows from investing activities:Costs of securing patents and trademarks
            
            
            (42,970
            )
            
            
            (40,718
            )Purchase of property and equipment
            
            
            (229,250
            )
            
            
            (303,198
            )Purchase of option to buy American International Industries, Inc.
      stock
            
            
            -
            
            
            
            (100,000
            )Proceeds from notes receivable
            
            
            -
            
            
            
            19,383Net cash used in investing activities
            
            
            (272,220
            )
            
            
            (424,533
            )Cash
      flows from financing activities:Proceeds from issuance of common stock
            
            
            -
            
            
            
            694,672Proceeds from issuance of preferred stock
            
            
            -
            
            
            
            1,981,162Proceeds from short-term borrowing
            
            
            250,000
            
            
            
            1,000,000Proceeds from long-term borrowing
            
            
            -
            
            
            
            284,551Principal
      payments under capital lease obligations
            
            
            (46,073
            )
            
            
            -Principal payments of short-term borrowings
            
            
            -
            
            
            
            (1,183,523
            )Principal payments of long-term borrowings
            
            
            (45,734
            )
            
            
            (30,921
            )Change
      in amount due to American International Industries, Inc.
            
            
            207,424
            
            
            
            31,435Net cash provided by financing activities
            
            
            365,617
            
            
            
            2,777,376Net increase (decrease) in cash
            
            
            (1,493,704
            )
            
            
            942,542Cash
      at beginning of period
            
            
            1,597,361
            
            
            
            396,505Cash
      at end of period
            
            $
            103,657
            
            
            $
            1,339,047Supplemental cash
      flow information:Interest paid
            
            $
            213,079
            
            
            $
            352,267Income taxes paid
            
            $
            12,785
            
            
            $
            -Non-cash transactions:Acquisition
      of fixed assets under capital lease obligations
            
            $
            203,515
            
            
            $
            -Transfer of notes receivable to pay long-term note due to American
      International Industries, Inc. - related party
            
            $
            -
            
            
            $
            370,927Accrued debt discount for common shares to be issued
            
            $
            29,000
            
            
            $
            -Accrued debt discount for common shares to be issued - related
    party
            
            $
            29,000
            
            
            $
            -The
      accompanying notes are an integral part of these
      unaudited consolidated financial statements.


Back to Table of Contents
 6


HAMMONDS INDUSTRIES,
INC.


Notes to
Unaudited Consolidated Financial Statements






Note 1 - Summary of Significant
Accounting Policies




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




Hammonds
is a 48% owned subsidiary of American International Industries,
Inc.
 In 2005,
Hammonds, through its parent company, acquired 51% of the capital stock of
Hammonds Technical Services, Inc. Hammonds Technical Services, Inc. and Hammonds
Fuel Additives, Inc. were separate privately-owned Texas companies. In
connection with the 2005 acquisition by Hammonds, Hammonds Fuel Additives was
merged into Hammonds Technical Services. In April 2005 and January 2006,
respectively, Hammonds Fuel Additives and Hammonds Water Treatment Systems,
respectively, were reincorporated as separate entities from Hammonds Technical
Services, and all three entities are wholly-owned subsidiaries of Hammonds. On
August 1, 2006, Hammonds acquired the 49% minority interest of Hammonds
Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water
Treatment Systems, Inc. in consideration for the issuance of 16,000,000
restricted shares of common stock, valued at a price of $0.25 per share,
the price of Hammonds' common stock at the date of the transaction. As a result
of this transaction, Hammonds owns 100% of each of the Hammonds
subsidiaries.
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of Hammonds and its
wholly-owned subsidiaries: Hammond Technical Services, Inc., Hammonds Fuel
Additives, Inc., and Hammonds Water Treatment Systems, Inc. In accordance with
FIN 46(R), American International Industries, Inc., our parent, consolidates
Hammonds even though its ownership is less than 51%, because the parent appoints
the members of Hammonds’ board of directors. Since Hammonds is incurring losses
and the minority interest has no recorded common stock equity value, the parent
recognizes 100% of Hammonds’ losses. All significant intercompany transactions
and balances have been eliminated in consolidation.
 
 Revenue
Recognition
 
 Revenue
is recognized when the earning process is completed, the risks and rewards of
ownership have transferred to the customer, which is generally the same day as
delivery or shipment of the product, the price to the buyer is fixed or
determinable, and collection is reasonably assured.  The Hammonds Companies
have purchase orders for all sales, of which many of the items are requested to
be container shipped and shipped directly to the end users.  All sales are
recorded when the inventory items are shipped.  Taxes assessed by a
governmental authority that are incurred as a result of a revenue transaction
are not included in revenues.  Hammonds has no significant sales
returns or allowances.
  Loss
Per Share
 The
basic net loss per common share is computed by dividing the net loss by the
weighted average number of shares outstanding during a period. Diluted net loss
per common share is computed by dividing the net loss, adjusted on an as if
converted basis, by the weighted average number of common shares outstanding
plus potential dilutive securities.
  Management's
Estimates and Assumptions
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.
 Back to Table of Contents
 7
 Fair
Value of Financial Instruments
 
 Hammonds
estimates the fair value of its financial instruments using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, Hammonds estimates of fair value are not necessarily
indicative of the amounts that Hammonds could realize in a current market
exchange. The use of different market assumption and/or estimation methodologies
may have a material effect on the estimated fair value amounts. The interest
rates payable by Hammonds on its notes payable approximate market rates.
Hammonds believes that the fair value of its financial instruments comprising
accounts receivable, notes receivable, accounts payable, and notes payable
approximate their carrying amounts.
  Note
2 - Financial Condition
  Hammonds
requires additional financing to grow its business and fund its
operations.  Hammonds unaudited interim consolidated financial statements
are prepared using accounting principles generally accepted in the United States
of America applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of
business.  Hammonds has incurred cumulative operating losses through
September 30, 2008 of $12,433,651 and had a working capital deficit of $165,777
at September 30, 2008.  Revenues during the nine months ended
September 30, 2008 were not sufficient to cover our operating costs and we
continue to generate negative cash flows from operations.  There can
be no assurance that Hammonds can or will be able to generate revenue or
complete any debt or equity financing that might be needed to support operations
in the future.  Hammonds’ consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.  Hammonds has hired an investment banking advisor to assist in
securing additional financing.
 Note 3 - Trading
Securities
  In
February 2007, Hammonds paid $100,000 for an option to buy 104,398 shares of
American International Industries, Inc. stock for $5.00 per share from a former
Hammonds' minority shareholder as part of a lawsuit settlement. Hammonds
estimated the fair value of this stock option at December 31, 2007, by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions as follows:
 December
      31, 2007Dividend
      yield
              
              
              0.00
              %Expected
      volatility
              
              
              39.74
              %Risk
      free interest
              
              
              6.25
              %Expected
      life
              
              2
      months
  As a
result, this option was revalued to $28,314, and an unrealized loss of $71,686
was recorded in other income (expense) for the year ended December 31,
2007.  This option expired in February 2008, resulting in a realized loss
of $100,000 and a reversal of the previously recorded unrealized loss of
$71,686.
  Note
4 - Inventory
  Inventory
consists of the following:
  September
      30, 2008
              
              
              December
      31, 2007Finished
      goods
              
              $
              337,603
              
              
              $
              231,870Work
      in process
              
              
              383,316
              
              
              
              36,045Parts
      and materials
              
              
              1,488,161
              
              
              
              1,420,0432,209,080
              
              
              
              1,687,958Less:
      Obsolescence reserve
              
              
              (118,810
              )
              
              
              (31,157
              )$
              2,090,270
              
              
              $
              1,656,801
  Back to Table of Contents
 8
 Note
5 - Property and Equipment
  A summary
of property and equipment and related accumulated depreciation and amortization
is as follows:
  September
      30, 2008
              
              
              December
      31, 2007Machinery
      and equipment
              
              $
              1,849,288
              
              
              $
              1,416,522Leasehold
      improvements
              
              
              96,796
              
              
              
              96,796Total
      property and equipment
              
              
              1,946,084
              
              
              
              1,513,318Less:
      Accumulated depreciation and amortization
              
              
              (583,105
              )
              
              
              (380,846
              )Net
      property and equipment
              
              $
              1,362,979
              
              
              $
              1,132,472
 
 
 Depreciation
expense for the three and nine months ended September 30, 2008 and 2007 was
$71,379, $44,618, $202,259, and $123,821, respectively.
 
 Hammonds
has entered into various capital lease agreements for the acquisition
of machinery and equipment.  Assets acquired under such financing
arrangements included in property and equipment are as
follows:
 September
      30, 2008
                  
                  
                  December
      31, 2007Machinery
      and equipment
                  
                  $
                  372,722
                  
                  
                  $
                  163,174Less
      accumulated depreciation and amortization
                  
                  
                  (43,247
                  )
                  
                  
                  -Net
      property and equipment
                  
                  $
                  329,475
                  
                  
                  $
                  163,174
 Principal
repayment provisions of long-term capital leases are as follows at September 30,
2008:
  2008
                
                $
                14,7412009
                
                
                71,2982010
                
                
                76,7452011
                
                
                75,0432012
                
                
                67,2802013
                
                
                5,403Total
                
                $
                310,510
 Note
6 - Intangible Assets
  Intangible
assets at September 30, 2008 consisted of the
following:
 Gross
      Carrying Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  
                  Intangibles,
      net
                  
                  Average
      Weighted LivesPatents
                  
                  $
                  4,587,467
                  
                  
                  $
                  1,121,871
                  
                  
                  $
                  3,465,596
                  
                  12
      yearsTrademarks
                  
                  
                  1,149,199
                  
                  
                  
                  307,143
                  
                  
                  
                  842,056
                  
                  10
      yearsSole
      Source Contract
                  
                  
                  1,144,039
                  
                  
                  
                  436,972
                  
                  
                  
                  707,067
                  
                  7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                  
                  $
                  6,880,705
                  
                  
                  $
                  1,865,986
                  
                  
                  $
                  5,014,719
                  
                  11
      years
 Intangible
assets at December 31, 2007 consisted of the following:
 Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                
                
                Intangibles,
      net
                
                Average
      Weighted LivesPatents
                
                $
                4,544,498
                
                
                $
                845,022
                
                
                $
                3,699,476
                
                12
      yearsTrademarks
                
                
                1,149,199
                
                
                
                220,953
                
                
                
                928,246
                
                10
      yearsSole
      Source Contract
                
                
                1,144,039
                
                
                
                314,396
                
                
                
                829,643
                
                7
      yearsPatents,
      Trademarks, and Sole Source Contracts
                
                $
                6,837,736
                
                
                $
                1,380,371
                
                
                $
                5,457,365
                
                11
      years
  Amortization
expense for the three and nine months ended September 30, 2008 and 2007 was
$162,259, $162,119, $485,615, and $495,369, respectively.
 Back to Table of Contents
 9
 Note
7 - Short-term Notes Payable
  September
      30, 2008
              
              
              December
      31, 2007Note
      payable with interest at 10.5%, interest payments due monthly, principal
      due on demand
              
              $
              89,999
              
              
              $
              89,999Note
      payable for $250,000 with interest at 10%, principal due December 31,
      2008, discounted by $29,000 and $0 for stock consideration,
      respectively
              
              
              221,000
              
              
              
              -$
              310,999
              
              
              $
              89,999
  At
September 30, 2008 and December 31, 2007, the average annual interest rate
of our short-term borrowing was approximately 10.1% and 10.5%,
respectively.
 
 Note
8 - Long-term Debt
  September
      30, 2008
              
              
              December
      31, 2007Note
      payable to a bank, interest due quarterly at prime plus 1%, principal
      balance due January 1, 2010, secured by assets of Hammonds' subsidiary,
      Hammonds Technical Services, Inc.
              
              $
              1,992,189
              
              
              $
              1,992,189Note
      payable to a bank, due in quarterly installments of interest only at prime
      plus 1%, with a principal payment due on January 1, 2010, secured by
      assets of Hammonds' subsidiary, Hammonds Technical Services,
      Inc.
              
              
              400,000
              
              
              
              400,000Note
      payable to a bank, with interest at 9.25%, due in monthly installments of
      principal and interest of $4,054 through February 26, 2012, secured by
      assets of Hammonds' subsidiary, Hammonds Technical Services,
      Inc.
              
              
              197,046
              
              
              
              220,338Note
      payable to a bank, with interest at 8.25%, due in monthly installments of
      principal and interest of $842 through April 7, 2012, secured by assets of
      Hammonds' subsidiary, Hammonds Technical Services, Inc.
              
              
              31,230
              
              
              
              36,727Note
      payable to a bank, due in monthly installments of principal and interest
      of $2,120 through April 3, 2011, secured by assets of Hammonds'
      subsidiary, Hammonds Technical Services, Inc.
              
              
              55,444
              
              
              
              72,3892,675,909
              
              
              
              2,721,643Less
      current portion
              
              
              (60,530
              )
              
              
              (56,058
              )$
              2,615,379
              
              
              $
              2,665,585
 
 Principal
repayment provisions of long-term debt are as follows at September 30,
2008:
  2008
              
              $
              14,6262009
              
              
              61,9442010
              
              
              2,460,1432011
              
              
              53,7502012
              
              
              85,446Total
              
              $
              2,675,909
 Back to Table of Contents
 10
 Note
9 - Preferred Stock
  In August
and September 2006, Hammonds sold to Vision Opportunity Fund Limited (“VOMF”)
833,333 shares of Series A Preferred Stock and 833,333 shares of Series B
Preferred Stock, respectively (the “2006 Private Financing Transactions”). In
connection with the sale of the Series A Convertible Preferred Stock, Hammonds
issued VOMF: (i) Series A Warrants to purchase 8,333,333 shares of common stock
at $0.18 per share, expiring in August 2011; and (ii) Series B Warrants to
purchase an additional 8,333,333 shares of common stock at $0.18 per share,
expiring in August 2007. In connection with the sale of the Series B Convertible
Preferred Stock, Hammonds issued VOMF: (i) Series C Warrants to purchase an
additional 8,333,333 shares of common stock at $0.50 per share, expiring on
September 29, 2011; and (ii) Hammonds agreed to extend the expiration dates on
the Series B Warrants issued in the 2006 Private Financing Transactions from
August 2007 to August 2008.
  Each
share of Series A and Series B Convertible Preferred Stock is convertible into
ten shares of Hammonds' common stock.
 
 On
September 20, 2007, Hammonds and VOMF agreed to amend the Series A, B
and C Warrants to: (i) adjust the exercise price of all of the Warrants to
$0.10; and (ii) provide for the issuance of a total of 2,102,960 shares of
Hammonds' newly authorized Series C Convertible Preferred Stock in lieu of
21,029,599 shares of common stock. On September 21, 2007, VOMF delivered a
notice of exercise of all 21,029,599 Series A, B and C Warrants at an exercise
price of $0.10 per warrant from which Hammonds received net proceeds of
$1,981,162.  As a result of this agreement, there are no warrants
outstanding related to the Series A, B and C Convertible Preferred
Stock.
 
 Hammonds
reviewed the following accounting standards to determine the appropriate
accounting for these issuances:
 - SFAS
No. 133: Accounting for
Derivative Instruments and Hedging Activities
 -
SFAS No. 150: Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity
 -
EITF 00-19: Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock
 -
EITF 98-5: Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios
 -
EITF 00-27: Application of Issue No. 98-5 to Certain Convertible
Instruments
 -
EITF Topic D-98: Classification and Measurement of Redeemable
Securities
 -
ASR No. 268: Redeemable Preferred Stocks
  We
concluded that all components of these issuances should be classified as equity,
because the only way for the value of the conversion feature to be realized
is through the issuance of shares. Hammonds has sufficient authorized and
unissued shares available to settle the contracts after considering all other
commitments that may require the issuance of stock.
  We valued
the warrants using the Black-Scholes model and allocated t he
proceeds from the preferred share issuances based on the relative fair values of
the securities issued.
  We
determined that a beneficial conversion feature exists for the Series A, B and C
Convertible Preferred Stock issuances. Based on our review of the "Emerging
Issues Task Force" EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and
EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments,
the amount of proceeds allocated to the Series A and Series B Convertible
Preferred Stock should be assigned to the embedded conversion feature with a
corresponding amount recorded as a "deemed dividend" to the preferred
shareholders. This is based on paragraph 6 of EITF 98-5, which states that "the
discount assigned to the beneficial conversion feature is limited to the amount
of the proceeds allocated to the convertible instrument."
  We
allocated the following amounts to the embedded conversion feature and recorded
a deemed dividend to the preferred shareholders:
  Preferred
      A – August 8, 2006
              
              $
              387,499Preferred
      A – August 23, 2006
              
              
              176,643Preferred
      B – September 30, 2006
              
              
              726,756Preferred C
      – September 20, 2007
              
              
              1,981,162Total
      deemed dividend
              
              $
              3,272,060
 Back to Table of Contents
 11
 On July
25, 2007, Hammonds and VOMF entered into an agreement pursuant to which
VOMF waived the cash dividends of $150,425 on the Series A and Series B
Convertible Preferred Stock accrued from August and September 2006,
respectively, through September 30, 2007. Additionally, VOMF agreed that future
accrued dividends may be paid, at Hammonds' option, in cash or in restricted
shares of Hammonds' common stock. The number of shares of common stock to
be issued as payment of accrued and unpaid dividends shall be determined by
dividing (i) the total amount of accrued and unpaid dividends to be converted
into common stock by (ii) eighty percent (80%) of the average of the VWAP for
the twenty (20) Trading Days immediately preceding the dividend payment date.
The term "VWAP" means, for any date, (i) the daily volume weighted average price
of the common stock for such date on the OTC Bulletin Board as reported by
Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to
4:02 p.m. Eastern Time); (ii) if the common stock is not then listed or quoted
on the OTC Bulletin Board and if prices for the common stock are then reported
in the "Pink Sheets" published by the Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the common stock so reported; or (iii) in all
other cases, the fair market value of a share of common stock as determined by
an independent appraiser selected in good faith by the Investor and reasonably
acceptable to Hammonds.
 The
modification of the exercise price to $0.10 per share for the Warrants requires
a comparison of the fair values of the warrants immediately before and after the
modification. As a result of this comparison, we calculated a fair value
increase of $386,334 for this modification. Since additional value was given to
the holders of these warrants, $386,334 was recognized and recorded as finance
expense in September 2007, in accordance with SFAS No. 123R, Share-Based
Payment.
 
 We valued
the warrants using the Black-Scholes model, using the following
assumptions:
  Stock
      Price on Date of Reduction
                
                
                Volatility
                
                
                Risk-Free
      Interest RateWarrants
      A, B, & C – September 20, 2007
                
                $
                0.60
                
                
                
                106.18
                %
                
                
                6.25
                %
  The
Black-Scholes model yielded the following valuations for the
warrants:
  Exercise
      Price / Term
                
                Fair
      ValueWarrants
      A, B, & C – September 20, 2007
                $0.10
      / 0.03 years
                
                $
                10,518,678Warrants
      A, B, & C – September 20, 2007
                Original
      Terms
                
                
                10,132,344Fair
      value increase
                
                
                $
                386,334
  Note
10 - Concentration of Credit Risk
  Financial
instruments that potentially subject Hammonds to credit risk are primarily
accounts receivable – trade.  Hammonds grants credit to customers
throughout the United States. Generally, Hammonds does not require collateral or
other security to support customer receivables. During the nine months ended
September 30, 2008, Hammonds Water Treatment Systems, Inc. had one customer that
represented 31% of total Hammonds' sales.
  Note
11 - Income Taxes
  The
provision for income taxes consists of the following:


Three Months
      Ended
            
            
            Nine Months
      EndedSeptember 30,
      2008
            
            
            September 30,
      2007
            
            
            September 30,
      2008
            
            
            September 30,
      2007Current
      taxes
            
            $
            -
            
            
            $
            (267,608
            )
            
            $
            
            
            
            $
            (756,980
            )Deferred
      tax benefit
            
            
            (354,833
            )
            
            
            -
            
            
            
            (1,539,098
            )
            
            
            -Benefits
      of operating loss carryforwards
            
            
            354,833
            
            
            
            267,608
            
            
            
            1,539,098
            
            
            
            756,980Current Federal Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Difference
      between actual and estimated 2007 Texas Margin Tax
            
            
            (1,776
            )
            
            
            -
            
            
            
            (29,629
            )
            
            
            -Texas
      Margin Tax estimated for 2008
            
            
            2,703
            
            
            
            -
            
            
            
            9,642
            
            
            
            -Tax
      expense (benefit)
            
            $
            927
            
            
            $
            -
            
            
            $
            (19,987
            )
            
            $
            -


Back to Table of Contents
 12
   Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007
                
                
                September
      30, 2008
                
                
                September
      30, 2007Net
      loss before taxes
                
                $
                (994,421
                )
                
                $
                (787,081
                )
                
                $
                (2,491,944
                )
                
                $
                (2,226,411
                )Income
      tax benefit computed at statutory rate
                
                $
                (358,128
                )
                
                $
                (267,608
                )
                
                $
                (847,261
                )
                
                $
                (756,980
                )Permanent
      differences - non deductible expenses
                
                
                4,214
                
                
                
                -
                
                
                
                17,097
                
                
                
                -Net
      effects of temporary differences
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Effect
      of federal graduated rates
                
                
                (919
                )
                
                
                -
                
                
                
                (708,934
                )
                
                
                -Increase
      (decrease) in valuation allowance
                
                
                354,833
                
                
                
                267,608
                
                
                
                1,539,098
                
                
                
                756,980Difference
      between actual and estimated 2007 Texas Margin Tax
                
                
                (1,776
                )
                
                
                -
                
                
                
                (29,629
                )
                
                
                -Texas
      Margin Tax estimated for 2008
                
                
                2,703
                
                
                
                -
                
                
                
                9,642
                
                
                
                -Income
      tax expense (benefit)
                
                $
                927
                
                
                $
                -
                
                
                $
                (19,987
                )
                
                $
                -
  Hammonds
has loss carryforwards totaling $11,974,078 available at September 30, 2008
that may be offset against future taxable income.  If not used, the
carryforwards will expire as follows:


Operating
      LossesAmount
                
                Expires$
                2,587,701
                
                2021$
                4,859,618
                
                2022$
                4,526,759
                
                2023
 Back to Table of Contents
 13
 Note
12 - Segment Information
  Hammonds
has three reportable segments: Hammonds Technical Services, Hammonds Fuel
Additives, and Hammonds Water Treatment Systems. Hammonds manufactures
engineered products and chemicals that serve multiple segments of the fuels
distribution, water treatment and utility vehicle industries. Hammonds' products
are marketed by a worldwide network of distributors, manufacturers'
representatives and original equipment manufacturers. The corporate overhead
includes Hammonds' investment holdings, including financing current operations
and expansion of its current holdings, as well as evaluating the feasibility of
entering into additional businesses.
  The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.  Hammonds evaluates
performances based on profit or loss from operations before income taxes, not
including nonrecurring gains and losses and foreign exchange gains and
losses.
  Hammonds'
reportable segments are strategic business units that offer different technology
and marketing strategies.
  Hammonds'
areas of operations are principally in the United States. No single foreign
country or geographic area is significant to the consolidated financial
statements.
  Consolidated
revenues from external customers, operating income / (losses), and identifiable
assets were as follows:


Three Months Ended September
      30,
            
            
            Nine Months Ended September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Hammonds
      Technical Services
            
            $
            618,581
            
            
            $
            1,962,312
            
            
            $
            3,061,558
            
            
            $
            3,938,724Hammonds
      Fuel Additives
            
            
            294,643
            
            
            
            281,292
            
            
            
            803,046
            
            
            
            824,714Hammonds
      Water Treatment
            
            
            889,005
            
            
            
            839,682
            
            
            
            2,563,553
            
            
            
            2,357,023Total revenue
            
            $
            1,802,229
            
            
            $
            3,083,286
            
            
            $
            6,428,157
            
            
            $
            7,120,461Income
      (loss) from operations:Hammonds
      Technical Services
            
            $
            (952,046
            )
            
            $
            8,275
            
            
            $
            (2,198,434
            )
            
            $
            (1,103,253
            )Hammonds
      Fuel Additives
            
            
            62,924
            
            
            
            43,229
            
            
            
            45,962
            
            
            
            107,177Hammonds
      Water Treatment
            
            
            18,990
            
            
            
            38,807
            
            
            
            76,619
            
            
            
            88,228Corporate
            
            
            (24,434
            )
            
            
            (509,555
            )
            
            
            (133,263
            )
            
            
            (640,528
            )Total
      loss from operations
            
            
            (894,566
            )
            
            
            (419,244
            )
            
            
            (2,209,116
            )
            
            
            (1,548,376
            )Other
      expense
            
            
            (99,855
            )
            
            
            (367,837
            )
            
            
            (282,828
            )
            
            
            (678,035
            )Total
      net loss before income taxes
            
            $
            (994,421
            )
            
            $
            (787,081
            )
            
            $
            (2,491,944
            )
            
            $
            (2,226,411
            )September
      30, 2008
            
            
            
            December
      31, 2007Identifiable
      assets:Hammonds
      Technical Services
            
            
            
            
            
            
            
            
            
            $
            8,839,442
            
            
            $
            8,925,595Hammonds
      Fuel Additives
            
            
            
            
            
            
            
            
            
            
            2,076,974
            
            
            
            2,025,761Hammonds
      Water Treatment
            
            
            
            
            
            
            
            
            
            
            1,029,121
            
            
            
            772,179Corporate
            
            
            
            
            
            
            
            
            
            
            (2,177,136
            )
            
            
            (908,297
            )Total identifiable assets
            
            
            
            
            
            
            
            
            
            $
            9,768,401
            
            
            $
            10,815,238


Back to Table of Contents
 14


Note
13 - Loss Per Share


Basic
losses per share are calculated on the basis of the weighted average number of
common shares outstanding. Diluted losses per share, in addition to the weighted
average determined for basic loss per share, include common stock equivalents,
which would arise from the conversion of the preferred stock to common
shares.
  Three Months Ended September
      30,
                
                
                Nine Months Ended September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Basic loss
      per share:Net
      loss
                
                $
                (995,348
                )
                
                $
                (787,081
                )
                
                $
                (2,471,957
                )
                
                $
                (2,226,411
                )Weighted
      average common shares outstanding
                
                
                49,962,114
                
                
                
                41,189,639
                
                
                
                49,867,756
                
                
                
                39,230,659Weighted
      average common shares outstanding for diluted net loss per
      share
                
                
                49,962,114
                
                
                
                41,189,639
                
                
                
                49,867,756
                
                
                
                39,230,659Net
      loss per share - basic
                
                $
                (0.02
                )
                
                $
                (0.02
                )
                
                $
                (0.05
                )
                
                $
                (0.06
                )Net
      loss per share - diluted
                
                $
                (0.02
                )
                
                $
                (0.02
                )
                
                $
                (0.05
                )
                
                $
                (0.06
                )


Note
14 - Commitments
  Hammonds
leases its 106,000 square foot manufacturing and office facility from a third
party under an operating lease which expires in October 2016. Future minimum
lease payments under the operating lease are as follows:
  Year
      December 31,
              
              Amount2008
              
              $
              436,3802009
              
              
              436,3802010
              
              
              436,3802011
              
              
              436,3802012
              
              
              436,380Thereafter
              
              
              1,745,520$
              3,927,420
  
 Note
15 - Related Party Transactions and Economic Dependence
  Hammonds has
been and continues to be dependent upon funding from its parent, American
International Industries, Inc. ("AMIN"). At September 30, 2008 and December 31,
2007, Hammonds owed the parent $773,063 and $594,640,
respectively.  During the three months ended September 30, 2008, AMIN
provided a bridge loan of $250,000.  This loan has a 10% interest rate and
is due December 31, 2008, or upon Hammonds receiving significant equity
financing. As additional consideration, Hammonds will issue 100,000 shares of
restricted common stock to AMIN.  These shares have been recorded as a debt
discount of $29,000 on the note.
  Note 16
- Subsequent Events
 On
November 7, 2008, AMIN set new record and issue dates of December 31, 2008
and February 25, 2009, respectively, for the special dividend of its shares
of common stock of HMDI to AMIN shareholders.  Additionally, AMIN
increased the special dividend from one to two shares of HMDI common stock for
each share of AMIN common stock.  After these transactions, AMIN's
ownership interest in Hammonds will be approximately 13% of the issued and
outstanding common stock.
 Back to Table of Contents
 15


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATION
  As used
in this Quarterly Report, the terms "we", "us", "our" and the
"Company" means Hammonds Industries, Inc., formerly International
American Technologies, Inc., a Nevada corporation, and its subsidiaries,
Hammonds Technical Services, Inc., Hammonds Fuel Services, Inc. and Hammonds
Water Treatment Systems, Inc. (collectively, "Hammonds"). To the extent that we
make any forward-looking statements in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this
Quarterly Report, we emphasize that forward-looking statements involve risks and
uncertainties and our actual results may differ materially from those expressed
or implied by our forward-looking statements. Our forward-looking statements in
this Quarterly Report reflect our current views about future events and are
based on assumptions and are subject to risks and uncertainties. Generally,
forward-looking statements include phrases with words such as "expect", "anticipate", "intend",
"plan", "believe", "seek", "estimate" and similar expressions to identify
forward-looking statements.
  Overview
  Hammonds
Industries, Inc., a Nevada corporation, is publicly traded on the OTCBB: Symbol
"HMDI". The Company was incorporated on August 18, 1986 and is a 48% owned
subsidiary of American International Industries, Inc., ("AMIN") NasdaqCM:
AMIN.  AMIN consolidates Hammonds even though its ownership is less than
51%, because the AMIN appoints the members of Hammonds’ board of directors.
Since Hammonds is incurring losses and the minority interest has no recorded
common stock equity value, AMIN recognizes 100% of Hammonds’ losses. AMIN’s
ownership percentage will be diluted in the event of the conversion by Vision
Opportunity Fund Limited (VOMF) of their shares of Hammonds' Series A, B and C
Convertible Preferred Stock into shares of Hammonds' common stock. See the
discussion below under "2007 Private Financing Transactions".  Further,
AMIN’s equity interest will be reduced to 13% upon the completion of the special
dividend by AMIN of the Company’s shares, which is presently scheduled
to commence in February 2009.
  In 2005,
the Company, through its parent company, acquired 51% of the capital stock of
Hammonds Technical Services, Inc. Hammonds Technical Services, Inc. and Hammonds
Fuel Additives, Inc. were separate privately-owned Texas companies. In
connection with the 2005 acquisition by the Company, Hammonds Fuel Additives was
merged into Hammonds Technical Services. In April 2005 and January 2006,
respectively, Hammonds Fuel Additives and Hammonds Water Treatment Systems,
respectively, were reincorporated as separate entities from Hammonds Technical
Services, and all three entities are wholly-owned subsidiaries of the Company.
On August 1, 2006, the Company acquired the 49% minority interest of Hammonds
Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water
Treatment Systems, Inc. in consideration for the issuance of 16,000,000
restricted shares of common stock, valued at a price of $0.25 per share, the
price of the Company's common stock at the date of the transaction. As a result
of this transaction, the Company owns 100% of each of the Hammonds
subsidiaries.
 2007
Private Financing Transactions
  In
connection with the agreement of VOMF to exercise up to 4,000,000 Series C
Warrants in March 2007, the Company reduced the exercise price of the Series C
Warrants from $0.50 per share to $0.18 per share through December 31, 2007,
following which the exercise price reverts to $0.50 per share. On March 27,
2007, VOMF exercised 3,970,400 Series C Warrants at a price of $0.18 per share
with net proceeds of $694,672 to the Company.
  On
September 20, 2007, the Company entered into an agreement with VOMF pursuant to
which the Series A, B and C Warrants were amended to: (i) adjust the exercise
price of all of the Warrants to $0.10; and (ii) provide for the issuance of a
total of 2,102,960 shares of the Company's newly authorized Series C Convertible
Preferred Stock in lieu of 21,029,599 shares of common stock. On September 21,
2007, VOMF delivered a notice of exercise of all 21,029,599 Series A, B and C
Warrants at an exercise price of $0.10 per warrant, from which the Company
received net proceeds of $1,981,162.
  In total,
the Company has received approximately $5.4 million from the 2006 and 2007 VOMF
Private Financing Transactions. The material terms of these preferred stock
issuances are included in note 8 to the consolidated financial
statements.
 Back to Table of Contents
 16
 Results of
Operations




Three and Nine Months Ended September
30, 2008 Compared to Three and Nine Months Ended September 30,
2007.




The
following is derived from, and should be read in conjunction with, our unaudited
consolidated financial statements, and related notes for the three and nine
months ended September 30, 2008 and 2007.
  Revenues. Hammonds
generated revenues for the three months ended September 30, 2008 of $1,802,229,
compared to $3,083,286 for the three months ended September 30, 2007,
representing a decrease of $1,281,057, or 42%. Revenues for the nine months
ended September 30, 2008 were $6,428,157, compared to $7,120,461 for the
same period in 2007, representing a decrease of $692,304, or 10%. For the
nine month period, Hammonds
Water Treatment revenues increased by $206,530, or 9%, and Hammonds
Technical Services revenues decreased by $877,166, or 22%.  The
decrease was due to delays in certain materials required for specific job
completion and the influence of an overall worldwide economic
slowdown.  Extensive roof damage caused by Hurricane Ike destroyed the
entire office and sales showroom complex.   Relocation of all
personnel within the complex into temporary facilities has impacted both
production and marketing efforts.  While all computers and accounting
network were saved, virtually all furniture and fixtures within the affected
area were destroyed. The Company is pursuing claims under its insurance policies
for lost income and additional expenses. No estimate of potential recovery can
be made at this time since the costs and losses are continuing.Hammonds' projected backlog of orders at September 30, 2008 is $3.2
million, compared to a backlog of orders of $4.8 million at September 30,
2007.  The
backlog is principally comprised of orders for injectors and
skids.  Subject to releases by customers, the entire projected backlog
at September 30, 2008 is expected to be delivered over the next twelve
months.  Some shipments originally scheduled for September were
shifted to October as a result of delays in components.  Shipping
delays caused by the storm damage result in shifting some sales from the third
quarter to the fourth quarter, while some sales have been lost due to our
limited showroom and marketing presence.
  Cost of Sales.Cost of sales
for the three months ended September 30, 2008 was $1,594,421, or 88% of
revenues, compared to $2,075,445, or 67% of revenues for the same period of
the prior year. Cost of sales for the nine months ended September 30, 2008 was
$5,149,527, or 80% of revenues, compared to $5,402,135, or 76% of
revenues for the same period of the prior year.  Cost of sales as a
percentage of revenue have increased due to the current decrease in
revenue.
  Selling and Administrative.Selling and administrative expenses decreased
to $1,102,374, or 61% of revenues, for the three months ended September 30,
2008, from $1,427,085, or 46% of revenues for the three months ended
September 30, 2007. The current quarter increase in selling and administrative
expenses as a percentage of revenues was primarily due to the decrease in
revenue for the quarter ended September 30, 2008.  Selling and
administrative expenses were $3,487,746, or 54% of revenues, for the
nine months ended September 30, 2008, compared to $3,266,702, or 46% of
revenues, for the nine months ended September 30, 2007.  The increase
in expenses was primarily due to an overall increase in expenses in
engineering, production and marketing of Hammonds' line of ODVs®.  The nine
month increase in selling and administrative expenses as a percentage of
revenues was primarily due to the decrease in revenue for the nine months ended
September 30, 2008.  Increased expenses related to the mitigation of
damages, relocation to new office space within the existing facility, and
restoration of services are reflected in the September expenses and will
continue into the next quarter.  Loss from Operations.Our
loss from operations for the three month period ended September 30, 2008, was
$894,566, compared to 2007 of $419,244.  Loss from operations for
the nine months ended September 30, 2008, was $2,209,116 compared to $1,548,376
for the nine months ended September 30, 2007.  The increase in the
loss from operations for both periods is due to the decrease in
revenues.
  Total Other Expenses.Other
expenses decreased to $99,855 for the three months ended September 30,
2008, from $367,837 for the three months ended September 30, 2007. Other
expenses decreased to $282,828 for the nine months ended September 30,
2008, from $678,035 for the nine months ended September 30, 2007. Other expenses
for the three and nine months ended September 30, 2007 included $386,334 in
finance expense for the issuance of preferred stock. Interest expense for
the three and nine months ended September 30, 2008 compared to 2007 decreased by
$33,749 and $122,643, respectively, due to the decrease in the amount owed
to the parent of $818,500 from September 30, 2007 to September 30,
2008.
  Net Loss.The net loss
increased to $995,348 for the three months ended September 30, 2008, compared to
a net loss of $787,081 for the three months ended September 30, 2007. The net
loss increased to $2,471,957 for the nine months ended September 30, 2008,
compared to a net loss of $2,226,411 for the nine months ended September
30, 2007.  The increase in the net losses for the three and nine month
periods was primarily due to our decrease in revenues.
 Back to Table of Contents
 17
 Liquidity and Capital
Resources
  At
September 30, 2008 and December 31, 2007, we had total assets of $9,768,401 and
$10,815,238, respectively. We had negative working capital of $165,777 at
September 30, 2008, compared to positive working capital of $2,660,254 at
December 31, 2007, representing a reduction of $2,826,031, due primarily to
funding operations and investment in production equipment and amounts owed to
our parent company of $773,063 coming due.
  During
the three months ended September 30, 2008, our parent and VOMF provided bridge
loans of $250,000 each.  These loans have a 10% interest rate and are due
December 31, 2008, or upon Hammonds receiving significant equity
financing.  Hammonds also agreed to issue 100,000 shares to each, our
parent and VOMF, as additional consideration for entering into the
loans.  The Company is in discussions with several groups regarding
the possible investment of additional equity financing to support the continuing
implementation of our business plan.  It is possible that new
investment into the Company might result in dilution to existing
shareholders.
  Net cash
used in operations was $1,587,101 during the nine months ended September
30, 2008, compared to $1,410,301 for 2007. The cash used during the nine months
ended September 30, 2008 was derived primarily from the net loss of
$2,471,957, offset by significant non-cash items included in the net loss
of depreciation and amortization of $687,874 and stock based compensation
of $104,000. The cash used during the nine months ended September 30, 2007 was
derived primarily from the net loss of $2,226,411 and increases in accounts
receivable of $371,093 and inventories of $427,764, offset by an increase
in accounts payable of $113,602, depreciation and amortization of $619,190,
stock based compensation of $448,500, finance expense for the issuance of
preferred stock of $386,334, and a management fee paid in restricted shares of
common stock to Hammonds' parent of $105,000.
  Net cash
used in investing activities was $272,220 during the nine months ended September
30, 2008, compared to cash used of $424,533 for 2007. The cash used during the
nine months ended September 30, 2008 was primarily from the investment in
production equipment of $229,250 and the cost of securing patents and trademarks
of $42,970. The cash used during the nine months ended September 30, 2007 was
primarily from purchases of an option to buy American International
Industries, Inc. stock for $100,000 as part of a lawsuit settlement and the
investment in property and equipment of $303,198.
  Net cash
provided in financing activities was $365,617 during the nine months ended
September 30, 2008, compared to net cash provided in financing activities of
$2,777,376 for the nine months ended September 30, 2007. The net cash provided
in financing activities during the nine month period ended September 30, 2008
was due to bridge loans in the amount of $500,000 provided by our parent
and VOMF, offset by payments on long-term debt and capital lease obligations of
$91,807. The net cash provided by financing activities during the nine month
period ended September 30, 2007 was due to net proceeds of $1,981,162 from the
issuance of 2,102,960 shares of Series C Convertible Preferred Stock in
connection with the exercise by VOMF of all outstanding Series A, B and C
Warrants in September 2007, net proceeds from issuance of 3,970,400 shares of
common stock upon the exercise by VOMF of Series C Warrants at an exercise price
of $0.18 per share resulting in net proceeds of $694,672, and proceeds from
borrowings of $1,284,551, offset by payments on debt of $1,214,444.
  In order
to successfully grow Hammonds' business and its plan to increase market share
for Hammonds' products and services, we have been dependent upon funding from
our parent, which loan at September 30, 2008 was $773,063, and our parent's
ability to secure and maintain our existing $2,000,000 revolving credit line
from a financial institution.
 
 The
Company received approximately $5.4 million from the 2006 and 2007 VOMF Private
Financing Transactions.  As a result of the fact that VOMF has
exercised all of the warrants issued in the Private Financing Transactions, the
Company will not receive any additional funding from VOMF unless new funding
arrangements are negotiated.
  If
additional debt and/or equity financing is required in 2008, we believe that
such financing will be available from our parent and institutional or other
private investors at terms and conditions acceptable to the
Company.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 Interest Rate Risk. The carrying amounts for
cash and cash equivalents, accounts receivable, notes payable and accounts
payable and accrued liabilities shown in the Condensed Consolidated Balance
Sheets approximate fair value at September 30, 2008 and December 31, 2007, due
to the generally short maturities of these items. At September 30, 2008 and
December 31, 2007, our investments were primarily in short-term dollar
denominated bank deposits with maturities of a few days, or in longer-term
deposits where funds can be withdrawn on demand without penalty. We have the
ability and expect to hold our investments to maturity.
  The
Company’s outstanding long-term debt as of September 30, 2008 and December 31,
2007, is at fixed interest rates, prime plus 1%, or prime floating rate. The
Company does not believe that a change of 100 basis points in interest rates
would have a material effect on the Company’s financial
condition.
 Back to Table of Contents
 18
 ITEM 4T. CONTROLS AND PROCEDURES
  Evaluation of disclosure controls
and procedures. As of September 30, 2008, the Company's chief executive
officer and chief financial officer conducted an evaluation regarding the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation
of these controls and procedures, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
 Changes in internal controls.
During the quarterly period covered by this report, no changes occurred in our
internal control over financial reporting that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
 PART
II - OTHER INFORMATION
   ITEM 1. LEGAL PROCEEDINGS
  None.
   ITEM 1A. RISK FACTORS
 For the
nine months ended September 30, 2008 there were no material changes from risk
factors as disclosed in Part I, Item 1A of the Company’s Annual Report on Form
10-K for the year ended December 31, 2007.
   ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
     ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  None.
   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
   ITEM 5. OTHER INFORMATION
  None.
   ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  (a) The
following documents are filed as exhibits to this report on Form 10-Q or
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical reference to the SEC filing that included such
document.
  Exhibit
      No.
              Description31.1
              Certification
      of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 200231.2
              Certification
      of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the
      Sarbanes-Oxley Act of 200232.1
              Certification
      of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of
    200232.2
              Certification
      of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
  (b)
Reports on Form 8-K During the Period Covered by this Report: None.
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 19
 SIGNATURES
   Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
   /s/ Daniel
Dror
 CEO
 Dated: 
November 14, 2008
   /s/ Sherry L.
Couturier
 CFO
 Dated:  November
14,  2008