Analysis
In order to claim the hammer as a reliable out-of-place artifact, one would need either
1. Convincing documentation that the hammer was once naturally embedded in an ancient rock formation, or
2. Independent scientific evidence indicating a problematic age for the hammer.
So far neither has been provided. The lack of evidence for the first condition has already been acknowledged in creationist accounts. Independent evidence for the hammer's age could be gleaned from a number of methods, including Carbon 14 dating on the wooden handle. If there was no appreciable amount of C14 in it (beyond expected residual contamination) it would imply the hammer was more than 50,000 years old, and if younger than that, C14 could help pinpoint its actual age.
However, for years Baugh refused to allow the hammer to be C14 dated. In an exchange of letters between creationist Walter Brown and Jim Lippard in Creation/Evolution, Brown (1989) suggested that the hammer handle has not been dated because Baugh had three "understandable" conditions for dating it: that it be done with mass spectrometry, that Baugh be present during the dating, and that someone else pay for it. However, Lippard countered that no one has objected to the first two conditions, and that Baugh had no right to expect the third, since he's the one making the claims, and thus the one obligated to back them up. Even so, even after others offered to pay for the dating, Baugh declined to have it done. As Day (1991) wrote in a follow up letter: "Far from being 'understandable,' Baugh's stipulations seem to be little short of evasive tactics... If four years have gone by and nothing has happened, I think it is safe to conclude that Baugh has no interest whatsoever in determining the truth about his marvelous hammer."
Finally, in the late 1990's Baugh supporter David Lines reported on a web site (Lines, 1997, 1999) that carbon 14 dating had "recently" been done on a specimen from the inside of the handle, and that the results "showed inconclusive dates ranging from the present to 700 years ago." No information was given by Lines about when or where the dating was done, nor was any formal report referenced. The date range also seems a little curious, since most C14 labs report a date with a plus-or-minus margin of error, rather than a wide range. Perhaps a number of tests were done with different results, but Lines does not clarify this. Evidently preferring a date in the thousands of years, Lines asserted that the dating results provided "graphic evidence that the handle has been contaminated by current organic substances." However, C14 labs have ways of minimizing modern carbon contamination, and it would not likely produce ages orders of magnitude in error.
At any rate, if the reported date range is even roughly indicative of the hammer's age, it is more supportive of the mainstream view of the hammer than Baugh's. After all, Baugh considers the hammer to be a "pre-Flood" relic-- presumably at least a few thousand years old. Baugh reportedly dismissed the results as only evidence that C14 is untrustworthy. However, even many creationists consider C14 dating reasonably accurate to several thousand years or more.
Another potentially useful exercise would be to analyze the composition of the concretion, comparing its lithology and fossil content (both macro and micro) with the nearby creek strata. A shell and other shell fragments are readily visible in the nodule, and Mackay (1985) stated that the fossils in the nodule "are similar to those in the surrounding area." Likewise, Helfinstine and Roth (1994) suggest the lithology of the nodule is the same as the nearby rocks. However, to my knowledge no one has positively identified the clam species, or confirmed whether they are fossil or modern forms, or made a detailed comparison of the lithology or other aspects of concretion with that of nearby rocks. From the brief examinations I made of the object in 1986 and 2006, my impression was that the large clam shell was probably a recent species.
One problem for hammer advocates is that careful analysis of the nodule's composition could conclusively refute Baugh's claim that it is an out- of-place artifact, but could not confirm it. That is, if the nodule contained only geologically recent material, there would be no reason to consider the hammer any older. However, as noted by Cole, if the nodule contained or was composed of ancient material, the hammer itself could still be of recent origin, since it could have been left in a place where a solution of ancient sediment collected and hardened around it. Such limy concretions can sometimes form in decades or less, and have been found around modern objects such as World War II artifacts (McKusick and Shinn, 1980). It's even possible that the nodule might contain a mixture of ancient and modern sediments or organic remains, as might occur in muddy muddles and pits in a mining operation.
The early American style of the hammer, and the largely undistorted and poorly mineralized condition of the handle, further suggests a relatively recent date. Well-preserved wood from Mesozoic or Paleozoic formations would not be expected to have such an appearance, nor to my knowledge have any similar wood specimens been documented in the nearby formation. Lines asserts on Baugh's web site that the hammer is partially "petrified" but I saw no evidence of this when I examined it in person, and other creationists have agreed that the wood in the handle looks relatively fresh, not much different from modern hardwood hammers (Helfinstine and Roth, 1994). In view of these considerations, It seems highly unlikely that the hammer was ever a natural part of the nearby Cretaceous beds, and more likely that it was dropped or discarded by a local miner or craftsman within the last few hundred years. It's also possible that the nodule was brought or washed into the area from some distance away, or from a higher stratum.
Lacking any rigorous geologic evidence for their claims, hammer advocates have tried to make hay from the composition of the hammer head. Mackay (1985) and Lang (1983) reported that the hammer was studied at the renown Batelle Laboratories in Columbus, Ohio, where the head was found to consist of 96.6% iron, 2.6% chlorine, and 0.74% sulfur by weight. Baugh suggested this profile was impossible to duplicate with modern technology under present atmospheric conditions (Helfinstine and Roth, 1994). However, this claim would be difficult to substantiate. Even if the composition were truly unique, it would more likely indicate a lost or abandoned technology, not evidence against mainstream geology. According to Helfinstine and Roth (1994) a "tomographic x-ray" of the hammer, taken by Texas Utilities in 1992, showed no inclusions or irregularities in the head. Curiously, they and Baugh interpreted this as evidence of "advanced metallurgy" from a superior pre-Flood culture, rather than further evidence that it is a relatively modern hammer.
Mackay (1994) stated that "research continues into the unusually shiny transparent layer which surrounded the hammer when it was discovered and why it did not corrode for several months." However, such statements contradict other creationist comments (Helfinstine and Roth, 1994) that the hammer had a brown (and thus presumably not shiny) surface when first broken from the concretion, and only when scratched was a shiny subsurface revealed.
Lines (1996) noted that the file cut made in the hammer head in 1934 has remained "corrosion-free" in over 60 years, and some creationists have suggested this indicates some unique or mysterious attribute. However, as long a metal object is kept dry and clean, this would not be unexpected, and the bulk of the head already in a somewhat rusted condition would be expected to oxidize somewhat faster than the scratched mark.
In the Bible-Science Newsletter, Walter Lang (1983) stated that Batelle lab technicians "were convinced that the rock itself could not have been formed except where there was a great deal of water and pressure," and that the "partly coalified" condition of the handle indicated to the technicians that the wood was "under pressure with water and volcanic action." However, one has to wonder whether these statements come from the technicians or hammer advocates themselves, since 1. Limy concretions are generally thought by geologists to form in calm rather than violent conditions, 2. Very little of the hammer handle is carbonized, and such features can and normally do originate without any "volcanic" action, and 3. No formal report of the Batelle analysis was ever produced (Helfinstine and Roth, 1994). Moreover, all assertions about Batelle work on the hammer appear to be suspect in view of a leaflet inserted into the February 1985 issue of Creation Ex Nihilo, which stated that all hammer research discussed in their article was privately done, and "all references to inferences that research or reports on the Hammer were done or prepared by Batelle Laboratories are in error."(Mackay 1985)
Another weak attempt to counter "evolutionist" skepticism toward Baugh's hammer claims was a comment by Mackay that "If it had been dropped under present atmospheric conditions and had to lie waiting to be buried, it would have lasted no longer than five years, after being buried." However, the hammer need not "lie waiting" very long before being buried; it could have fallen into an area where it would be soon if not immediately subject to a sediment solution. Once buried, it would be largely protected from decay in either the mainstream scenario or his own.
During a June 2006 talk at his Creation Evidence Musuem, Baugh again left the impression that the hammer was found embedded in a Cretaceous formation--telling the audience that it was found "in Cretaceous strata"-- and again failing to clarify that the hammer and nudule combination was found loose rather than in situ. As recently as September 2008 Baugh supporter Ian Juby encouraged the same unfounded notions on his web site, implying that it was known to be from Cretaceous rock (Juby, 2008).
Perhaps the most bizarre claim about the hammer was Baugh's statement that "Both the wooden handle and metal shaft were completely encased in the sandstone, indicating that man was not around to make the artefact [sic] before the sandstone encased it."(Baugh, 1987). Besides contradicting other accounts that the hammer was partly exposed when found, Baugh fails to explain how the hammer could have been made in the first place if "man was not around...before the sandstone encased it."
Conclusions
As with all extraordinary claims, the burden of proof is on those making the claims, not on those questioning them. Despite some creationist assertions that the hammer is a dramatic pre-Flood relic, no clear evidence linking the hammer to any ancient formation has been presented. Moreover, the hammer's artistic style and the condition of the handle suggest a historically recent age. It may well have been dropped by a local worker within the last few hundred years, after which dissolved sediment hardened into a concretion around it. Unless Baugh or others can provide rigorous evidence that the hammer was once naturally situated in a pre-Quaternary stratum, it remains merely a curiosity, not a reliable out-of-place artifact.