U.
S. SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549




AMENDMENT
NO. 2 TO




FORM
10-KSB/A




(Mark
One)




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




For the
fiscal year ended December 31, 2007




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




For the
transition period from ___________ to _____________




Commission
File Number 000-30291




SHUMATE
INDUSTRIES, INC.


(Name of
small business issuer as specified in its charter)




Delaware
              03-0453686(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer
                Identification
      No.)





1011
Beach Airport Rd


Conroe,
Texas 77301


(Address of principal
executive offices, including zip code)




Registrant’s
telephone number, including area code:  (936) 539-5770


Securities
registered pursuant to Section 12(b) of the Act: None


Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, $.001 par
value









Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act
of 1934 during the past 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.YesxNo ̈




Check if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form
10-KSB. ̈




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




The
issuer’s revenues for the most recent fiscal year were $9,033,614.




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $3,902,500 as of May 14,
2008.  Shares of common stock held by each officer and director and by
each person or group who owns 10% or more of the outstanding common stock
amounting to 5,337,077 shares have been excluded in that such persons or groups
may be deemed to be affiliates.  This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.




As of May
14, 2008, 20,947,071 shares of our common stock were issued and
outstanding.




Documents
Incorporated by Reference:   None.




Transitional
Small Business Disclosure Format:  No.







EXPLANATORY
NOTE





In response to a comment
raised by the staff of the Securities and Exchange Commission, we are filing
this Amendment No. 2 on Form 10-KSB (the “Amendment”) to our Annual Report on
Form 10-KSB/A for the year ended December 31, 2007 originally filed on June 5,
2008.  We are filing this Amendment to restate our financial
statements presented in our Annual Report on Form 10-KSB/A for the year ended
December 31, 2007 which previously accounted for $2 million in debt forgiveness
as income (related to promissory notes issued to Stillwater National Bank and
Trust Company) under our consolidated statement of operations for the fiscal
year ended December 31, 2006.   As a result of a normal periodic
review of our financial statements by the staff of the Securities and Exchange
Commission, management subsequently determined on November 26, 2008 that it was
more appropriate to record the $2 million in debt forgiveness as additional paid
in capital.  This will effect our financial statements as follows: (i)
$2 million in debt forgiveness income was removed from the statement of
operations under the year ended December 31, 2006 presentation resulting in an
increase to net loss of $2,000,000 and an increase in net loss per share of
$0.13 per share from $0.09 to $0.22, (ii) the balance sheets for both December
31, 2006 and 2007 were changed to increase accumulated deficit and additional
paid in capital by $2 million, (iii) on the Statement of Changes in Stockholders
Equity (Deficit), the net loss for the year ended December 31, 2006 and
additional paid in capital were increased by $2 million (iv) on the Statement of
Cash Flows the increase in net loss of $2 million for the year ended December
31, 2006, was offset by the removal of the $2 million of debt forgiveness
income.





This
Amendment amends and restates only certain information in the following sections
as a result of the current restatements described above:





Part
I—Item Management’s Discussion and Analysis or Plan of Operations


Part
I—Item 7.  Financial Statements


Part
I—Item 8A.  Controls and Procedures





In
addition, we are also including currently-dated Sarbanes Oxley Act
Section 302 and Section 906 certifications of the Chief Executive
Officer and Chief Financial Officer that are attached to this Amendment as
Exhibits 31.1, 31.2, 32.1 and 32.2.





For the
convenience of the reader, this Amendment sets forth the entire Form 10-KSB
which was prepared and relates to the Company as of December 31, 2007.
However, this Amendment only amends and restates the Items described above to
reflect the effects of the restatement and no attempt has been made to modify or
update other disclosures presented in our December 31, 2007 Form 10-KSB.
Accordingly, except for the foregoing amended information, this Amendment
continues to speak as of June 5, 2008 (the filing date of the December 31,
2007 Form 10-KSB/A), and does not reflect events occurring after the filing of
our December 31, 2007 Form 10-KSB/A and does not modify or update those
disclosures affected by subsequent events. Forward looking statements made in
the December 31, 2007 Form 10-KSB/A have not been revised to reflect
events, results or developments that have become known to us after the date of
the original filing (other than the current restatements described above), and
such forward looking statements should be read in their historical context.
Unless otherwise stated, the information in this Amendment is not affected by
such current restatements is unchanged and reflects the disclosures made at the
time of the original filing.




PART
I




Shumate
Industries, Inc., including all its subsidiaries, are collectively referred to
herein as “Shumate Industries,” “Shumate,” “the Company,” “us,” or
“we”.




Item
1.  DESCRIPTION OF BUSINESS




Overview





Shumate
Industries, Inc. is a Texas based energy field services
company.  Shumate is a holding company that, through its subsidiaries,
operates in two principal businesses: contract machining and manufacturing and a
valve product line. Shumate seeks to leverage its existing infrastructure,
expertise, and customer channels to grow its business and introduce new
technologies to the energy markets.


2





We
currently employ 87 people at two plants totaling approximately 90,000 square
feet in Conroe, Texas, just north of Houston. Our executive offices are located
at 1011 Beach Airport Road, Conroe, Texas 77301. Our telephone number is (936)
539-5770 and our Internet address is www.shumateinc.com.





Contract
Machining and Manufacturing – Shumate Machine Works, Inc.





Our
contract machining and manufacturing division, Shumate Machine Works, Inc.,
focuses in the energy field services market. We manufacture products, parts,
components, and assemblies for our customers designed to their specifications.
We provide state of the art 3-D modeling software, computer numeric-controlled,
or CNC, machinery and manufacturing expertise to our customers’ research and
development, engineering, and manufacturing departments for desired results with
their products.





The
diverse line of products we manufacture include the following:





·
            Expandable
      tubular products including liner hangers, launchers and sand screens for
      energy field service applications;


·
            Top
      drive assemblies, sub-assemblies and spare service
  parts;


·
            Measurement
      while drilling (MWD) products;


·
            Directional
      drilling products;·
            Completion
      tools;


·
            Exploration
      products for research and
development;


·
            Natural
      gas measurement equipment, including fittings and
  valves;


·
            Power
      frames for centrifugal pumps and mud motors;
and


·
            Sub-sea
      control equipment.





Our
investment in capital equipment and software provides us capabilities to perform
close tolerance highly specialized work for oil field equipment and tools,
process controls, formation evaluation tools, and exploration and production
products. Our capabilities include producing large-diameter products and close
tolerance machined parts that range up to thirty-four feet in length using a
myriad of materials of construction including high grade carbon steel, high
grade stainless steel, nickel, and chrome based alloys. We use state of the art,
large part CNC equipment in the production of these parts and have developed
in-house trade secrets and processes with respect to the manufacture of certain
products. We produce complex assemblies, including expandable tubing technology
products that are used in field service operations under extreme environmental
conditions for oil and gas exploration.





Our
customers include, without limitation, Baker Hughes, BJ Services Company, Canrig
Drilling Technology, a Nabors Industries company, Enventure Global Technologies,
FMC Technologies, Halliburton Energy Services, National Oil Well Varco,
Oceaneering Intervention Engineering, Shell Development, Smith International,
and Weatherford International.





Valve
Product Technology – Hemiwedge Valve Corporation





We formed Hemiwedge Valve Corporation
as a wholly-owned subsidiary to develop and commercialize a new patented
technology addressing what we believe to be a significant opportunity in the
global valve market.


Our first
product line, known as the Hemiwedge® Cartridge valve, is a quarter-turn
hemispherical wedge valve engineered to provide what we believe are substantial
technological improvements compared with what is available in the marketplace
today, such as traditional butterfly, ball, and gate valve designs.





We
believe that the patented design of the Hemiwedge® Cartridge valve combines the
benefits of quarter-turn valves with the durability of gate valves. The
Hemiwedge® Cartridge valve has a non-rotating core which guides the fluid flow
through the valve to the Hemiwedge® itself. This is a hollow hemisphere where
the inner and outer walls are slightly offset, having non-concentric centers,
producing a hemispherical wedge shape - the “Hemiwedge®.” Operation of the valve
rotates the Hemiwedge®, a quarter-turn, moving it between the core and valve
seat, thus controlling the flow. We believe that these design features in the
combination of the Hemiwedge® shut off and stationary core make the Hemiwedge®
Cartridge valve unique.


3




We
believe that the Hemiwedge® Cartridge valve will offer substantial improvements
over currently available valve technologies offered by our competition as well
as a great value proposition to future customers as a result of the following
improvements:





New
cartridge replacement design reduces maintenance downtime and minimizes supply
disruptions





Our new
top-entry cartridge design has all of the internal parts of the valve affixed to
the bonnet. Therefore, once the bonnet is removed with top-entry ease for
in-field maintenance, all the internals are removed as well, including the
seals. A new pre-certified replacement cartridge can be installed without
removing the valve body from its line of service. We believe this represents a
substantial reduction in maintenance and service downtime from a few days to a
few hours, depending on the application, location and size. We also believe this
is a significant cost-reduction benefit to users, especially in severe service
applications such as entrained solids, sour gas gathering, and CO2
flooding  where valves fail frequently and supply disruption from
shutting down a line during service may result in significant costs and loss of
revenues.











Reduced
failure frequency rates from superior design





We
believe many times when valves “break,” it is usually due to leaks caused by
leaking seals within a valve. Most ball valves, by example (see “Figure 2”),
have more turbulent flow patterns where the fluid within the valve comes into
direct contact with the seals during modulation, actuation and service. Our
Hemiwedge® Cartridge valve seals (see “Figure 1”) are not placed within the flow
path and therefore we believe our valve is more durable, lasts longer, and will
not encounter seal damage as frequently as currently available valve products as
a result of its protected sealing surfaces. We believe that this product
advantage will be more evident in severe and critical service
applications.




Figure 1, shows the
      transition between on and off in a Hemiwedge® Cartridge valve. This
      demonstrates how the stationary core and moving Hemiwedge® guides the flow
      past the seal face with a minimum of flow turbulence. This protects the
      sealing surfaces when handling abrasive or corrosive
    fluids.
                
                Figure 2, shows the flow
      through a ball or plug valve. Both the inlet and the outlet flow pass
      across the sealing surfaces, with the ball moving across the main flow
      path. This highly turbulent flow action causes premature failure of the
      seals in most severe
applications.




4





Hemiwedge® Down hole
Isolation valve





We executed a two year development
agreement in July 2006 with a subsidiary of Shell Technology Ventures known as
At Balance Americas. At Balance is not a related party and the development
agreement was negotiated on an arm’s length basis.  As a leading
drilling services company focused in managed pressure drilling (MPD), At Balance
sought development of a totally new design and prototype down hole valve to be
used in drilling applications in connection with managed pressure drilling.
Throughout 2007, we designed, engineered, manufactured and performed
above-ground testing on the first size of a product line. We have determined
that as of the date of this report the product in development for At Balance is
developed substantially enough to enter into licensing discussions for purposes
of commercialization.


5


Hemiwedge® Sub sea high
pressure valve





We have developed additional Hemiwedge®
technology now in prototype stage, of a 20,000 PSI high pressure valve utilizing
a metal-to-metal or all metal seal for chemical injection applications sub-sea.
We intend to exclusively or non-exclusively license this technology for the
specific market vertical of sub-sea and below two inch bore size for a high
pressure chemical injection valve product line.





Fiscal
2007 and Fiscal 2008 Developments





In 2007,
we continued to experience increased revenues in our Shumate Machine Works
division. Increases in commodity prices, particularly in the energy sector, and
in activity level in the energy field services industry resulted in increased
demand for our products from our existing customers. In particular, we received
increased orders for drilling tools, liner hangers, top-drive units and
components in 2007.  As a result, we increased revenues by
approximately $525,000, or 7%.





While we
have achieved certain milestones our results from operations in 2007, we
continue to have substantial indebtedness outstanding.  As of December
31, 2007, we had outstanding indebtedness to Stillwater National Bank of
approximately $3.8 million.


.


March
2007 Warrant Solicitation





On March
14, 2007, we agreed that we would issue new Class B Warrants to any holders of
Class A Warrants (issued in our December 2006 offering) who exercised all or a
portion of their Class A Warrants by no later than 5:00 p.m. Central Daylight
Time on March 31, 2007.  The Class B Warrants have a term of five
years, expiring on March 31, 2012, and an exercise price of $2.00 per
share.  The Class B Warrants include piggy-back registration rights,
subject to customary underwriter cutbacks.  Since the common stock
underlying the Class B Warrants was not registered by March 31, 2008, the
holders are entitled to exercise the Class B Warrants on a cashless basis at any
time that there is not an effective registration statement covering the resale
of the common stock underlying the Class B Warrants.  As of March 31,
2007, an aggregate of 536,300 of our Class A warrants were exercised in
connection herewith and we received gross proceeds of $670,375
therefrom.  In addition, we issued 536,300 shares of our common stock
and 536,300 Class B Warrants in connection with the exercise of the 536,300
Class A Warrants.





2007
Bridge Notes





Between
July 10, 2007 and November 1, 2007, we sold $3,050,000 of principal amount of
Bridge Notes with warrants to purchase 610,000 shares of our common stock to
accredited investors in a private offering pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act.  The
Bridge Notes have a 1 year term and bear interest at ten percent (10%); payable
monthly in arrears, however we have the right to defer any interest payment and
accrue same to principal. As of December 31, 2007, approximately $116,000 in
interest was accrued to principal.  At the election of the holders,
the Bridge Notes are convertible into our common stock at a fixed conversion
price of $1.89 or into our next Offering.  If not otherwise converted,
we will be required to prepay the Bridge Notes upon consummation an Offering or
its maturity.  An NASD member firm, acted as primary placement agent
in connection with the offering and received $210,000 in commissions while
another NASD member firm received $5,000 in placement agents
fees.  Our net proceeds of this offering after the payment of
commissions, fees and other expenses of the offering were approximately
$2,825,000.





Amended
Stillwater Credit Facility





On
January 25, 2008, we entered into an Amended and Restated Loan Agreement with
Stillwater National Bank and Trust Company (the “Amended Loan
Agreement”).  On October 19, 2005 we entered into that certain
Agreement (as reported in our Current Report on Form 8-K dated October 19, 2005)
with Stillwater, which Agreement was amended by a certain First Amendment to
Agreement and Guarantors’ Consent dated October 19, 2006, as amended by a
certain Second Amendment to Agreement dated effective January 19, 2007
(collectively, the “Prior Agreement”).





The
Amended Loan Agreement amends and restates the Prior Agreement as
follows:


6





1.           Term
Loan.  Our prior Term Note dated October 19, 2005 in favor of
Stillwater had an outstanding principal balance of $3,003,998 (as of January 25,
2008) and a maturity date of April 19, 2008.  Stillwater loaned us
(along with our co-borrowers Shumate Machine Works, Inc. and Hemiwedge Valve
Corporation) $3,329,000 pursuant to a new term note dated January 25, 2008,
which funds advanced under the new term note were used to refinance the old term
note and provide working capital.  The new term note requires us to
make 26 equal monthly payments (beginning on February 28, 2008) in an amount
sufficient to fully amortize principal and interest on the amended and restated
note over 64 months.  The new term note is due and payable on April
19, 2010.  The new term note bears interest at a rate equal to the
prime rate plus two percent, and it is secured by a first priority security
interest in all of our existing and future assets as well as a security interest
in certain personal assets of Larry Shumate.





2.           Revolving
Loan.  Our prior revolving promissory note dated October 19,
2005 in favor of Stillwater, had an outstanding principal balance of $893,676
(as of January 25, 2008) and a maturity date of April 19,
2008.  Stillwater loaned us (and the other co-borrowers set forth
above) $1,000,000 pursuant to a new revolving promissory note dated January 25,
2008, which funds advanced under the new revolving promissory were used to
refinance the old revolving promissory note and provide working
capital.  The initial balance on the new line of credit was equal to
the balance of our previous line of credit with Stillwater ($893,676 principal
balance as of January 25, 2008).  The advances available under the new
revolving promissory note are limited to a borrowing base of the sum of (a) 85%
of eligible accounts receivable, and (b) 50% of eligible
inventory.  The new revolving promissory note bears interest at a rate
equal to the prime rate plus two percent, and it is secured by a first priority
security interest in all of our existing and future assets as well as a security
interest in certain personal assets of Larry Shumate. On the 28th day of
each month, beginning January 28, 2008, we will pay all interest accrued on the
new revolving promissory note.  The amount we can borrow on the line
of credit is subject to qualifying accounts receivable and
inventory.  The new revolving promissory note will mature and become
fully due and payable on April 19, 2009.





The loan
documents for the Stillwater line of credit and term loan require us to meet
certain financial ratios and tests.  Stillwater issued waivers under
the original credit facility for periods tested where were not in compliance
with certain covenants thereunder.  However, we have not received a
waivers for the March 31, 2008 period under the Amended Stillwater Credit
Facility where we were not in compliance with certain covenants
thereunder.  As of the date of this report, we have not received a
notice of default from Stillwater.  Should Stillwater decide to
declare a default, it would result in an acceleration of the related debt and
could result in Stillwater foreclosing on our assets.





We
anticipate that increasing energy commodity prices, including prices of oil and
natural gas, should continue to cause our customers to increase their drilling
and other exploration activities.  As a result, we anticipate seeing
increased oil rig counts as well as a renewal of drilling and production
activity in previously dormant areas.  We believe that such an
increase in activity would result in increased demand for our energy related
field service products during the 2008 fiscal year.  In addition, we
anticipate that our recent commercialization of the Hemiwedge® Cartridge valve
product line will enhance our profitability, although there can be no assurance
thereof.





Transactions
Relating to Beach Road Facility





On May
15, 2008, our wholly owned subsidiary, Shumate Machine Works entered into a
series of simultaneous transactions pursuant to which it purchased the property
located at 1011 Beach Airport Road, Conroe, Texas 77301, underlying its lease
(the “Original Lease”) with Brewer Family Charitable Remainder Annuity Trust
#1.  The terms of the Original Lease included an option to purchase
the underlying property.  Shumate Machine Works purchased the property
for $1,726,949 pursuant to a warranty deed.





Concurrently
with the purchase of the property, Shumate Machine Works sold this property to
Trader Properties LLC, which Trader Properties immediately leased to Hemiwedge
Valve Corporation.  Shumate Machine Works sold the property to Trader
Properties for an aggregate purchase price of $2,180,000 pursuant to a general
warranty deed with vendor’s lien.  As such, Shumate Machine Works
received net cash of $319,617.   These proceeds were used to pay
back certain indebtedness.





The terms
of the Commercial Lease Agreement between Hemiwedge Valve Corporation and Trader
Properties is for a term of 10 years with a monthly rent of $24,000 per month,
which shall be increased by 2% each year for the term of the
lease.  Hemiwedge Valve Corporation is required to maintain public
liability insurance of not less than $1,000,000 during the term of the
lease.  To secure performance under the commercial lease, Hemiwedge
Valve Corporation granted Trader Properties a lien and security interest against
all of its’ non-exempt personal property that is in the leased
premises.


7





Shumate
Industries has guaranteed payment and performance of the lease pursuant to a
Guaranty Agreement.  In addition, Shumate Industries agreed to issue
Trader Properties a five year warrant to purchase 100,000 shares of its common
stock at an exercise price of $0.25 per share prior to June 15,
2008.





Business
Development





Organization





Our
predecessor, Global Realty Management Group, Inc., or GRMG, was incorporated in
the State of Florida in 1997.  In June 2002, GRMG reincorporated under
the laws of the State of Delaware from the State of Florida pursuant to a merger
with a newly formed Delaware corporation.  Under the terms of this
reincorporation merger, GRMG changed its name from “Global Realty Management
Group, Inc.” to “Excalibur Industries, Inc.”  In October 2005, we
changed our name from “Excalibur Industries, Inc.” to “Shumate Industries,
Inc.”





Acquisition
of Hemiwedge Assets





On
December 5, 2005, we acquired the intellectual property rights to the Hemiwedge®
line of products, including the Hemiwedge® valve, from Soderberg Research and
Development, Inc. and certain of its affiliates.  The intellectual
property rights acquired consist of all patents, trademarks, and internet
website relating to the Hemiwedge® product line.  For these
intellectual property rights, we paid $138,500 in cash and a two-year, six
percent (6%) promissory note in the principal amount of $100,000, payable in 24
equal installments of principal and interest.  In addition, we agreed
to deposit: (a) $72,000 into an escrow account, the property of Soderberg
Research Inc., to be paid in the form of a monthly advance in the amount of
$3,000 for each month of the 24 month period beginning with the month
immediately following the closing date; and (b) three percent (3%) of the net
sales proceeds collected from customers from: (i) gross revenue from sales of
products to which the acquired intellectual property relates, less (ii) sales
and/or use taxes, import and/or export duties, outbound transportation costs,
and amounts allowed or credited due to returns, which payments shall begin two
years after the closing date and continue until March 29, 2013.  The
$72,000 in monthly advances shall be credited against the three percent (3%) of
the net sales proceeds.





Reorganization





On
October 19, 2005, we completed a restructuring of our company, resulting in a
significant reduction of our outstanding debt and providing us with a
strengthened balance sheet and reduced debt servicing requirement. The
restructuring was effected through an out-of-court restructuring, or
“recapitalization plan,” which consisted of the following:





·
            an
      agreement to amend and restate a series of notes issued to Stillwater
      National Bank, or Stillwater, into one term
  note;


·
            the
      extension of our current line of credit with
  Stillwater;


·
            the
      issuance of a convertible note to
Stillwater;


·
            the
      issuance of a note, by Stillwater, to our Chief Financial Officer to
      advance funds to purchase shares of our common stock for
      $250,000;


·
            the
      conversion of a portion of our debt to Stillwater into 20% of our
      then-outstanding common stock after giving effect to the
      restructuring;


·
            our
      reacquisition of the capital stock of our operating subsidiary, Shumate
      Machine Works;


·
            a
      release from Stillwater for any indebtedness not covered
      above;


·
            the
      exchange of our outstanding unsecured notes, including principal and
      accrued interest, for our common stock;
and


·
            the
      grant of restricted stock awards to our executive officers, in return for
      their personal guarantees on new bank debt, and to our non-employee
      directors.




8





In
addition, in connection with the recapitalization, we changed our name to
“Shumate Industries, Inc.” and effected a 1-for-7 reverse stock split of our
then outstanding shares of common stock.  The recapitalization plan,
the name change, the reverse stock split, the adoption of our 2005 Stock
Incentive Plan, and the re-election of our directors were all approved at a
special meeting of our stockholders on October 19, 2005.





The
recapitalization plan for achieving our financial goals closed on October 19,
2005 and consisted of the following transactions (the “restructuring
transactions”):





Amended and Restated Term
Note.  Stillwater has amended and restated a series of notes in
the current aggregate principal amounts of approximately $9,413,000 into an
amended and restated note in the principal amount of approximately
$5,600,000.  The amended and restated note requires interest only
payments for the six months following closing, and thereafter, requires us to
make 24 equal monthly payments in an amount sufficient to fully amortize
principal and interest on the amended and restated note over 120
months.  The amended and restated note is due and payable 30 months
after closing, at which time, we will be required to make a balloon payment of
the entire outstanding principal balance and all accrued
interest.  The note bears interest at a rate equal to the prime rate
plus two percent, and it is secured by a first priority security interest in all
of our existing and future assets.  The proceeds of this note were
applied as follows: $303,000 to purchase machines from Larry C. Shumate, our
President and Chief Executive Officer, and from A. Earl Swift, a former
director; $100,000 to purchase the capital stock of Shumate Machine Works; and
the remainder was applied to our existing indebtedness to
Stillwater.





Revised Line of
Credit.  Stillwater has extended our current revolving line of
credit in an amount of up to $1,000,000 for one year.  The initial
balance on the line of credit is the balance of our existing line of credit with
Stillwater, less the excess transferred to the amended and restated
note.  The advances available under the line of credit are limited to
a borrowing base of the sum of (a) 80% of eligible accounts receivable, and (b)
50% of eligible inventory.  The line of credit bears interest at a
rate equal to the prime rate plus two percent, and it is secured by a first
priority security interest in all of our existing and future
assets.  We failed to repay the line of credit on October 19, 2006, as
we were required to do by our agreement with Stillwater.  As of
October 19, 2006 we and Stillwater entered into a First Amendment to Agreement
and Guarantors’ Consent pursuant to which Stillwater agreed to redefine the line
of credit maturity date to January 19, 2007, which was subsequently extended to
April 19, 2008.





Convertible
Note.  We issued a convertible note to Stillwater in the
principal amount of $2,500,000. The principal and accrued interest on the
convertible note is convertible, at Stillwater’s option, into shares of our
common stock at a conversion rate of $1.00 per share (on a post reverse stock
split basis).  The convertible note matures on the earlier of 60
months from the date of issuance or the date on which it is fully converted into
our common stock.  Interest on the convertible note shall accrue from
the date of closing until the earlier of conversion or 24 months, at which time
the accrued interest was capitalized into principal.  Beginning at the
end of the ninth quarter, we are obligated to make quarterly interest payments
on the convertible note.  The convertible note bears interest at a
rate equal to the prime rate plus two percent, and it is secured by a first
priority security interest in all of our assets.  We have agreed to
include the shares of common stock underlying the convertible note on any
eligible registration statement that we may file with the Securities and
Exchange Commission under the Securities Act of 1933 in the next five
years.





On April
13, 2006, we entered into a letter agreement with Stillwater pursuant to which
Stillwater agreed to accept $500,000 from us in full satisfaction of the secured
convertible promissory note, subject to certain conditions.  On August
9, 2006, the letter agreement was amended to increase the payment by $25,000 to
$525,000 if payment was made between September 2, 2006 and December 1, 2006 and
by $50,000 to $550,000 if payment was made between December 2, 2006 and March 1,
2007.  On December 1, 2006 we repaid the secured convertible
promissory note in full.





CFO
Note.  Stillwater has loaned $350,000 to our Chief Financial
Officer, Matthew C. Flemming, to purchase an aggregate of 250,000 newly issued
shares (post reverse stock split) of our common stock, representing
approximately 2.16% of our outstanding common stock after giving effect to the
restructuring, for a total purchase price of $250,000.  The balance
was applied to the existing personal indebtedness of Mr. Flemming to Stillwater
of approximately $10,000,000 under a personal guarantee of our indebtedness to
Stillwater.  Stillwater has released Mr. Flemming from the remainder
of his personal guarantee.


9





Conversion of Prior Bank
Debt.  Stillwater has exchanged $2,368,000 of our outstanding
indebtedness to Stillwater for 2,368,000 newly issued shares of our common stock
(on a post reverse-split basis), representing not less than 20% of the
outstanding shares of our common stock after giving effect to the
restructuring.  We have agreed to include these shares of common stock
on any eligible registration statement that we may file with the Securities and
Exchange Commission under the Securities Act of 1933 in the next five
years.





Releases.  Stillwater
has released us and our Chief Financial Officer, Matthew C. Flemming, from our
respective obligations of the prior debt to Stillwater, except to the extent
that such prior debt is amended and restated, issued, or guaranteed as set forth
above.





Unsecured Note Exchange
Offer.  Our unsecured note holders have exchanged all of our
outstanding unsecured notes, with interest rates ranging from 6% to 12% and all
currently due and owing, for approximately 1,691,310 newly issued shares of our
common stock (on a post reverse-split basis), representing approximately 14.61%
of the outstanding shares of our common stock after giving effect to the
restructuring.





Restricted Stock
Awards.  Our board of directors have granted restricted stock
awards of approximately 3,950,000 shares of newly issued common stock (on a post
reverse-split basis) to our executive officers and our non-employee directors,
representing approximately 34.12% of the outstanding shares of our common stock
after giving effect to the restructuring.  These shares vested on the
closing of the restructuring.





As previously reported on a current
report on Form 8-K, on April 28, 2005, Excalibur Holdings, our bankrupt
subsidiary and holder of 100% of the common stock of Shumate Machine Works,
Inc., our sole operating subsidiary, received notice from Stillwater National
Bank that Stillwater intends to dispose of the capital stock of Shumate Machine
Works in a private sale after May 9, 2005 pursuant to the Oklahoma Uniform
Commercial Code.  As part of the restructuring, Stillwater transferred
100% of the capital stock of Shumate Machine Works to us.





A
complete description of the restructuring plan is set forth in our definitive
proxy statement for the October 19, 2005 special meeting of stockholders, which
has been filed with the Securities and Exchange Commission.





Bankruptcies





On
December 31, 2003, three of our operating subsidiaries, Excalibur Steel,
Excalibur Services, and Excalibur Aerospace, each filed a voluntary petition for
protection under Chapter 7 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court, Southern District of Texas.  On July 26, 2004, the
United States Bankruptcy Court, Southern District of Texas, discharged Excalibur
Steel and Excalibur Aerospace of all of its debts and liabilities pursuant to
Chapter 7 of the U.S. Bankruptcy Code, and on August 3, 2004, the United States
Bankruptcy Court, Southern District of Texas, discharged Excalibur Services of
all of its debts and liabilities pursuant to Chapter 7 of the U.S. Bankruptcy
Code.  As a result of the discharge of these liabilities, we recorded
$5,218,883 in debt forgiveness income in 2004.





On March
9, 2005, Excalibur Holdings, Inc., our wholly-owned subsidiary and the former
parent corporation of Shumate Machine Works, Inc., filed a voluntary petition
for protection under Chapter 7 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court, Southern District of Texas.  On November 30,
2005,the United
States Bankruptcy Court, Southern District of Texas, discharged Excalibur
Holdings of all of its debts and liabilities pursuant to Chapter 7 of the U.S.
Bankruptcy Code. As a result of the discharge of these liabilities, we recorded
$1,837,295 in debt forgiveness income in 2005.





The
Company currently has two wholly-owned subsidiaries.  Each of the
following former subsidiaries of the Company has been dissolved: Excalibur
Steel, Excalibur Services, Excalibur Aerospace and Excalibur
Holdings.





Our
Markets





The
energy field services market is comprised of several market segments including
oil & gas field services, pipeline and transportation, process controls,
fluid management and controls, sub-sea, refining, and maintenance services for
these areas.  We currently manufacture products, spare parts, and
assemblies for the oil & gas field services market segment. With our new
Hemiwedge® Cartridge valve product line, we intend to expand into process
controls, which is sometimes known as the energy flow control
market.  We may also expand into other areas of the energy field
services market to pursue growth strategies that complement and/or leverage our
current business and expertise.


10





Contract
Machining and Manufacturing – Shumate Machine Works





The
dollar size of the United States (U.S.) oil & gas field services market can
be measured by the U.S. drilling and completion activity spending and the total
U.S. well service and work-over spending.  In its March 2008 Drilling and Production Outlookreport, Spears and Associates, a leading energy market research firm,
stated that U.S. drilling and completion spending was $116.9 billion for 2007,
up 12% from the year 2006, and that U.S. well service and work-over or
production spending was $16.2 billion in 2007, approximately equal to
2006.





Valve
Product Technology – Hemiwedge Valve Corporation





We
believe that the industrial valve market is large and growing. According to a
recent report from The McIlvaine Company, the dollar value of industrial valve
shipments in 2007 was projected at approximately $8.5 billion in the United
States, up almost 4% from 2006, and $44.8 billion worldwide, up approximately 4%
from 2006.





Neither
the Spears and Associates report nor the McIlvaine Company report was prepared
for us nor has either company consented to the use of this information in our
report; rather, these reports are available for public use.





Our
Strategy





Strategies
to achieve our growth objectives include the following:





Commercializing and growing our
proprietary new Hemiwedge® valve technology via the Cartridge valve product
line, Down-hole isolation valve and licensing agreements for sub-sea
applications of the valve.  In late December 2006 we launched
our Hemiwedge®
technology with the Hemiwedge® Cartridge valve product line, a surface-level
engineered valve, targeting oil and gas, process and pipeline
applications.





Generating more revenues and
increasing our profit margins by expanding our contract machining and
manufacturing business and through investing in additional state-of-the art CNC
equipment which offers us the ability to make increasingly complex tools as
required by our customers.As a result of higher commodity
prices, activity levels and pricing for our customers, we will continue to
expand our operations at Shumate Machine Works and invest in additional
computer-numeric controlled machinery that allows us to manufacture higher
precision critical components for our customers growing demand of energy
equipment.





Developing strategic alliances with
other companies to leverage our valve technology into market segments where we
have little or no expertise.We intend to license and partner
our Hemiwedge® technology in market verticals where we have little or no
expertise to maximize the technology’s value. For example, our Hemiwedge®
technology has been tested in severe service applications and the company may
partner with another company dominate in a particular market vertical such as
tar sands or mining utilizing their strengths to commercialize further
Hemiwedge® technology.  In addition, our Hemiwedge® technology has
been tested at very high pressures and demonstrated “bubble-tight” sealing
capability and functionality for sub-sea applications, providing a proof of
concept needed to pursue licensing discussions with larger energy companies with
a presence in those markets.





Acquiring other technology-oriented
products to leverage our asset base, manufacturing infrastructure, market
presence and experienced personnel.We have
extensive experience in manufacturing and machining products, and we have a
reputation for providing quality products and services in the energy field
services market.  We have an existing base of customers and existing
distribution channels in this market.  We intend to combine our
experience, reputation, customer base, and distribution channels with our
expertise and knowledge of the industry to market and distribute other
technology-oriented product lines for this customer base and through these
distribution channels.




11





Sales
and Marketing; Customers





In our
contract machining and manufacturing division, we have developed and maintained
long-term relationships with our customers.  We use a variety of
methods to identify target customers, including the utilization of databases,
direct mail, and participation in manufacturers’ trade shows.  The
energy field service target market usually consists of larger, well capitalized
companies as well as smaller firms.  These efforts supplement our
traditional sales and marketing efforts of customer referrals and territory
canvassing.  In 2007, we expended approximately $467,000 on sales and
marketing, which included the salaries, commissions, and expenses of our sales
department.





Nearly
all of our sales are on a negotiated price basis. In some cases, sales are the
result of a competitive bid process where a customer sends to us and other
competitors a list of products required, and we submit a bid on each
job.  Frequently, the ability to meet customer delivery schedules as
well as plant capacities and capabilities are a significant aspect of winning
any bid or purchase order.





For our
valve division, we intend to target the severe service applications in oil and
gas, process and  pipeline markets where there is a demand for
engineered valves. These target markets seek supply disruption mitigation and
rapid maintenance benefits that our Hemiwedge® Cartridge valve system is
designed to provide.  Although we believe that our valve product line
provides significantly improved functionality for higher-end or engineered
severe service applications, we intend to price our valves competitively
relative to other engineered valve manufacturers to establish market
share.  In addition to leveraging our existing customer base and
distribution channels to market and distribute the valve product line, we have
identified a network of established independent representative companies to
market and distribute the valves on a success fee basis.  We intend to
complement this effort with direct employee salespersons, product catalogs, web
site, direct mail, trade shows and sales support professionals that can travel
to sales locations to consummate sales.





We have a
customer base of more than 20 customers.  Two of these customers
represented approximately 71% percent of our revenues for fiscal year
2007.  We continually focus on developing more volume from secondary
and tertiary customers and with new customers to reduce customer concentration
risk.  We believe that long-term relationships with many of our
customers will contribute to our success.  While we intend to leverage
our existing customer relationships to market the valve product, we also will
seek additional new customers for the valve product line, which we anticipate
would result in reduced revenue and account receivables
concentrations.





Raw
Materials





The
principal raw materials that we use are carbon steel, aluminum, stainless steel,
nickel, brass, titanium and various special alloys and other
metals.  The metals industry as a whole is cyclical, and at times
pricing and availability of raw materials in the metals industry can be volatile
due to numerous factors beyond our control, including general, domestic and
international economic conditions, labor costs, production levels, competition,
import duties and tariffs and currency exchange rates.  This
volatility can significantly affect the availability and cost of raw materials,
and may, therefore, adversely affect our net sales, operating margin, and
profitability.  On average, pricing for raw materials has fluctuated
about thirty percent annually on a historical basis. During periods of rising
raw materials pricing, we have been able to pass through the increase in cost to
our customers approximately ninety percent of the time.  The remaining
ten percent reflects down-time between reviewing costs on standardized
repetitive work that is not quoted on a monthly basis.  Accordingly,
the increase in the cost of raw materials has had an immaterial effect on our
operations; however, it is possible that we may not be able to pass any portion
of such increases on to our customers in the future.





Competition





Both the
machining and manufacturing business and the valve product business are engaged
in fragmented and highly competitive industry segments.  We estimate
that there are more than 100 machine shops in the metro-Houston area alone, and
that there are more than 4,000 valve product manufacturers and distributors
within the United States alone.  We estimate that our share of the
market, based on 2007 revenues, is less than one percent
(1%).  Competition is based primarily on quality, service, price,
performance timeliness and geographic proximity.  We compete with a
large number of other machining and manufacturing operators on a national,
regional and local basis, most of which have greater financial resources than we
do, and several of which are public companies.  We also compete with
overseas competitors whose labor costs may be significantly lower than our
costs.  We anticipate the valve product, when launched, will compete
with a large number of companies with international and national capabilities
that will possess greater financial resources.


12





We
believe that we are able to compete by defining and understanding customer needs
and by using our equipment and machinery base to manufacture products with
difficult specifications and tolerances.





Intellectual
Property





As part
of our ongoing research, development, and manufacturing activities, we intend to
seek patents when appropriate on inventions involving new products and product
improvements.  In December 2005, we acquired the intellectual property
rights to the Hemiwedge® line of products, including the Hemiwedge® Cartridge
valve, from Soderberg Research and Development, Inc. and certain of its
affiliates.  These intellectual property rights consisted of two (2)
unexpired United States patents, one (1) expired United States patent, several
pending United States patent applications, and one (1) registered United States
trademark.  We have developed several new inventions to the technology
which have been propagated within numerous new patent applications during 2006
and 2007. We have
also filed international patent applications for the inventions embodied in the
pending United States patent application.





These
intellectual property rights are of considerable importance to the Hemiwedge®
Cartridge valve product line (including the development stage down-hole
isolation valve and sub sea high pressure valve), and we consider them, in the
aggregate, to be material to our valve technology commercialization
plans.  It is possible that these intellectual property rights may
later be invalidated by a court of competent jurisdiction, and it is also
possible that our products or proposed products may be found to infringe upon
the intellectual property rights of others.





We also
rely on trade secret protection for our confidential and proprietary
information.  We seek to enter into confidentiality agreements with
our employees, partners, and suppliers.  It is possible, however, that
others will independently obtain similar information or otherwise gain access to
our trade secrets.





Government
Regulation and Environmental Matters





Our
operations are subject to a number of federal, state and local regulations
relating to the protection of the environment and to workplace health and
safety.  In particular, our operations are subject to extensive
federal, state and local laws and regulations governing waste disposal, air and
water emissions, the handling of hazardous substances, painting product on
premises, environmental protection, remediation and workplace
exposure.  Hazardous materials used in our operations include
lubricants and cleaning solvents.





We
believe that we are in substantial compliance with all such laws and do not
currently anticipate that we will be required to expend any substantial amounts
in the foreseeable future in order to meet current environmental or workplace
health and safety requirements.





Although
no environmental claims have been made against us and we have not been named as
a potentially responsible party by the Environmental Protection Agency or any
other entity, it is possible that we could be identified by the EPA, a state
agency or one or more third parties as a potentially responsible party under
CERCLA or under analogous state laws. If so, we could incur substantial
litigation costs to prove that we were not responsible for the environmental
damage.





Safety





We are
committed to emphasizing and focusing on safety in the workplace.  We
currently have a variety of safety programs in place, which include periodic
safety meetings and training sessions to teach proper safety work
procedures.  We have established “best practices” processes throughout
most of our operations to ensure that our employees comply with safety standards
that we establish and to ensure full compliance with federal, state and local
laws and regulations.  In addition, we intend to continue to emphasize
the need for an accident-free workplace.


13





Risk
Management and Insurance





The
primary risks in our operations are property damage, workers’ compensation, and
third-party bodily injury.  We maintain insurance above certain
self-insured limits for liability for bodily injury, third-party property
damage, and workers’ compensation, all of which we consider sufficient to insure
against these risks.





Employees





We
currently employ 87 people in Conroe, Texas.  Of the total,
approximately 22 are in administration, 6 are in engineering and drafting, 2 are
in sales, marketing and distribution, and 57 are in machining, manufacturing and
production.  None of our employees are represented by a labor union,
and we have not entered into a collective bargaining agreement with any
union.  We have not experienced any work stoppages and consider the
relations with our employees to be good.





Item
1A.  RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION





An
investment in our common stock involves a high degree of risk.  You
should carefully consider the risks described below and the other information in
this annual report, including our financial statements and the notes to those
statements, before you purchase our common stock.  The risks and
uncertainties described below are those that we currently believe may materially
adversely affect our company.  Additional risks and uncertainties may
also impair our business operations.  If the following risks actually
occur, our business, financial condition and results of operations could be
seriously harmed, the trading price of our common stock could decline and you
could lose all or part of your investment.





Our
business might fail, even after our 2005 restructuring.





Although
we completed a restructuring of our debt in October 2005, and although we have
increased revenues in each of the last three years, we have still incurred
operating losses in each of the last three fiscal years.  Our ability
to become profitable will depend upon several factors, including whether we can
continue to increase our revenues in Shumate Machine Works, Inc., and whether
our Hemiwedge® valve products are successful in the marketplace.  We
cannot estimate with any certainty the long-term demand for our products and
services or the degree to which we will meet that demand.  If demand
for our products and services does not increase, or if the market for our
products and services declines, we may not be able to earn enough revenue to
generate profits from operations or positive cash flow.





We
may be unable to continue as a going concern in which case our securities will
have little or no value.





Our
independent auditor has noted in its report concerning our financial statements
as of December 31, 2007 and 2006 that we have incurred recurring losses from
operations and have a working capital deficiency, which raises substantial doubt
about our ability to continue as a going concern.  We have incurred
recurring losses from operations in 2007 and 2006, respectively and, we have
negative working capital as of December 31, 2007.  These conditions
raise substantial doubt as to our ability to continue as a going
concern.  We cannot assure you that we will achieve operating profits
in the future.





We
have substantial indebtedness outstanding, and our operations are significantly
leveraged.  If we are unable to repay our debt obligations in a timely
fashion, it could have a material adverse effect on our business and
prospects.





In order
to finance our operations we have incurred substantial indebtedness, including
the debt with Stillwater National Bank which consists of a line of credit and a
term loan, as well as our recent 2007 bridge financing.  As of
December 31, 2007, we owed total indebtedness of approximately $3.8 million (not
including accrued interest) to Stillwater National Bank, our senior
lender.  Additionally, we owe our recent bridge loan investors $3.05
million (not including accrued interest accreted to principal) and various
lenders such as a premium finance note for the annual premium of approximately
$55,000 for our directors and officers liability policy.  Our cash
flows from operations are currently not sufficient to service our debt
obligations.  If we fail to pay our debt obligations in a timely
fashion, we will be in default under one or more of our loan
agreements.  If we default on our loan obligations with Stillwater
National Bank, it could exercise its rights and remedies under the loan
agreement, which could include foreclosing on all of our assets.  Any
such action would have a material adverse effect on our business and
prospects.


14





We
will likely need to finance our operations and a full-scale launch of the
Hemiwedge® products through additional bank borrowings or other capital
financings.  If we are unable to obtain additional capital, we may not
be able to adequately fund our Hemiwedge Valve Corporation subsidiary or
continue our business.





We had working capital of $338,874 as
of December 31, 2006 and we had a working capital deficit of $4,647,597 as of
December 31, 2007.  Since December 31, 2006, we have completed a
private placement of our convertible notes which resulted in net proceeds to us
of approximately $2.74 million, providing us with working capital for the
immediate future.  Currently, we believe that we will not be able to
fund our operations, working capital requirements, and debt service requirements
throughout the 2008 fiscal year with existing working capital and cash flows
generated from operations.  In addition, we will need additional
capital to be able to fund the further development of the Hemiwedge® technology
and the operations of the Hemiwedge® Cartridge valve products.  In
addition, we do not believe that we will be able to conduct a full-scale
expansion of the Hemiwedge® product, including an inventory buildup or an
expansion of the product line, without obtaining additional
financing.





We
currently have a $1,000,000 secured revolving line of credit facility with
Stillwater National Bank.  This loan is subject to a borrowing base
that is computed on our qualifying accounts receivable and
inventory.  The outstanding balance on this line of credit was
approximately $526,206 at May 14, 2008, which, at the time, $1,000,000 was the
maximum allowed due to the amount of the qualifying accounts receivable and
inventory, also referred to as our borrowing base. The outstanding balance on
the line of credit and the borrowing base fluctuate based on our available
working capital and our qualifying accounts receivable and
inventory.  As such, we may not have the ability to borrow additional
funds on this line of credit.





In the
event we seek to expand the rate of Hemiwedge® Cartridge valve’s growth and
scale up of the product line, or in the event that our cash flows from
operations are insufficient to fund our operations, working capital
requirements, and debt service requirements, we would need to raise additional
capital, either by borrowing more money, if possible, or by selling our
securities or seeking out joint venture opportunities.  Any material
additional borrowing or significant capital expenditures require the written
consent of our lender, Stillwater National Bank.  We may not be
successful in raising additional financing as and when we need it.  If
we are unable to obtain additional financing in sufficient amounts or on
acceptable terms, our operating results and prospects could be adversely
affected.





The
majority of our revenues are generated from a small number of customers, and our
results of operations and cash flows will be adversely affected if any of our
major customers either fail to pay on a timely basis or cease to purchase our
products.





In 2007,
two of our customers accounted for approximately 71% of our sales.  At
December 31, 2007, two customers accounted for approximately 30% of our trade
accounts receivable balance.  These customers do not have any ongoing
commitment to purchase our products and services.  We generally do not
require collateral from our customers, although we do perform ongoing credit
evaluations of our customers and maintain allowances for potential credit losses
which, when realized, have been within the range of our
expectations.  If one or more of our major customers stops purchasing
our products or defaults in its obligation to pay us, our results of operations
as well as our cash flows will be adversely affected.





Our
Hemiwedge Valve Corporation subsidiary is an early stage company with no
significant operating history.





One of
our subsidiaries, Hemiwedge Valve Corporation, is an early stage company that
has not had significant operations. Its primary business purpose is to develop,
manufacture, and market applications of its new valve technology known as the
Hemiwedge® valve. The Hemiwedge® Cartridge valve, our surface-level valve
product line targeting the oil and gas, process and pipeline markets, was
launched in late December 2006.  Other applications of the Hemiwedge®
technology are still in the engineering, design, and development stage. This
subsidiary only began generating product revenue in the late fourth quarter of
2006, and has incurred losses since its formation. As an early stage company,
the prospects for Hemiwedge Valve Corporation are subject to all of the risks,
uncertainties, expenses, delays, problems, and difficulties typically
encountered in the establishment of a new business.  We expect that
unanticipated expenses, problems, and technical difficulties may occur which
would result in material delays in the development and growth of the Hemiwedge®
valve. We may not be able to successfully implement our plans for Hemiwedge
Valve Corporation and achieve a significant level of
operations.


15





If
we do not successfully commercialize the Hemiwedge® Cartridge valve product, we
may never achieve profitability in this subsidiary.





We have
incurred substantial expenses to acquire and fund the development of our
Hemiwedge® Cartridge valve product.  We only began generating product
revenue in the late fourth quarter of 2006 in this subsidiary in connection with
the Hemiwedge® Cartridge valve launch in December 2006. Many of our research and
development programs for applications of the Hemiwedge® technology are at an
early stage.  Early stage product lines are subject to inherent risks
of failure.  These risks include the possibilities that the Hemiwedge®
valve may not last as long as the products of our competitors or may not reduce
torque as anticipated. Even if the Hemiwedge® valve technology operates as
anticipated, it may not be commercially successful.  If we are unable
to develop the Hemiwedge® product as anticipated, or if the product is
successfully developed but not accepted in the marketplace, Hemiwedge Valve
Corporation may never be profitable.





Our
ability to achieve any significant revenue in Hemiwedge Valve Corporation may
depend on our ability to establish effective sales and marketing
capabilities.





As a
result of the launch of the Hemiwedge® Cartridge valve in the late fourth
quarter of 2006, we need to build a sales and marketing infrastructure and
customer channels which may include independent sales representative firms,
distributors and/or employees.  If we fail to establish an effective
internal marketing and sales force or to make alternative arrangements to have
these products marketed and sold by others, our ability to commercialize our
valve product line and to enter new or existing markets will be
impaired.





The
line of credit and term loan with Stillwater National Bank contain numerous
restrictive covenants which limit management’s discretion to operate our
business.





In order to obtain the line of credit
and term loan from Stillwater National Bank, we will agree to certain covenants
that place significant restrictions on, among other things, our ability to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments, and to sell or otherwise dispose of assets and merge
or consolidate with other entities.  The Stillwater line of credit and
term loan also require us to meet certain financial ratios and tests and require
us to obtain consent from Stillwater in order to change our senior management.
For the year ended December 31, 2006 and 2007 and the fiscal periods ended March
31, June 30, September 30, December 31, 2007 and March 31, 2008, we were not in
compliance with certain covenants under the credit facility.  Our
lender issued waivers for the periods tested, except for the December 31, 2007
and March 31, 2008 periods.  However, we have no reason to believe
that such waiver will not ultimately be granted, and on January 25, 2008, we
entered into an Amended and Restated Loan Agreement with Stillwater National
Bank and Trust Company that extended both credit facilities.  There
can be no assurance that we will be in compliance with the financial covenants
in future periods or that Stillwater will issue a waiver for the past periods we
were not in compliance or any future periods in which we are not in compliance
with these covenants. Our failure to comply with the covenants included in the
Stillwater National Bank loan agreements could result in an event of default,
which could trigger an acceleration of the related debt.  If we were
unable to repay the debt upon any such acceleration, Stillwater could seek to
foreclose on our assets in an effort to seek repayment under the
loans.  If Stillwater were successful, we would be unable to conduct
our business as it is presently conducted and our ability to generate revenues
and fund our ongoing operations would be materially adversely
affected.  We have not yet received a waiver for the period from
Stillwater National Bank.





The
interest rate on a significant portion of our indebtedness varies with the
market rate of interest.  An increase in the interest rate could have
a material adverse effect on our results of operations.





The
interest on the line of credit and term loan from Stillwater National Bank is
payable monthly at the prime rate plus two percent.  The base rates on
the line of credit and term loan will fluctuate over time, and if the base rates
significantly increase, our interest expense will increase.  This
would have a material adverse affect on our results of operations.  As
an example, based on the amounts outstanding under the line of credit and term
loan at December 31, 2007, a one percent increase in Stillwater’s prime rate
would increase our annual debt service by approximately $43,000.




16




We may not be able to successfully
increase our sales.  If we do not increase our sales, we may never
become profitable.




It is
possible that we may be unable to successfully implement any of our strategies
to increase sales, including expanding the range of processes and services that
we offer, developing long-term partnering relationships with customers and
adding new customers.  Our ability to increase our sales will be
affected by many factors which are beyond our control, such as falling commodity
prices which will decrease demand for our products or the failure of the
marketplace to respond positively to our Hemiwedge® valve
technology.  We cannot assure you that our strategies to increase our
sales will be successful.  If they are not, we may never become
profitable.





We
want to develop additional new energy field services products, but we may not
have the financial ability to do so.





We are
currently seeking opportunities to develop or acquire energy field services
products and technologies through acquisitions or licensing
agreements.  We believe acquiring our own product lines would leverage
our expertise in manufacturing and marketplace knowledge and complement our
current contract machining business and customer
relationships.  However, the energy field services market has numerous
manufacturers that are larger than we are and have greater financial resources
than we do.  Even if we were to acquire or design our own products, it
is possible that we may not have the financial capacity to enter this
market.





We
face significant competition in our markets.  Our inability to compete
successfully could have a material adverse effect on our business and results of
operations.





The
energy field services industry, including both the machining and manufacturing
industry and the commercial valve industry, is highly
competitive.  Competition in the sale of our products is primarily
based on engineering, product design, process capability, quality, cost,
delivery and responsiveness.  Many of our competitors are entities
that are larger and have greater financial and personnel resources than we
do.  We also compete with foreign manufacturers that have
substantially cheaper labor costs than we do.  We may not be able to
compete successfully.  If we do not compete successfully, our business
and results of operations will be materially adversely affected.





Failure
to protect our proprietary technology could impair our competitive
position.





We have
obtained or are in the process of obtaining U.S. and foreign patents and patent
applications for our Hemiwedge® technology.  Our success will depend
in part on our ability to obtain patent protection for our Hemiwedge®
technology, preserve our trade secrets, and operate without infringing the
proprietary rights of third parties.





Although
we place considerable importance on obtaining patent protection for our
technologies, products and processes, the enforceability of our patents is
uncertain and involves complex legal and factual questions.  The
applicant or inventors of subject matter covered by patent applications or
patents owned by us may not have been the first to invent or the first to file
patent applications for such inventions.





Furthermore,
enforcement of patents and proprietary rights in many other countries may be
problematic or unpredictable.  The issuance of a patent in one country
does not assure the issuance of a similar patent in another
country.  Claim interpretation and infringement laws vary by nation,
so the extent of any patent protection is uncertain and may vary in different
jurisdictions.





Due to
uncertainties regarding patent law and the circumstances surrounding our patent
applications, the pending or future patent applications we own may not result in
the issuance of any patents.  Existing or future patents owned by us
may be challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others.  Further, any rights we may have under any
issued patents may not provide us with sufficient protection against competitive
products or otherwise cover commercially valuable products or
processes.


17





Litigation
or other disputes regarding patents and other proprietary rights may be
expensive, cause delays in bringing products to market and harm our ability to
operate.





The
manufacture, use or sale of our Hemiwedge® product candidates may infringe on
the patent rights of others.  If we are unable to avoid infringement
of the patent rights of others, we may be required to seek a license, defend an
infringement action, or challenge the validity of the patents in
court.  Patent litigation is costly and time consuming.  We
may not have sufficient resources to bring these actions to a successful
conclusion.  In addition, if we do not obtain a license, develop or
obtain non-infringing technology, or fail to successfully defend an infringement
action or have the patents we are alleged to infringe declared invalid, we may
incur substantial money damages, encounter significant delays in bringing our
Hemiwedge® products to market, be precluded from participating in the
manufacture, use, or sale of our Hemiwedge® products without first obtaining
licenses to do so, or not be able to obtain any required license on favorable
terms, if at all.  In addition, if another party claims the same
subject matter (or subject matter overlapping with the subject matter) that we
have claimed in a U.S. patent application or patent, we may decide or be
required to participate in interference proceedings in the United States Patent
and Trademark Office in order to determine the priority of
invention.  Loss of such an interference proceeding would deprive us
of patent protection sought or previously obtained and could prevent us from
commercializing our products.  Participation in such proceedings could
result in substantial costs, whether or not the eventual outcome is
favorable.  These additional costs could adversely affect our
financial results.





Confidentiality
agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.





In order
to protect our proprietary technology and processes, we rely in part on
confidentiality agreements with our employees, consultants, outside
collaborators, and other advisors.  These agreements may not
effectively prevent disclosure of confidential information and may not provide
an adequate remedy in the event of unauthorized disclosure of confidential
information.  Costly and time-consuming litigation could be necessary
to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely affect our
competitive business position.





We
purchase metals in the open market, and our profitability may vary if prices of
metals fluctuate.





The
principal raw materials that we use are carbon steel, aluminum, stainless steel,
nickel, brass, titanium and various special alloys and other
metals.  The metals industry as a whole is cyclical, and at times
pricing and availability of raw materials in the metals industry can be volatile
due to numerous factors beyond our control, including general, domestic and
international economic conditions, labor costs, production levels, competition,
import duties and tariffs and currency exchange rates.  This
volatility can significantly affect the availability and cost of raw materials,
and may, therefore, adversely affect our net sales, operating margin and net
income.  During periods of rising raw materials pricing, there can be
no assurance that we will be able to pass any portion of such increases on to
our customers.  When raw material prices decline, customer demands for
lower prices could result in lower sale prices and, as we use existing
inventory, result in lower margins.  Changing metal prices could
adversely affect our ability to attain profitably.





The
oil & gas industry is subject to fluctuations in demand, which results in
fluctuations in our results of operations.





Most of
our products are sold to oil and gas field services companies that experience
significant fluctuations in demand based on economic conditions, energy prices,
domestic and international drilling rig counts, consumer demand, and other
factors beyond our control.  In 2006 and 2007, we experienced
increased activity levels driven by increases in energy commodity prices and
increased demand for oil field drilling products.  However, the
increase in demand could be temporary as commodity prices fluctuate
daily.  Reduced demand for oil field drilling products would result in
lower activity levels for our company.  These changes can happen very
quickly and without forecast or notice, and may have a material adverse effect
on our results of operations.





We
may need to recruit additional personnel for Hemiwedge Valve
Corporation.  If we are unable to attract qualified personnel, we may
be unable to operate the business as planned.





Our
ability to implement our business plan and develop Hemiwedge Valve Corporation
may depend on our ability to attract and retain other qualified management,
engineering, machinists, project development, and sales and marketing
personnel.  We compete for such persons with other companies, some of
which have substantially greater capital resources and facilities than we
have.  Further, demand for such personnel during periods of increased
demand for energy products is very strong.  We may not be able to
recruit or retain personnel of the requisite caliber or in adequate numbers to
enable us to conduct the Hemiwedge® business as planned.


18





Our
operations are subject to a number of federal, state and local regulations
relating to the protection of the environment and to workplace health and
safety.  If we were found to be responsible for significant damages
related to such regulation, it could have a material adverse effect on our
business and results of operation.





Our
operations are subject to extensive federal, state and local laws and
regulations governing waste disposal, air and water emissions, the handling of
hazardous substances, environmental protection, remediation, workplace exposure,
and other matters.  Hazardous materials that we use in our operations
primarily include lubricants and cleaning solvents.  Our leased
facility is located in an industrial area close to properties with histories of
heavy industrial use.  Although no environmental claims have been made
against us and we have not been named as a potentially responsible party by the
EPA or any other party, it is possible that we could be identified by the EPA, a
state agency or one or more third parties as a potentially responsible party
under CERCLA or under analogous state laws.  If so, we could incur
substantial litigation costs to prove we are not responsible for the
environmental damage, or, if we were found to be a responsible party, we could
be liable for significant damages.  This could have a material adverse
effect on our business and results of operations.




19


INVESTMENT
RISKS





There
is a limited trading market for our shares.  You may not be able to
sell your shares if you need money.





Our
common stock is traded on the Over-The-Counter Bulletin Board, an inter-dealer
automated quotation system for equity securities.  During the 30
trading days ended March 31, 2008, the average daily trading volume of our
common stock was approximately 41,000 shares.  As of March 31, 2008,
we had approximately 400 record holders of our common stock (not including an
indeterminate number of stockholders whose shares are held by brokers in “street
name”).  There has been limited trading activity in our stock, and
when it has traded, the price has fluctuated widely.  We consider our
common stock to be “thinly traded” and any last reported sale prices may not be
a true market-based valuation of the common stock.  Stockholders may
experience difficulty selling their shares if they choose to do so because of
the illiquid market and limited public float for our common stock.





We
are subject to the penny stock rules and these rules may adversely affect
trading in our common stock.





Our
common stock is a “low-priced” security under rules promulgated under the
Securities Exchange Act of 1934.  In accordance with these rules,
broker-dealers participating in transactions in low-priced securities must first
deliver a risk disclosure document which describes the risks associated with
such stocks, the broker-dealer’s duties in selling the stock, the customer’s
rights and remedies and certain market and other
information.  Furthermore, the broker-dealer must make a suitability
determination approving the customer for low-priced stock transactions based on
the customer’s financial situation, investment experience and
objectives.  Broker-dealers must also disclose these restrictions in
writing to the customer, obtain specific written consent from the customer, and
provide monthly account statements to the customer.  The effect of
these restrictions probably decreases the willingness of broker-dealers to make
a market in our common stock, decreases liquidity of our common stock and
increases transaction costs for sales and purchases of our common stock as
compared to other securities.





Transfers
of our securities may be restricted by virtue of state securities “blue sky”
laws which prohibit trading absent compliance with individual state laws. These
restrictions may make it difficult or impossible to sell shares in those
states.





Transfers
of our common stock may be restricted under the securities or securities
regulations laws promulgated by various states and foreign jurisdictions,
commonly referred to as “blue sky” laws. Absent compliance with such individual
state laws, our common stock may not be traded in such jurisdictions. Because
the securities registered hereunder have not been registered for resale under
the blue sky laws of any state, the holders of such shares and persons who
desire to purchase them should be aware that there may be significant state blue
sky law restrictions upon the ability of investors to sell the securities and of
purchasers to purchase the securities. These restrictions may prohibit the
secondary trading of our common stock. Investors should consider the secondary
market for our securities to be a limited one.





There
are options and warrants to purchase shares of our common stock currently
outstanding.





As of
December 31, 2007, we have granted options and warrants to purchase an aggregate
of 4,636,120 shares of our common stock to various persons and entities, of
which options and warrants to purchase up to 4,350,787 shares of our common
stock are currently exercisable.  The exercise prices on these options
and warrants range from $0.63 per share to $4.20 per share.  If
issued, the shares underlying options and warrants would increase the number of
shares of our common stock currently outstanding and will dilute the holdings
and voting rights of our then-existing shareholders.





We
have no immediate plans to pay dividends.





We have
not paid any cash dividends to date and do not expect to pay dividends for the
foreseeable future.  In addition, the terms of our line of credit and
term loan from Stillwater National Bank prohibit us from declaring or paying
dividends or purchasing or redeeming any of our capital stock without the
approval of Stillwater National Bank.  We intend to retain earnings,
if any, as necessary to finance the operation and expansion of our
business.


20





Our
officers and directors collectively own a substantial portion of our outstanding
common stock, and as long as they do, they may be able to control the outcome of
stockholder voting.





Our
officers and directors are collectively the beneficial owners of approximately
27% of the outstanding shares of our common stock as of the date of this
report.  As long as our officers and directors collectively own a
significant percentage of our common stock, our other shareholders may generally
be unable to affect or change the management or the direction of our company
without the support of our officers and directors.  As a result, some
investors may be unwilling to purchase our common stock.  If the
demand for our common stock is reduced because our officers and directors have
significant influence over our company, the price of our common stock could be
materially depressed.  The officers and directors will be able to
exert significant influence over the outcome of all corporate actions requiring
stockholder approval, including the election of directors, amendments to our
certificate of incorporation and approval of significant corporate
transactions.





We
have the ability to issue additional shares of our common stock and shares of
preferred stock without asking for stockholder approval, which could cause your
investment to be diluted.





Our
Certificate of Incorporation authorizes the Board of Directors to issue up to
50,000,000 shares of common stock and up to 10,000,000 shares of preferred
stock.  The power of the Board of Directors to issue shares of common
stock, preferred stock or warrants or options to purchase shares of common stock
or preferred stock is generally not subject to stockholder
approval.  Accordingly, any additional issuance of our common stock,
or preferred stock that may be convertible into common stock, may have the
effect of diluting your investment.





By
issuing preferred stock, we may be able to delay, defer or prevent a change of
control.





Our
Certificate of Incorporation permits us to issue, without approval from our
shareholders, a total of 10,000,000 shares of preferred stock.  Our
Board of Directors can determine the rights, preferences, privileges and
restrictions granted to, or imposed upon, the shares of preferred stock and to
fix the number of shares constituting any series and the designation of such
series.  It is possible that our Board of Directors, in determining
the rights, preferences and privileges to be granted when the preferred stock is
issued, may include provisions that have the effect of delaying, deferring or
preventing a change in control, discouraging bids for our common stock at a
premium over the market price, or that adversely affect the market price of and
the voting and other rights of the holders of our common stock.





Our
stock price is volatile.





The
trading price of our common stock has been and continues to be subject to
fluctuations.  The stock price may fluctuate in response to a number
of events and factors, such as quarterly variations in operating results, the
operating and stock performance of other companies that investors may deem as
comparable and news reports relating to trends in the marketplace, among other
factors.  Significant volatility in the market price of our common
stock may arise due to factors such as:




·
            our
      developing business;





·
            a
      continued negative cash flow;





·
            relatively
      low price per share;





·
            relatively
      low public float;





·
            variations
      in quarterly operating results;





·
            general
      trends in the industries in which we do
  business;





·
            the
      number of holders of our common stock;
and





·
            the
      interest of securities dealers in maintaining a market for our common
      stock.


21




As long
as there is only a limited public market for our common stock, the sale of a
significant number of shares of our common stock at any particular time could be
difficult to achieve at the market prices prevailing immediately before such
shares are offered, and could cause a severe decline in the price of our common
stock.





There
are limitations in connection with the availability of quotes and order
information on the OTCBB.





Trades
and quotations on the OTCBB involve a manual process and the market information
for such securities cannot be guaranteed. In addition, quote information, or
even firm quotes, may not be available.  The manual execution process
may delay order processing and intervening price fluctuations may result in the
failure of a limit order to execute or the execution of a market order at a
significantly different price.  Execution of trades, execution
reporting and the delivery of legal trade confirmation may be delayed
significantly.  Consequently, one may not be able to sell shares of
our Common Stock at the optimum trading prices.





There
are delays in order communication on the OTCBB.





Electronic
processing of orders is not available for securities traded on the OTCBB and
high order volume and communication risks may prevent or delay the execution of
one's OTCBB trading orders.  This lack of automated order processing
may affect the timeliness of order execution reporting and the availability of
firm quotes for shares of our Common Stock.  Heavy market volume may
lead to a delay in the processing of OTCBB security orders for shares of our
Common Stock, due to the manual nature of the market.  Consequently,
one may not able to sell shares of our Common Stock at the optimum trading
prices.





There
is a risk of market fraud on the OTCBB.





OTCBB
securities are frequent targets of fraud or market manipulation. Not only
because of their generally low price, but also because the OTCBB reporting
requirements for these securities are less stringent than for listed or NASDAQ
traded securities, and no exchange requirements are imposed.  Dealers
may dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden,
sharp increase of price and trading volume and the equally sudden collapse of
the market price for shares of our Common Stock.





There
is a limitation in connection with the editing and canceling of orders on the
OTCBB.





Orders
for OTCBB securities may be canceled or edited like orders for other securities.
All requests to change or cancel an order must be submitted to, received and
processed by the OTCBB.  Due to the manual order processing involved
in handling OTCBB trades, order processing and reporting may be delayed, and one
may not be able to cancel or edit one's order. Consequently, one may not able to
sell its shares of our Common Stock at the optimum trading prices.





Increased
dealer compensation could adversely affect our stock price.





The
dealer's spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of shares of our Common Stock on
the OTCBB if the stock must be sold immediately.  Further, purchasers
of shares of our Common Stock may incur an immediate "paper" loss due to the
price spread.  Moreover, dealers trading on the OTCBB may not have a
bid price for shares of our Common Stock on the OTCBB.  Due to the
foregoing, demand for shares of our Common Stock on the OTCBB may be decreased
or eliminated.





22


Cautionary
Statement Concerning


Forward-Looking
Information





This
annual report and the documents to which we refer you and incorporate into this
annual report by reference contain forward-looking statements.  In
addition, from time to time, we, or our representatives, may make
forward-looking statements orally or in writing.  These are statements
that relate to future periods and include statements regarding our future
strategic, operational and financial plans, potential acquisitions, anticipated
or projected revenues, expenses and operational growth, markets and potential
customers for our products and services, plans related to sales strategies and
efforts, the anticipated benefits of our relationships with strategic partners,
growth of our competition, our ability to compete, the adequacy of our current
facilities and our ability to obtain additional space, use of future earnings,
and the feature, benefits and performance of our current and future products and
services.





You can identify forward-looking
statements by those that are not historical in nature, particularly those that
use terminology such as “may,” “should,” “expects,” “anticipates,”
“contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,”
“potential,” “seek” or “continue” or the negative of these or similar
terms.  In evaluating these forward-looking statements, you should
consider various factors, including those described in this annual report under
the heading “Risk Factors.”  These and other factors may cause our
actual results to differ materially from any forward-looking
statement.  We caution you not to place undue reliance on these
forward-looking statements.





We base
these forward-looking statements on our expectations and projections about
future events, which we derive from the information currently available to
us.  Such forward-looking statements relate to future events or our
future performance.  Forward-looking statements are only
predictions.  The forward-looking events discussed in this annual
report, the documents to which we refer you and other statements made from time
to time by us or our representatives, may not occur, and actual events and
results may differ materially and are subject to risks, uncertainties and
assumptions about us.  For these statements, we claim the protection
of the “bespeaks caution” doctrine.  The forward-looking statements
speak only as of the date hereof, and we expressly disclaim any obligation to
publicly release the results of any revisions to these forward-looking
statements to reflect events or circumstances after the date of this
filing.


23


Item
2.  PROPERTIES




We lease
approximately 90,000 square feet of manufacturing space in Conroe,
Texas.





Approximately
30,000 square feet is used by Shumate Machine Works for its
operations.  On April 1, 2006, Shumate Machine Works and the lessor
terminated the existing lease for these premises and entered into a new
lease.   The lease term ends on March 31, 2011.  The
base rent is $18,600 per month, representing a reduction of rent of $4,000 per
month.  The new lease grants to Shumate Machine Works an option to
purchase the premises at the end of the lease term for an agreed-upon purchase
price or current appraised price. If it exercises this option, Shumate Machine
Works is entitled to a credit in an amount equal to 5% of all lease payments
paid during the term.  Effective February 1, 2007, our rent increased
to $22,100 in connection with a 5,000 square foot expansion.





In
December 2005, Shumate Machine Works entered into a lease agreement for a
manufacturing facility of approximately 60,000 square feet to be used by
Hemiwedge Valve Corporation.  The term of the lease is three years and
the rent is approximately $14,000 per month.  The lease agreement
grants to Shumate Machine Works an option to purchase the premises covered under
the lease for a purchase price of approximately $1,825,000 before
lease.  Shumate Machine Works will be entitled to a credit against the
purchase price in an amount equal to the amount necessary to amortize the
purchase price at 7% over a period of 240 months.  The option to
purchase expires on September 1, 2009.  On May 15, 2008, Shumate
Machine Works exercised the aforementioned option and purchased the property for
$1,726,949 pursuant to a warranty deed.  Concurrently with the
purchase, the property was sold to Trader Properties LLC and immediately leased
to Hemiwedge Valve Corporation. The Commercial Lease Agreement between Hemiwedge
Valve Corporation and Trader Properties is for a term of 10 years with a monthly
rent of $24,000 per month, which rent is increased by 2% each year for the term
of the lease.  Hemiwedge Valve Corporation is required to maintain
public liability insurance of not less than $1,000,000 during the term of the
lease.  To secure performance under this lease, Hemiwedge Valve
Corporation granted Trader Properties a lien and security interest against all
of its’ non-exempt personal property that is in the leased
premises  Shumate Industries guaranteed payment and performance of the
lease pursuant to a Guaranty Agreement.  In addition, Shumate
Industries agreed to issue Trader Properties a warrant to purchase 100,000
shares of its common stock at an exercise price of $0.25 per share prior to June
15, 2008.





The
existing facilities are adequate for our current operations.  We
anticipate that additional facilities may be leased or purchased as needed and
that facilities that are adequate for our needs are readily
available.





Item
3.   LEGAL PROCEEDINGS





We are
not a party to material legal proceedings as of the date of this
report.  In April 2008, Sunbelt Machine Works threatened litigation
against us relating to the to the $150,000 termination payment due under (and in
connection with the termination of) that certain Stock Purchase Agreement dated
August 17, 2007.  We have failed to make the first 2 installment payments
of $37,500 as required under the Stock Purchase Agreement.  The parties are
currently in settlement discussions regarding this matter and no lawsuit has
been formally filed.  We have recorded $178,995 in accrued expenses in
our financial statements to reflect this contingency.





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





None.




24


PART
II




Item
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS




Our common stock has traded on the OTC
Bulletin Board under the symbol “SHMT.OB” since October 20,
2005.  Before that date, our common stock traded on the OTC Bulletin
Board under the symbol “EXCB.OB” since June 10, 2002.  Before that
date, our common stock traded on the OTC Bulletin Board under the symbol
“GRMA.OB,” and before that, it traded on the OTC Bulletin Board under the symbol
“GRMG.OB.”  The following table shows the high and low bid prices for
our common stock for each quarter since January 1, 2006 as reported by the OTC
Bulletin Board.  All share prices have been adjusted to provide for
the one for seven reverse split which was effected on October 19, 2005 (i.e.
they have been increased seven times to compare them to current
prices).





We
consider our stock to be “thinly traded” and any reported sale prices may not be
a true market-based valuation of our stock.  Some of the bid
quotations from the OTC Bulletin Board set forth below may reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.





2006 (OTC Bulletin
      Board)
                  
                  High Bid
                  
                  
                  Low BidFirst
      quarter
                  
                  $
                  1.30
                  
                  
                  $
                  0.65Second
      quarter
                  
                  
                  1.60
                  
                  
                  
                  0.71Third
      quarter
                  
                  
                  1.65
                  
                  
                  
                  1.00Fourth
      quarter
                  
                  
                  1.53
                  
                  
                  
                  0.90





2007 (OTC Bulletin Board)
                  
                  High Bid
                  
                  
                  Low BidFirst
      quarter
                  
                  $
                  2.30
                  
                  
                  $
                  1.17Second
      quarter
                  
                  
                  2.14
                  
                  
                  
                  1.30Third quarter
                  
                  
                  2.03
                  
                  
                  
                  1.37Fourth
      quarter
                  
                  
                  1.64
                  
                  
                  
                  0.60





As of May
14, 2008 there were 379 record holders of our common stock. This does not
include an indeterminate number of shareholders whose shares are held by brokers
in street name.





We have
not paid cash dividends since our inception and we do not contemplate paying
dividends in the foreseeable future.  Furthermore, the terms of our
line of credit and term loan with Stillwater National Bank prohibit us from
declaring or paying dividends or purchasing or redeeming any of our capital
stock without the approval of Stillwater National Bank.  We anticipate
that earnings, if any, will be retained to retire debt and for the operation of
our business.





Shares
eligible for future sale could depress the price of our common stock and lower
the value of your investment.  Sales of substantial amounts of our
common stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for shares of our common stock.




25


Securities Authorized for Issuance
Under Equity Compensation Plans.The following provides
information concerning compensation plans under which our equity securities are
authorized for issuance as of December 31, 2007:





(a)
                      
                      
                      (b)
                      
                      
                      (c)Plan
      Category
                      
                      Number of
                        securities to be
                        issued upon
                        exercise of
                        outstanding
                        options, warrants
                        and rights
                      
                      
                      Weighted-average
                        exercise price of
                        outstanding
                        options, warrants
                        and rights
                      
                      
                      Number of securities
                        remaining available
                        for future issuance
                        under equity
                        compensation plans
                        (excluding securities
                        reflected in column
                        (a))Equity
      compensation plans approved by security holders (1)(2)
                      
                      
                      1,535,810
                      
                      
                      $
                      1.42
                      
                      
                      
                      3,683,643Equity
      compensation plans not approved by security holders
      (3)(4)(5)(6)
                      
                      
                      120,000
                      
                      
                      $
                      1.50
                      
                      
                      
                      —Total
                      
                      
                      1,547,810
                      
                      
                      $
                      1.43
                      
                      
                      
                      3,683,643





(1)
            2005 Stock Incentive
      Plan.  On April 29, 2005, our board of directors adopted,
      and on October 19, 2005, our stockholders approved, our 2005 Stock
      Incentive Plan.  The purpose of the plan is to further align the
      interests of employees, directors and non-employee consultants with those
      of the stockholders by providing incentive compensation opportunities tied
      to the performance of the common stock and by promoting increased
      ownership of the common stock by such individuals.  The plan is
      also intended to advance the interests of the company and its shareholders
      by attracting, retaining and motivating key personnel upon whose judgment,
      initiative and effort the successful conduct of the company’s business is
      largely dependent.  We are permitted to grant awards of stock
      options, stock awards, and restricted stock awards under the
      plan.  The maximum aggregate number of shares of common stock
      that may be issued and sold under all awards granted under the plan is
      10,000,000 shares, and as of December 31, 2007, we have issued 4,783,690
      shares under the plan, and there are options to purchase 1,532,667 shares
      outstanding under this plan.




(2)
            2001 Stock Option
      Plan.  On April 8, 2002, we assumed the 2001 Excalibur
      Holdings, Inc. Stock Option Plan, which was approved by the securities
      holders of Excalibur Holdings prior to our assumption of the
      plan.  We are authorized to issue options to purchase up to
      285,714 shares under this plan.  As of December 31, 2007, there
      were options to purchase 3,143 shares outstanding under this
      plan.




(3)
            Individual Option and Warrant
      Grants.  We have granted warrants on an individual
      basis.  We have granted no options on an individual
      basis.  Of the warrants we have granted on an individual basis
      for compensatory services, there are currently warrants to purchase in the
      aggregate up to 12,000 shares of our common stock at a weighted average
      price of $1.50 per share.




(4)
            Stock Grant
      Plan.Our board of directors adopted our 2003 Stock
      Grant Plan on June 25, 2003.  The purpose of this plan was to
      encourage and enable our officers, employees, directors, consultants,
      advisors, and other key persons upon whose judgment, initiative and
      efforts we largely depends for the successful conduct of our business to
      acquire a proprietary interest in us.  We were permitted to
      issue up to 428,157 shares of common stock under this plan, and to date,
      we had issued 232,063 shares.  On April 20, 2006, our board of
      directors terminated this plan.




(5)
            Employee Stock Incentive
      Plan.  Our board of directors adopted our 2003 Employee
      Stock Incentive Plan on July 17, 2003.  The purpose of this plan
      was to allow designated officers and employees of us and our subsidiaries
      to receive options to purchase our common stock and to receive grants of
      common stock subject to certain restrictions.  We were permitted
      to issue up to 1,071,429 shares of common stock under this plan, and to
      date, we issued no shares or options to purchase shares under this
      plan.  On April 20, 2006, our board of directors terminated this
      plan.


26





(6)
            Non-Employee Directors and
      Consultants Retainer Stock Plan.  Our board of directors
      adopted our 2003 Non-Employee Directors and Consultants Retainer Stock
      Plan on July 17, 2003.  The purposes of this plan was to enable
      us to promote the interests of us and our stockholders by attracting and
      retaining non-employee directors and consultants capable of furthering our
      future success and by aligning their economic interests more closely with
      those of our stockholders, by paying their retainer or fees in the form of
      shares of our common stock.  We were permitted to issue up to
      357,143 shares of common stock under this plan, and to date, we issued no
      shares under this plan.  On April 20, 2006, our board of
      directors terminated this plan.




Recent
Sales of Unregistered Securities





1.
            On
      November 1, 2007, we entered into a Note Purchase Agreement with a single
      accredited investor pursuant to which we issued a $1,000,000 of principal
      amount of convertible promissory note and a warrant to purchase 200,000
      shares of our common stock (the “Purchase Agreement”). The note has a 1
      year term and bears interest at ten percent (10%); provided, however, that
      we are required to prepay the note if we consummate of a subsequent equity
      financing (as defined) within the next 12 months. Interest is payable
      monthly in arrears, however we have right to defer any interest payment
      and accrue same to principal. The note is convertible into our common
      stock at a fixed conversion price of $1.89. In addition, if we close a
      subsequent equity financing within the next 12 months, the note holder has
      the option to convert the outstanding balance of the note into such
      financing on the same terms as the other investors in such
      financing.





Under the
terms of this note and the related warrant, the note and the warrant are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended





The note
was issued with a warrant to purchase up to 200,000 shares of our common stock
at an exercise price of $1.89 per share, subject to adjustment. The warrant
holder may designate a "cashless exercise option." This option entitles the
warrant holders to elect to receive fewer shares of common stock without paying
the cash exercise price. The number of shares to be determined by a formula
based on the total number of shares to which the warrant holder is entitled, the
current market value of the common stock and the applicable exercise price of
the warrant.





We
granted the investor in the offering “piggyback” registration rights for the
resale of the shares issuable upon conversion of the note and upon exercise of
the warrant.





We relied
on the exemption from registration provided by Regulation D and/or Section 4(2)
of the Securities Act of 1933, as amended, for the offer and sale of the note
and the warrant.





The net
proceeds from the financing for working capital and general corporate purposes.
An NASD member firm, acted as placement agent in connection with the offering
and  received $140,000 in commissions. Our net proceeds of this
offering after the payment of commissions, fees and other expenses of the
offering were approximately $850,000.





2.
            In
      March 2008, we issued $150,000 in 12% demand promissory notes to three
      accredited investors in equal $50,000 notes.  The proceeds were
      used for working capital and general corporate purposes. The issuance was
      exempt under Section 4(2) of the Securities Act of 1933, as
      amended.





3.
            In
      March and April, 2008, we issued $25,000 and $75,000, respectively, 12%
      demand promissory note to a single investor.  The proceeds were
      used for working capital and general corporate purposes.  The
      issuance was exempt under Section 4(2) of the Securities Act of 1933, as
      amended.




27


Item
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS





The
following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and related notes included in this
report.  This report contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.  The
statements contained in this report that are not historic in nature,
particularly those that utilize terminology such as “may,” “will,” “should,”
“expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable
terminology are forward-looking statements based on current expectations and
assumptions.





Various
risks and uncertainties could cause actual results to differ materially from
those expressed in forward-looking statements.  Factors that could
cause actual results to differ from expectations include, but are not limited
to, those set forth under the section “Risk Factors” set forth in this
report.





The
forward-looking events discussed in this annual report, the documents to which
we refer you and other statements made from time to time by us or our
representatives, may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about
us.  For these statements, we claim the protection of the “bespeaks
caution” doctrine.  All forward-looking statements in this document
are based on information currently available to us as of the date of this
report, and we assume no obligation to update any forward-looking
statements.  Forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements.





General





Shumate Industries is a Texas based
energy field services company.  Shumate is a holding company that,
through its subsidiaries, operates in two principal
businesses:  contract machining and manufacturing and a valve product
line.  Shumate seeks to leverage its existing infrastructure,
expertise, and customer channels to grow its business and introduce new
technologies to the energy markets.





We
currently employ 87 people at two plants totaling approximately 90,000 square
feet in Conroe, Texas, north of Houston.  Our executive offices are
located at 1011 Beach Airport Road, Conroe, Texas 77301.  Our
telephone number is (936) 539-5770 and our Internet address is www.shumateinc.com.





Contract
Machining and Manufacturing – Shumate Machine Works, Inc.





Our
contract machining and manufacturing division, Shumate Machine Works, Inc.,
focuses in the energy field services market. We manufacture products, parts,
components, and assemblies for our customers designed to their specifications.
We provide state of the art 3-D modeling software, computer numeric-controlled,
or CNC, machinery and manufacturing expertise to our customers’ research and
development, engineering, and manufacturing departments for desired results with
their products.





The
diverse line of products we manufacture include the following:





·
            Expandable
      tubular products including liner hangers, launchers and sand screens for
      energy field service applications;


·
            Top
      drive assemblies, sub-assemblies and spare service
  parts;


·
            Measurement
      while drilling (MWD) products;


·
            Directional
      drilling products;·
            Completion
      tools;


·
            Exploration
      products for research and
development;


·
            Natural
      gas measurement equipment, including fittings and
  valves;


·
            Power
      frames for centrifugal pumps and mud motors;
and


·
            Sub-sea
      control equipment.




28


Our
investment in capital equipment and software provides us capabilities to perform
close tolerance highly specialized work for oil field equipment and tools,
process controls, formation evaluation tools, and exploration and production
products. Our capabilities include producing large-diameter products and close
tolerance machined parts that range up to thirty-four feet in length using a
myriad of materials of construction including high grade carbon steel, high
grade stainless steel, nickel, and chrome based alloys. We use state of the art,
large part CNC equipment in the production of these parts and have developed
in-house trade secrets and processes with respect to the manufacture of certain
products. We produce complex assemblies, including expandable tubing technology
products that are used in field service operations under extreme environmental
conditions for oil and gas exploration.





Our
customers include, without limitation, Baker Hughes, BJ Services Company, Canrig
Drilling Technology, a Nabors Industries company, Enventure Global Technologies,
FMC Technologies, Halliburton Energy Services, National Oil Well Varco,
Oceaneering Intervention Engineering, Shell Development, Smith International,
and Weatherford International.





Valve
Product Technology – Hemiwedge Valve Corporation





We formed Hemiwedge Valve Corporation
as a wholly-owned subsidiary to develop and commercialize a new patented
technology addressing what we believe to be a significant opportunity in the
global valve market.


Our first
product line, known as the Hemiwedge® Cartridge valve, is a quarter-turn
hemispherical wedge valve engineered to provide what we believe are substantial
technological improvements compared with what is available in the marketplace
today, such as traditional butterfly, ball, and gate valve designs.





We
believe that the patented design of the Hemiwedge® Cartridge valve combines the
benefits of quarter-turn valves with the durability of gate valves. The
Hemiwedge® Cartridge valve has a non-rotating core which guides the fluid flow
through the valve to the Hemiwedge® itself. This is a hollow hemisphere where
the inner and outer walls are slightly offset, having non-concentric centers,
producing a hemispherical wedge shape - the “Hemiwedge®.” Operation of the valve
rotates the Hemiwedge®, a quarter-turn, moving it between the core and valve
seat, thus controlling the flow. We believe that these design features in the
combination of the Hemiwedge® shut off and stationary core make the Hemiwedge®
Cartridge valve unique.





Reorganization/Debt
Forgiveness





On
October 19, 2005, we completed a restructuring of our company, resulting in a
significant reduction of our outstanding debt and providing us with a
strengthened balance sheet and reduced debt servicing
requirement.  The restructuring was effected through an out-of-court
restructuring, or “recapitalization plan,” which consisted of, among other
things, a restructuring of debt we owed to Stillwater National Bank, or
Stillwater, the issuance of stock in exchange for the cancellation and
conversion of debt, the issuance of restricted stock awards, the change of our
name to “Shumate Industries, Inc.”, and a 1-for-7 reverse stock
split.  A detailed description of the restructuring plan is set forth
in the Description of Business in our Annual Report on Form 10-KSB as filed with
the Securities and Exchange Commission for the year ended December 31,
2005.





As a
result of the reorganization, in 2005, we recognized $4,222,743 in debt
forgiveness income from Stillwater and $204,414 in debt forgiveness income
related to the exchange of the unsecured notes for common stock.





On March
31, 2006, we entered into a First Amendment to Loan Agreement and Guarantor’s
Consent with Stillwater National Bank, or Stillwater, pursuant to which
Stillwater agreed to forgive $2,000,000 of indebtedness under an amended and
restated term promissory note which we had previously delivered to Stillwater in
connection with our October 19, 2005 reorganization.  In connection
with this first amendment, we executed and delivered a new amended and restated
term promissory note in the principal face amount of $3,633,053.





The new
amended and restated note requires one interest only payment on March 31, 2006,
and thereafter, requires us to make 24 equal monthly payments in an amount
sufficient to fully amortize principal and interest on the amended and restated
note over 84 months.  The amended and restated note is due and payable
on April 19, 2008, at which time we will be required to make a balloon payment
of the entire outstanding principal balance and all accrued
interest.  The note bears interest at a rate equal to the prime rate
plus two percent, and it is secured by a first priority security interest in all
of our existing and future assets.


29





As a
result of this amendment, we recorded paid in capital in the amount of
$2,000,000 in the first quarter of 2006 as Stillwater National Bank was
considered a related party.





On April
13, 2006, we entered into a letter agreement with Stillwater National Bank, or
Stillwater, pursuant to which Stillwater agreed to accept $500,000 from us in
full satisfaction of a secured convertible promissory note in the principal
amount of $2,500,000 that we had previously issued to Stillwater in connection
with our October 19, 2005 reorganization.  Stillwater’s agreement to
accept this reduced amount was subject to the following conditions: (i) the
$500,000 payment must come from new equity funds and cannot be borrowed or in
any way become our obligation or an obligation of our related concerns, (ii)
Stillwater will not assign the rights in the note to another party and the terms
of the new equity investment must contain no terms which allow the investor(s)
of the new equity funds to gain any special benefit resulting from the spread
between the $500,000 and the face amount of the note, (iii) the new equity funds
must be raised upon terms to the investors no better than those recently
approved by Stillwater for dilution of its equity interest, (iv) a breach of
(i)-(iii) above will constitute a breach of the reorganization agreement dated
October 19, 2005 between us, Stillwater, and other parties, and (iv) payment of
the full $500,000 must be made on or before September 1, 2006. On August 9,
2006, the letter agreement was amended to increase the payment by $25,000 to
$525,000 if payment is made between September 2, 2006 and December 1, 2006 and
by $50,000 to $550,000 if payment is made between December 2, 2006 and March 1,
2007. All other conditions as set forth above remain the same. On December 1,
2006, we delivered $525,000 to Stillwater as full payment of the $2.5 million
debenture. In connection with this payment, Stillwater agreed to the
cancellation of the entire remaining outstanding principal and approximately
$272,000 of accrued interest due and owing under the terms of the debenture at
December 1, 2006.





Critical
Accounting Policies





Our
discussion and analysis of our financial conditions and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United
States.  The preparation of financial statements requires managers to
make estimates and disclosures on the date of the financial
statements.  On an on-going basis, we evaluate our estimates,
including, but not limited to, those related to revenue
recognition.  We use authoritative pronouncements, historical
experience, and other assumptions as the basis for making
judgments.  Actual results could differ from those
estimates.  We believe the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
consolidated financial statements.





Revenue
Recognition





Revenues
of Shumate Machine Works are derived primarily from machining of oil field
drilling parts, components, and tools for our customers.  Shumate
Machine Works’ revenue is recognized when persuasive evidence of an arrangement
exists, the service or sale is complete, the price is fixed or determinable, and
collectibility is reasonably assured.  This typically occurs when the
order is shipped.   Shipping terms are FOB shipping and title
passes to the customer at the time the product is shipped.  Customers
have the right to inspection and acceptance for generally up to five days after
taking delivery.  Orders may not be returned by customers due to the
custom specifications of each product, but rework on items is sometimes
necessary if the product was not within the original order
specifications.  We test all orders against the customer’s order
specifications prior to shipment.  Customer requests for rework and
customer rejection of shipments have been historically low.





Revenues
of Hemiwedge Valve Corporation are derived from Hemiwedge® Cartridge valve
product sales and an agreement to perform contractual research and development
services.  The research and development services revenue is recognized
as the services are performed and related costs are incurred and
recorded.  The valve product sales revenue is recognized when
persuasive evidence of an arrangement exists, the sale is complete, the price is
fixed or determinable, and collectibility is reasonably assured.  This
typically occurs when the order is shipped.   Shipping terms are
FOB shipping and title passes to the customer at the time the product is
shipped.  Customers have the right to inspection and acceptance for
generally up to five days after taking delivery.




30




Accounts
Receivable




Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  The allowance for doubtful accounts represents our estimate
of the amount of possible credit losses existing in our accounts
receivable.  We determine the allowance based on management’s estimate
of likely losses based on a review of current open receivables and our
historical write-off experience.  We review the adequacy of our
allowance for doubtful accounts quarterly.  Significant individual
accounts receivable balances and balances which have been outstanding greater
than 90 days are reviewed individually for collectibility.  Account
balances, when determined to be uncollectible, are charged against the
allowance.





Concentration
of credit risk





At
December 31, 2007, two customers accounted for 30% of our trade accounts
receivable balance.  Because management believes that all such amounts
are collectible due to the nature of the customers and our collection experience
with the payers, we have not recorded an allowance for doubtful accounts for
these receivables.





Inventory





Inventory
is stated at the lower of cost (first-in, first-out for raw materials and
specific job cost for work-in-process and finished goods) or
market.  Slow-moving inventories are periodically reviewed for
impairment in value.  Work-in-process and finished goods include
labor, materials and production overhead.





Results
of Continuing Operations





Basis
of Presentation





The
results of operations set forth below for the years ended December 31, 2007 and
2006 are those of the continuing operations of Shumate Industries, which include
Shumate Machine Works and Hemiwedge Valve Corporation on a consolidated
basis.





The
following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of net sales from continuing
operations:




Year
      EndedDecember 31,2007
            
            
            2006Net
      sales
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of sales
            
            
            (77.7
            )
            
            
            (78.2
            )Gross
      profit
            
            
            22.3
            
            
            
            21.8Selling,
      general and administrative
            
            
            (70.8
            )
            
            
            (44.4
            )Depreciation
            
            
            (2.1
            )
            
            
            (1.1
            )Bad
      debt recovery (expense)
            
            
            -
            
            
            
            0.3Research
      and development
            
            
            (19.3
            )
            
            
            (9.7
            )Operating
      loss
            
            
            (69.9
            )%
            
            
            (33.1
            )%




Comparison
of the Years ended December 31, 2007 and 2006





Net sales. Net sales increased by
$1,313,732 or an increase of 17% to $9,033,614 for the year ended December 31,
2007 from $7,719,882 for the year ended December 31, 2006.





On a
segmental reporting basis, Shumate Machine Works sales increased by $524,961, or
an increase of 7%, to $7,928,763 for the year ended December 31, 2007, compared
to $7,403,802 for the year ended December 31, 2006.  Continued
increases in commodity prices, particularly in the energy sector, and activity
levels in the energy field services industry resulted in a 30% increase in
volume for the products we manufacture.  As a result of this increased
demand, volumes have increased for Shumate products and components including
expandable liner hangers and top drive assemblies.  Our customers and
market trends such as current rig count and commodities futures prices indicate
that this activity level in the energy field services industry will remain in
fiscal year 2008.


31




Hemiwedge
Valve Corporation sales increased by $788,771, or an increase of 250%, to
$1,104,851 for the year ended December 31, 2007, compared to $316,080 for the
year ended December 31, 2006.  These revenues reflect amounts earned
for services completed under the development agreement with At Balance Americas,
LLC. as well as Hemiwedge® Cartridge valve sales.  Many of our
customers entered into trial test programs for our Hemiwedge® Cartridge valve
during 2007 and as such, we believe will become larger purchasing customers in
2008 and thereafter. We believe the industrial valve market to continue to grow
in 2008 based on peer company announcements and industry forecasts.





Cost of
Sales.  Consolidated cost of sales increased by $985,524 or
16%, to $7,021,894, for the year ended December 31, 2007, from $6,033,370 for
the year ended December 31, 2006.  As a percentage of net sales, cost
of sales decreased to 77.7% of net sales for the year ended December 31, 2007
versus 78.2% of sales for the year ended December 31, 2006. Cost of sales for
Shumate Machine Works increased by $1,011,377, while cost of sales for Hemiwedge
Valve Corporation increased by $345,274.  Cost of sales includes
various allocated overhead items such as facility lease, utilities, and indirect
labor costs with related payroll tax and employee benefits expense. The decrease
in cost of sales as a percentage of net sales resulted primarily from higher
volumes of our products covering more of our fixed costs within cost of sales,
partially offset by wage inflation of our direct labor. In 2007, our 30%
increase in sales volume covered a 3% increase in our fixed costs and a 29%
increase in wage inflation for our direct labor.  As a result, we
generated a gross profit of $2,011,720, with a gross profit margin of 22.3%, for
fiscal 2007.  We are focused on increasing revenues and seeking to
improve gross margins by generating more sales with higher pricing for Shumate
products and components.  We believe that continued improvement in the
energy markets resulting from higher commodity prices will continue to lead to
better pricing, volumes and gross margins.





Selling, general, and
administrative.  Selling, general and administrative expenses
increased by $2,969,061 to $6,396,410 for the year ended December 31, 2007, from
$3,427,349 for the year ended December 31, 2006.  As a percentage of
net sales, selling, general and administrative expenses were 70.8% for the year
ended December 31, 2007, as compared to 44.4% for the comparable period in
2006.  Our selling, general, and administrative expenses have
increased from professional accounting, lawyer and consulting fees associated
with public company costs and Sarbanes-Oxley requirements which increased by
$369,000 in 2007. Additionally, expenses have increased by $554,000 from higher
wage expense relating to executives and sales and marketing personnel hired at
Hemiwedge Valve Corporation in connection with the increased operations and
activities during 2007.  Other increases were related to product
advertising, travel and marketing expenses of $247,000 at Hemiwedge Valve
Corporation.  We also incurred approximately $662,872 in non-cash
stock and option awards associated with FASB 123R in the fiscal year ended
December 31, 2007.  Additionally, we recorded an expense of
$333,575 in the quarter ending September 30, 2007 for acquisition related costs
associated with the failed acquisition of Sunbelt Machine Works,
Inc.  Our firm also expensed approximately $374,000 from the cost of
our shares issued in connection with the hiring of our investment relations
firm.  The Board also agreed to indemnify an officer of the Company,
and record an accrued expense of approximately $580,000 in connection with a
judgment personally assessed on our officer from a previously discharged
corporate liability.





Depreciation.Depreciation
expense increased by $157.961 to $608,448 for the year ended December 31, 2007
from $450,487 for the year ended December 31, 2006, primarily due to $564,000 of
new equipment purchases and $57,000 in leasehold improvements to our Hemiwedge
Valve Corporation facility.





Bad debt
expense.  During the year ended December 31, 2006, we reduced
our allowance for bad debts by $20,000, to $40,000.   We did not
charge off any accounts receivable in the fiscal year ended December 31,
2007.




Research and development.Research and development expense increased by $990,795 to $1,741,434 for
the year ended December 31, 2007 from $750,639 for the year ended December 31,
2006.  We anticipate that we will continue to incur research and
development expenses as we continue the development of the Hemiwedge® valve
technology and implement additional product forms and applications of the valve
technology.  We expect that these expenses will include consulting
fees, engineering fees, design fees and costs, development fees and costs, third
party testing costs, patent and other intellectual property filing costs, legal
fees, prototyping costs, costs of new materials, and other research and
development costs.


32





Operating loss.  We
incurred an operating loss of $6,318,036 for the year ended December 31, 2007, a
increase of $3,764,200 as compared to an operating loss of $2,553,836 for the
year ended December 31, 2006.





On a
segmental reporting basis, Shumate Machine Works recorded $571,263 in operating
income for the year ended December 31, 2007.  This operating income
resulted from increased revenues at Shumate Machine Works.





Hemiwedge
Valve Corporation recorded an operating loss of $3,525,693 for the year ended
December 31, 2007.  This operating loss was primarily due to the scale
-up of the Hemiwedge Valve Corporation operations, including significant
expenses of $380,000 for new executives and sales and marketing personnel
additions and $38,000 related to recruiting costs. Additionally, we incurred
$1,741,434 in research and development expenses.





In
addition, we incurred general corporate overhead expenses of $3,363,606 for the
year ended December 31, 2007 resulting from the costs of operating a publicly
reporting company including $733,000 for accounting, legal and professional
fees, for Sarbanes-Oxley consulting costs, filing costs, $530,000 for investor
relations and shareholder meeting costs.





We have
not reduced our fixed costs or our research and development costs significantly
enough to bring them below the revenues we generated in the
period.  In the event that we successfully commercialize our
Hemiwedge® products, we anticipate that increased revenues from the sales of our
Hemiwedge® products will improve our results of operations.





Interest
expense.  Interest expense increased by $137,453 to $892,748
for the year ended December 31, 2007, from $755,295 for the year ended December
31, 2006.  Our interest expense increased due to increased amount of
debt from the convertible notes issued in 2007 along with our senior credit
facility costs.





Provision for income
taxes.  We generated a net loss of $7,210,784 for the year
ended December 31, 2007 compared to a net loss of $1,309,131 for the year ended
December 31, 2006. We have made no provision for income taxes due to our tax
loss carry-forward from previous years.





Liquidity
and Capital Resources





We have
financed our operations, acquisitions, debt service, and capital requirements
through cash flows generated from operations, debt financing, capital leases,
and issuance of equity securities.  We had a working capital deficit
of $4,647,597 at December 31, 2007.  We had cash of $83,591 as of
December 31, 2007, compared to having cash of $1,547,326 at December 31,
2006.





We used
$4,475,529 of net cash in operating activities for the year ended December 31,
2007, compared to using $1,885,632 in the year ended December 31,
2006.  Cash used in operating activities is primarily due to an
increase in inventory of $365,000 and $220,000 in other assets  This
was offset by non-cash charges of $608,000 for amortization and depreciation and
$1,346,000 for issuances of stock, stock options and warrants.





Net cash
flows used in investing activities was $450,849 for the year ended December 31,
2007, compared to $895,087 in the year ended December 31, 2006.  Cash
of $388,773 was used for the purchase of property and equipment and $62,076 was
used for patent investments.





Net cash
flows provided by financing activities were $3,462,643 for the year ended
December 31, 2007, compared to net cash provided by financing activities of
$4,113,827 in the year ended December 31, 2006.  Cash provided by
financing activities is primarily due to proceeds from notes payable of
$3,300,000, offset by payments on notes payable of $460,473 and net decrease in
draws on bank credit line of $14,310.





Bank
Credit Facility





The
primary source of our financing has been our credit facility with Stillwater
National Bank. Our credit facility with Stillwater National Bank was
restructured on October 19, 2005 and further amended as set forth
below.


33





On
February 8, 2007 and effective January 19, 2007, we renewed our $1,000,000
secured revolving line of credit facility with Stillwater. The amount we can
borrow on the line of credit subject to qualifying accounts receivable and
inventory. The advances available under the line of credit are limited to a
borrowing base of the sum of (a) 85% of eligible accounts receivable, and (b)
50% of eligible inventory. The line of credit bears interest at a rate equal to
the prime rate plus two percent, and it is secured by a first priority security
interest in all of our existing and future assets. The line of credit expires on
April 19, 2008.




On
January 25, 2008, we entered into an Amended and Restated Loan Agreement with
Stillwater National Bank and Trust Company (the “Amended Loan Agreement”.). On
October 19, 2005 we entered into that certain Agreement (as reported in our
Current Report on Form 8-K dated October 19, 2005) with Stillwater, which
Agreement was amended by a certain First Amendment to Agreement and Guarantors’
Consent dated October 19, 2006, as amended by a certain Second Amendment to
Agreement dated effective January 19, 2007 (collectively, the “Prior
Agreement”).





The
Amended Loan Agreement amends and restates the Prior Agreement as
follows:




1.           Term
Loan. Our prior Term Note dated October 19, 2005 in favor of Stillwater
had an outstanding principal balance of $3,003,998 (as of January 25, 2008) and
a maturity date of April 19, 2008. Stillwater loaned us (along with our
co-borrowers Shumate Machine Works, Inc. and Hemiwedge Valve Corporation)
$3,329,000 pursuant to a new term note dated January 25, 2008, which funds
advanced under the new term note were used to refinance the old term note and
provide working capital. The new term note requires us to make 26 equal monthly
payments (beginning on February 28, 2008) in an amount sufficient to fully
amortize principal and interest on the amended and restated note over 64 months.
The new term note is due and payable on April 19, 2010. The new term note bears
interest at a rate equal to the prime rate plus two percent, and it is secured
by a first priority security interest in all of our existing and future assets
as well as a security interest in certain personal assets of Larry
Shumate.





2.           Revolving
Loan. Our prior revolving promissory note dated October 19, 2005 in favor
of Stillwater, had an outstanding principal balance of $893,676 (as of January
25, 2008) and a maturity date of April 19, 2008. Stillwater loaned us (and the
other co-borrowers set forth above) $1,000,000 pursuant to a new revolving
promissory note dated January 25, 2008, which funds advanced under the new
revolving promissory were used to refinance the old revolving promissory note
and provide working capital. The initial balance on the line of credit was equal
to the balance of our prior line of credit with Stillwater ($893,676 principal
balance as of January 25, 2008). The advances available under the new revolving
promissory note are limited to a borrowing base of the sum of (a) 85% of
eligible accounts receivable, and (b) 50% of eligible inventory. The new
revolving promissory note bears interest at a rate equal to the prime rate plus
two percent, and it is secured by a first priority security interest in all of
our existing and future assets as well as a security interest in certain
personal assets of Larry Shumate. On the 28th day of
each month, beginning January 28, 2008, we will pay all interest accrued on the
new revolving promissory note. The amount we can borrow on the line of credit is
subject to qualifying accounts receivable and inventory. The new revolving
promissory note will mature and become fully due and payable on April 19,
2009.





The loan
documents for the Stillwater line of credit and term loan require us to meet
certain financial ratios and tests.  Stillwater issued waivers under
the original credit facility for periods tested where were not in compliance
with certain covenants thereunder.  However, we have not received a
waivers for the March 31, 2008 period under the Amended Stillwater Credit
Facility where we were not in compliance with certain covenants
thereunder.  As of the date of this report, we have not received a
notice of default from Stillwater.  Should Stillwater decide to
declare a default, it would result in an acceleration of the related debt and
could result in Stillwater foreclosing on our assets.





Convertible
Promissory Notes




Since
July 1, 2007, we have sold $3,050,000 of principal amount of convertible
promissory notes with warrants to purchase 610,000 shares of its common stock to
accredited investors. The notes have a 1 year term and bear interest at ten
percent (10%); provided, however, that we are required to prepay the note if we
consummate a subsequent equity financing (as defined) within the next 12 months.
Interest is payable monthly in arrears; however, we have the right to defer any
interest payment and accrue same to principal. The notes are convertible into
our common stock at a fixed conversion price of $1.89. In addition, if we close
a subsequent equity financing within the next 12 months, the note holders have
the option to convert the outstanding balance of such note into such financing
on the same terms as the other investors in such financing.


34




Under the
terms of the notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended.




The notes
were issued with warrants to purchase up to 610,000 shares of our common stock
at an exercise price of $1.89 per share, subject to adjustment. The warrant
holders may designate a “cashless exercise option.” This option entitles the
warrant holders to elect to receive fewer shares of common stock without paying
the cash exercise price. The number of shares to be determined by a formula
based on the total number of shares to which the warrant holder is entitled, the
current market value of the common stock and the applicable exercise price of
the warrant.




Shumate determined
that the conversion feature of the note and the warrants issued were not
derivative instruments pursuant to SFAS No. 133, Accounting for Derivatives, as
amended. Under the provisions of EITF Issue 98-5, Shumate estimated that
fair value of the beneficial conversion feature and warrants at the issuances of
the notes using Black-Scholes option pricing model to exceed the principal vale
of the note. The resulting discount of $552,495 is being amortized over the life
of the notes using the effective interest method. The amortized amount for the
year ended December 31, 2007 is $187,589.




We
granted the investors in the offering registration rights for the resale of the
shares issuable upon conversion of the note and upon exercise of the warrant. To
the extent that all such shares are not registered pursuant to the granted
piggyback registration rights, Shumate agreed to register the remaining
underlying shares, if any, by January 6, 2008.  We accrued
approximately $26,000 at December 31, 2007 for estimated liquidated damages
penalties expected to be due such investors for failure to timely register their
shares as required under the registration rights agreement.




We used
the net proceeds from the financing for working capital and general corporate
purposes. An NASD member firm acted as primary placement agent in connection
with the offering and received $210,000 in commissions while another NASD member
firm received $5,000 in placement agent fees. . In addition, another $10,000 in
legal fees were incurred. The net proceeds of this offering after the payment of
commissions, fees and other expenses of the offering were approximately
$2,825,000.




Liquidity
and Capital Requirements





In 2005,
we successfully restructured our outstanding indebtedness with Stillwater
National Bank and our unsecured creditors. In addition, we have seen an increase
in pricing for our oil and gas drilling products and components, which allowed
us to generate gross profits since the third quarter of 2005, as discussed
within this report. Even with these improvements in our capital structure and
results of operations, we are still operating on a net loss basis, and we will
need to continue to service our debt obligations from our continuing
operations.





In
addition, we have a $1,000,000 secured revolving line of credit facility,
subject to qualifying accounts receivable and inventory, with Stillwater
National Bank. The outstanding balance on this line of credit was approximately
$526,206 at May 14, 2008, and at the time, $1,000,000 was the maximum allowed
due to the amount of the qualifying accounts receivable and inventory, also
referred to as our borrowing base. The outstanding balance on the line of credit
and the borrowing base fluctuate based on our available working capital, our
qualifying accounts receivable and inventory, and at various points in time we
may have the ability to borrow additional funds on this line of
credit.





As of the
date of this report, we do not believe that we will be able to fund our
operations, working capital requirements, and debt service requirements in
Shumate Machine Works through fiscal year 2008 through existing working capital
and cash flows generated from operations, although our working capital position
may fluctuate depending on the timing of our receipt of research and development
milestone payments under the Hemiwedge Valve Corporation’s development agreement
with At Balance Americas, LLC. It is possible that we may not achieve any
further milestones set forth in the development agreement, in which case our
working capital will be materially compromised.


35





In
addition, we have completed the beta development of the Hemiwedge® Cartridge
valve technology and have commenced the commercialization of the Hemiwedge®
Cartridge valve product. We have funded the initial launch of the Hemiwedge®
valve products through existing working capital, cash flows generated from
operations, the equity raises completed in 2006, the proceeds from the exercise
of warrants in March 2007, and the convertible debt raise referenced above. Our
revolving line of credit does not allow permit us to borrow against inventory
and accounts receivable of Hemiwedge Valve Corporation. Additionally, our
existing working capital and cash flows generated from operations will not be
sufficient to conduct full implementation of the Hemiwedge® Cartridge valve
product line.





Accordingly,
we will need to finance our operations through additional bank borrowings under
our Stillwater line of credit or other capital financings. Since our collateral
may not be sufficient to borrow additional amounts under the Stillwater line of
credit at such time, particularly since we may not borrow against Hemiwedge
accounts receivable or inventory under our current line of credit, we will need
to seek additional debt or equity financing, in the form of a private placement
or a public offering, a strategic alliance, or a joint venture. Such additional
financing, alliances, or joint venture opportunities might not be available to
us, when and if needed, on acceptable terms or at all. If we are unable to
obtain additional financing in sufficient amounts or on acceptable terms under
such circumstances, our operating results and prospects could be adversely
affected. In addition, any debt financings or significant capital expenditures
require the written consent of our lender, Stillwater National
Bank.





Our
management has also contemplated monetizing certain assets to address our
capital needs.  Presently, the assets held by our Shumate Machine
Works subsidiary are one opportunity available for sale which we are considering
to address our capital needs.  As such, our management is currently
searching for suitable acquisition partners to purchase all, or substantially
all of the assets of Shumate Machine Works on an informal basis.  Such
a sale, if consummated, could enable us to retire our senior
debt.  This, coupled with the continued growth of our Hemiwedge® valve
product lines, could result in the remaining company being a more attractive
candidate for additional future debt and/or equity financing.





In
addition, we have initiated a formal search program for other
technology-oriented products or companies, targeting complementary market
segments. The acquisition of such products may also require us to obtain
additional debt or equity financing, and we may issue our common stock as all or
part of the purchase price for any such acquisition.





We may
continue to incur operating losses if the energy field services market
deteriorates or softens. Such losses could require us to renegotiate our
affirmative covenants with our lender, including the liquidity ratio and debt
service ratios. Our ability to comply with these covenants in the future will
depend on whether we can obtain additional capital financing or increase our
cash flows from operations.





In
addition to the 2005 recapitalization and fiscal 2006 and 2007 equity and
convertible debt financings, we anticipate that, due in part to increasing
energy prices, demand for our energy related field service products will
continue to increase in the coming fiscal year. The fiscal 2005 reorganization,
debt restructuring during 2005 and 2006, equity and convertible debt financings
during 2006 and 2007, operating expense reductions, and our intent to capitalize
on anticipated increase in demand are the steps that we have been taking to try
to return to profitability.  However, it is possible that none of these
steps will be completed and that we may never return to
profitability.





We intend
to retain any future earnings to retire debt, finance the expansion of our
business and any necessary capital expenditures, and for general corporate
purposes. All of our bank debt contains restrictions as to the payment of
dividends.




36


Off-Balance
Sheet Arrangements





None.




37


Item
7.  FINANCIAL STATEMENTS





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


Shumate
Industries, Inc.


Conroe,
Texas





We have
audited the accompanying consolidated balance sheets of Shumate Industries,
Inc., as of December 31, 2007 and 2006 and the related consolidated statements
of operations, changes in stockholders’ equity (deficit) and cash flows for the
years ended December 31, 2007and 2006. These consolidated financial statements
are the responsibility of Shumate’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatements. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Shumate as of
December 31, 2007 and 2006 and the results of its consolidated operations and
its consolidated cash flows for the periods described in conformity with
accounting principles generally accepted in the United States of
America.




As
discussed in Note 2 to the consolidated financial statements, the accompanying
consolidated financial statements have been prepared assuming that Shumate will
continue as a going concern. Shumate requires significant amount of cash in its
operations and does not have sufficient cash to fund its operations for the next
twelve months, which raises substantial doubt about its ability to continue as a
going concern. Management’s plans regarding those matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





As
discussed in Note 19 to the consolidated financial statements, in 2008
management determined an error existed in the fiscal 2006 financial
statements.  This error resulted in an overstatement of net income and
an understatement of additional paid in capital for fiscal 2006 and an
understatement of both additional paid in capital and accumulated deficit for
fiscal 2007.  Accordingly, adjustments have been made to both fiscal
2006 and 2007 to correct this error.





/s/
Malone & Bailey, PC





MALONE
& BAILEY, PC


www.malone-bailey.com


Houston,
Texas





June 2,
2008, except for Notes 2, 3, 7, 16 and 19


which
are dated December 17, 2008


38





SHUMATE
INDUSTRIES, INC.


CONSOLIDATED
BALANCE SHEETS


(restated)





December 31,
                      
                      
                      December 31,2007
                      
                      
                      2006ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      83,591
                      
                      
                      $
                      1,547,326Accounts
      receivable, net of allowance for doubtful accounts of $40,000 and
      $40,000
                      
                      
                      502,383
                      
                      
                      
                      554,134Inventory
                      
                      
                      1,259,166
                      
                      
                      
                      893,650Prepaid
      expense and other current assets
                      
                      
                      497,245
                      
                      
                      
                      198,753Total
      current assets
                      
                      
                      2,342,385
                      
                      
                      
                      3,193,863Fixed
      assets, net of accumulated depreciation of $2,502,132  and
      $1,922,242
                      
                      
                      2,376,061
                      
                      
                      
                      2,303,372Patents,
      net of accumulated amortization of $58,078 and $29,038
                      
                      
                      340,366
                      
                      
                      
                      307,331Deposits
                      
                      
                      84,320
                      
                      
                      
                      104,140Total
      assets
                      
                      $
                      5,143,132
                      
                      
                      $
                      5,908,706LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
                      
                      $
                      1,065,656
                      
                      
                      $
                      652,980Accounts
      payable - related party
                      
                      
                      105,000
                      
                      
                      
                      -Accrued
      expenses
                      
                      
                      1,548,504
                      
                      
                      
                      435,234Deferred
      revenue
                      
                      
                      -
                      
                      
                      
                      400,000Current
      portion of notes payable - other
                      
                      
                      8,798
                      
                      
                      
                      75,370Current
      portion of capital lease obligation
                      
                      
                      51,586
                      
                      
                      
                      31,924Current
      portion of equipment notes payable
                      
                      
                      5,578
                      
                      
                      
                      -Current
      portion of convertible notes payable, net of discount of
      $364,290
                      
                      
                      2,800,535
                      
                      
                      
                      -Current
      portion of term note payable - T Swift
                      
                      
                      250,000
                      
                      
                      
                      -Current
      portion of term note payable - Stillwater National Bank
                      
                      
                      389,719
                      
                      
                      
                      480,565Line
      of credit - Stillwater National Bank
                      
                      
                      764,606
                      
                      
                      
                      778,916Total
      current liabilities
                      
                      
                      6,989,982
                      
                      
                      
                      2,854,989Long
      term liabilities:Long
      term portion of capital lease obligation
                      
                      
                      -
                      
                      
                      
                      51,838Long
      term portion of equipment notes payable
                      
                      
                      24,479
                      
                      
                      
                      -Term
      note payable - Stillwater National Bank
                      
                      
                      2,614,279
                      
                      
                      
                      2,883,392Total
      long term liabilities
                      
                      
                      2,638,758
                      
                      
                      
                      2,935,230Total
      liabilities
                      
                      
                      9,628,740
                      
                      
                      
                      5,790,219Commitments
      and contingencies
                      
                      
                      -
                      
                      
                      
                      -Stockholders'
      equity (deficit)Preferred
      stock, $.001 par value, 10,000,000 shares authorized,no
      shares issued or outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $.001 par value, 50,000,000 shares authorized,20,578,071
      and 19,322,277 shares issued and outstanding
                      
                      
                      20,578
                      
                      
                      
                      19,322Additional
      paid-in-capital
                      
                      
                      24,581,595
                      
                      
                      
                      22,015,762Deferred
      compensation
                      
                      
                      -
                      
                      
                      
                      (39,600
                      )Accumulated
      deficit
                      
                      
                      (29,087,781
                      )
                      
                      
                      (21,876,997
                      )Total
      stockholders' equity (deficit)
                      
                      
                      (4,485,608
                      )
                      
                      
                      118,487Total
      liabilities and stockholders' equity (deficit)
                      
                      $
                      5,143,132
                      
                      
                      $
                      5,908,706





See
summary of accounting policies and accompanying notes to consolidated financial
statements




39





SHUMATE INDUSTRIES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(restated)




For the Yearsended December 31,2007
                  
                  
                  2006REVENUES
                  
                  $
                  9,033,614
                  
                  
                  $
                  7,719,882COST
      OF REVENUESCost
      of revenues
                  
                  
                  6,605,358
                  
                  
                  
                  5,665,243Depreciation
      expense
                  
                  
                  416,536
                  
                  
                  
                  368,127Total
      cost of revenues
                  
                  
                  7,021,894
                  
                  
                  
                  6,033,370GROSS
      PROFIT
                  
                  
                  2,011,720
                  
                  
                  
                  1,686,512OPERATING
      EXPENSES:Selling,
      general and administrative
                  
                  
                  6,396,410
                  
                  
                  
                  3,427,349Depreciation
      expense
                  
                  
                  191,912
                  
                  
                  
                  82,360Bad
      debt expense (recovery)
                  
                  
                  -
                  
                  
                  
                  (20,000
                  )Research
      and development
                  
                  
                  1,741,434
                  
                  
                  
                  750,639Total
      operating expenses
                  
                  
                  8,329,756
                  
                  
                  
                  4,240,348LOSS
      FROM OPERATIONS
                  
                  
                  (6,318,036
                  )
                  
                  
                  (2,553,836
                  )OTHER
      INCOME (EXPENSE)Interest
      expense
                  
                  
                  (892,748
                  )
                  
                  
                  (755,295
                  )NET
      LOSS
                  
                  $
                  (7,210,784
                  )
                  
                  $
                  (3,309,131
                  )Basic
      net income (loss) per share
                  
                  $
                  (0.36
                  )
                  
                  $
                  (0.22
                  )Diluted
      net income (loss) per share
                  
                  
                  (0.36
                  )
                  
                  
                  (0.22
                  )Weighted
      average shares outstanding-Basic
                  
                  
                  20,061,282
                  
                  
                  
                  15,367,674Weighted
      average shares outstanding-Diluted
                  
                  
                  20,061,282
                  
                  
                  
                  15,367,674





See
summary of accounting policies and accompanying notes to consolidated financial
statements


40





SHUMATE
INDUSTRIES, INC.


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


For
the Years Ended December 31, 2007 and 2006





AdditionalCommon Stock
                
                
                Paid-In
                
                
                Deferred
                
                
                AccumulatedShares
                
                
                Par
                
                
                Capital
                
                
                Compensation
                
                
                Deficit
                
                
                TotalBalances
      at December 31, 2005
                
                
                12,116,394
                
                
                $
                12,116
                
                
                $
                12,278,742
                
                
                $
                -
                
                
                $
                (18,567,866
                )
                
                $
                (6,277,008
                )Common
      stock issued for services
                
                
                85,000
                
                
                
                85
                
                
                
                99,415
                
                
                
                -
                
                
                
                -
                
                
                
                99,500Common
      stock issued for cash
                
                
                7,120,883
                
                
                
                7,121
                
                
                
                5,590,429
                
                
                
                -
                
                
                
                -
                
                
                
                5,597,550Costs
      of raising capital
                
                
                -
                
                
                
                -
                
                
                
                (537,538
                )
                
                
                -
                
                
                
                -
                
                
                
                (537,538
                )Options
      and warrants issued
                
                
                -
                
                
                
                -
                
                
                
                337,075
                
                
                
                -
                
                
                
                -
                
                
                
                337,075Related
      party debt forgiveness
                
                
                -
                
                
                
                -
                
                
                
                4,247,639
                
                
                
                -
                
                
                
                -
                
                
                
                4,247,639Deferred
      compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (39,600
                )
                
                
                -
                
                
                
                (39,600
                )Net
      loss (restated)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,309,131
                )
                
                
                (3,309,131
                )Balances
      at December 31, 2006 (restated)
                
                
                19,322,277
                
                
                
                19,322
                
                
                
                22,015,762
                
                
                
                (39,600
                )
                
                $
                (21,876,997
                )
                
                
                118,487Common
      stock issued for cash
                
                
                680,520
                
                
                
                681
                
                
                
                769,079
                
                
                
                
                
                
                
                
                
                
                
                769,760Common
      stock issued for services
                
                
                480,050
                
                
                
                480
                
                
                
                643,377
                
                
                
                
                
                
                
                
                
                
                
                643,857Costs
      of raising capital
                
                
                
                
                
                
                
                
                
                
                (132,333
                )
                
                
                
                
                
                
                
                
                
                
                (132,333
                )Cashless
      exercise of warrants
                
                
                95,224
                
                
                
                95
                
                
                
                (95
                )
                
                
                
                
                
                
                
                
                
                
                -Options
      and warrants issued
                
                
                
                
                
                
                
                
                
                
                733,310
                
                
                
                
                
                
                
                
                
                
                
                733,310Discount
      on beneficial conversion feature related to convertible notes
      payable
                
                
                
                
                
                
                
                
                
                
                552,495
                
                
                
                
                
                
                
                
                
                
                
                552,495Deferred
      compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                39,600
                
                
                
                
                
                
                
                39,600Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (7,210,784
                )
                
                
                (7,210,784
                )Balances
      at December 31, 2007 (restated)
                
                
                20,578,071
                
                
                $
                20,578
                
                
                $
                24,581,595
                
                
                $
                -
                
                
                $
                (29,087,781
                )
                
                $
                (4,485,608
                )





See
summary of accounting policies and accompanying notes to consolidated financial
statements


41





SHUMATE INDUSTRIES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Years Ended December 31, 2007 and 2006





20062007
                      
                      
                      (restated)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (7,210,784
                      )
                      
                      $
                      (3,309,131
                      )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Depreciation
      and amortization expense
                      
                      
                      608,448
                      
                      
                      
                      450,487Bad
      debt expense (recovery)
                      
                      
                      -
                      
                      
                      
                      (20,000
                      )Amortization
      of beneficial conversion feature discount
                      
                      
                      187,589
                      
                      
                      
                      -Stock-based
      compensation
                      
                      
                      1,346,332
                      
                      
                      
                      396,975Changes
      in:Accounts
      receivable
                      
                      
                      51,751
                      
                      
                      
                      425,782Inventory
                      
                      
                      (365,516
                      )
                      
                      
                      (611,550
                      )Other
      assets
                      
                      
                      (220,133
                      )
                      
                      
                      (107,111
                      )Accounts
      payable
                      
                      
                      412,673
                      
                      
                      
                      189,839Accounts
      payable - related party
                      
                      
                      105,000
                      
                      
                      
                      -Accrued
      expenses
                      
                      
                      1,009,111
                      
                      
                      
                      299,077Deferred
      revenue
                      
                      
                      (400,000
                      )
                      
                      
                      400,000Net
      cash used in operating activities
                      
                      
                      (4,475,529
                      )
                      
                      
                      (1,885,632
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
                      
                      
                      (388,773
                      )
                      
                      
                      (916,735
                      )Proceeds
      from sale of fixed assets
                      
                      
                      -
                      
                      
                      
                      75,000Purchase
      of patents
                      
                      
                      (62,076
                      )
                      
                      
                      (53,352
                      )Net
      cash used in investing activities
                      
                      
                      (450,849
                      )
                      
                      
                      (895,087
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      change in bank credit line
                      
                      
                      (14,310
                      )
                      
                      
                      (58,699
                      )Payments
      on notes payable
                      
                      
                      (100,514
                      )
                      
                      
                      (887,486
                      )Payments
      on notes payable - related party
                      
                      
                      (359,959
                      )
                      
                      
                      -Proceeds
      from notes payable
                      
                      
                      3,300,000
                      
                      
                      
                      -Proceeds
      from sales of common stock, net of offering cost
                      
                      
                      637,426
                      
                      
                      
                      5,060,012Net
      cash provided by financing activities
                      
                      
                      3,462,643
                      
                      
                      
                      4,113,827NET
      INCREASE (DECREASE) IN CASH AND CASHEQUIVALENTS
                      
                      
                      (1,463,735
                      )
                      
                      
                      1,333,108CASH
      AND CASH EQUIVALENTS, beginning of period
                      
                      
                      1,547,326
                      
                      
                      
                      214,218CASH
      AND CASH EQUIVALENTS, end of period
                      
                      $
                      83,591
                      
                      
                      $
                      1,547,326Supplemental
      disclosures:Cash
      paid for income taxes
                      
                      $
                      -
                      
                      
                      $
                      -Cash
      paid for interest
                      
                      
                      422,712
                      
                      
                      
                      500,302Non-cash
      investing and financing transactions:Cashless
      exercise of options
                      
                      
                      97,500
                      
                      
                      
                      -Note
      payable for purchase of fixed assets
                      
                      
                      31,823
                      
                      
                      
                      -Accrued
      interest on bridge loan
                      
                      
                      115,441
                      
                      
                      
                      -Discount
      on warrants
                      
                      
                      413,571Discount
      for beneficial conversion feature related to convertible notes
      payable
                      
                      
                      138,924
                      
                      
                      
                      -Amount
      accrued for purchase of fixed assets
                      
                      
                      231,500
                      
                      
                      
                      -Related
      party debt foregiveness income
                      
                      
                      -
                      
                      
                      
                      2,247,639





See
summary of accounting policies and accompanying notes to consolidated financial
statements


42





SHUMATE
INDUSTRIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES





Description
of Business.  Shumate Industries, Inc. (“Shumate”) is a Texas based
energy field services company. Shumate is a holding company that, through its
subsidiaries, operates in two principal businesses: Shumate Machine Works, Inc.
(“Shumate Machine”), a contract machining and manufacturing company, and
Hemiwedge Valve Corporation (“Hemiwedge”), a company formed to launch a
proprietary valve product line. Shumate seeks to leverage its existing
infrastructure, expertise, and customer channels to grow its business and
introduce new technologies to the energy markets.





Basis of Presentation.The
consolidated financial statements include the accounts of Shumate and its
wholly-owned subsidiaries, Shumate Machine and Hemiwedge. Significant
inter-company accounts and transactions have been eliminated.





Reclassifications.Certain amounts in the
consolidated financial statements of the prior year have been reclassified to
conform to the presentation of the current year for comparative
purposes.





Use of Estimates in Financial
Statement Preparation.  The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.





Revenue
Recognition.  Revenues of Shumate Machine are derived primarily
from machining of oil field drilling parts, components and tools.  All
revenue is recognized when persuasive evidence of an arrangement exists, the
service or sale is complete, the price is fixed or determinable and
collectibility is reasonably assured.  This typically occurs when the
order is shipped.  Shipping terms are FOB shipping and title passes to
the customer at the time the product is shipped. Customers have the right to
inspection and acceptance for generally up to five days after taking
delivery.  Returns are not accepted due to the custom specifications
of each product, but rework on items is necessary if the product was not within
the original order specifications.  Customer requests for rework and
customer rejection of shipments has been historically low.





Revenues
of Hemiwedge Valve Corporation are derived from Hemiwedge® Cartridge valve
product sales and an agreement to perform contractual research and development
services.  The research and development services revenue is recognized
as the services are performed and related costs are incurred and
recorded.  The valve product sales revenue is recognized when
persuasive evidence of an arrangement exists, the sale is complete, the price is
fixed or determinable, and collectibility is reasonably assured.  This
typically occurs when the order is shipped.   Shipping terms are
FOB shipping and title passes to the customer at the time the product is
shipped.  Customers have the right to inspection and acceptance for
generally up to five days after taking delivery.





Cash and Cash
Equivalents.  For purposes of the statements of cash flows,
cash equivalents include all highly liquid investments with original maturities
of three months or less.





Allowance for Doubtful
Accounts.  Bad debt expense is recognized based on management’s
estimate of likely losses per year, based on past experience and an estimate of
current year uncollectible amounts.  The allowance was $40,000 and
$40,000 as of December 31, 2007 and December 31, 2006,
respectively.





Inventory.  Inventory
is stated at the lower of cost (first-in, first-out for raw materials and
specific job cost for work-in-process and finished goods) or
market.  Slow-moving inventories are periodically reviewed for
impairment in value.  Work-in-process and finished goods include
labor, materials and production overhead.





Property and
Equipment.  Property and equipment is valued at cost. Additions
are capitalized and maintenance and repairs are charged to expense as
incurred.  Gains and losses on dispositions of equipment are reflected
in operations.  Depreciation is provided using the straight-line
method over the estimated useful lives of the assets, which are three to twelve
years.


43





Patents.  Patents
are initially measured based on their fair values.  Patents are being
amortized on a straight-line basis over a period of 8 to 10 years and are stated
net of accumulated amortization at $58,078 and $29,038 at December 31, 2007 and
2006, respectively.  Amortization expense of $29,041 and $29,041 was
charged to operations during 2007 and 2006, respectively.





Impairment of Long-Lived
Assets.  Shumate reviews the carrying value of its long-lived
assets annually or whenever events or changes in circumstances indicate that the
historical cost-carrying value of an asset may no longer be
appropriate.  Shumate assesses recoverability of the carrying value of
the asset by estimating the future net cash flows expected to result from the
asset, including eventual disposition.  If the future net cash flows
are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset’s carrying value and fair
value.





Income
Taxes.  Income tax expense is based on reported earnings before
income taxes.  Deferred income taxes reflect the impact of temporary
differences between assets and liabilities recognized for consolidated financial
reporting purposes and such amounts recognized for tax purposes, and are
measured by applying enacted tax rates in effect in years in which the
differences are expected to reverse.





Stock-Based
Compensation.  Effective January 1, 2006, Shumate began
recording compensation expense associated with stock options and other forms of
equity compensation in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 123R,Share-Based Payment, as
interpreted by SEC Staff Accounting Bulletin No. 107.  Prior to
January 1, 2006, Shumate had accounted for stock options according to
the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees, and related interpretations, and therefore no related
compensation expense was recorded for awards granted with no intrinsic
value.  Shumate adopted the modified prospective transition method
provided for under SFAS No. 123R, and, consequently, have not retroactively
adjusted results from prior periods.





There
were 991,000 and 805,000 options issued to employees and non-employee directors
during the year ending December 31, 2007 and 2006, respectively.  See
Note 13 for details.





Accounting for Derivative
Instruments. Shumate does not use derivative  instruments to
hedge exposures to cash flow, market, or foreign currency risks. Shumate
evaluates all of it financial instruments under the application of SFAS 133 and
EITF 00-19 to determine if such the financial instruments are derivatives or
contain features that qualify as embedded derivatives. There are no derivative
instruments outstanding as of December 31, 2007 and 2006.





Basic and Diluted Net Income per
Share.  Basic loss per share is computed using the weighted
average number of shares of common stock outstanding during each period. Diluted
loss per share includes the dilutive effects of common stock equivalents on an
“as if converted” basis. For the years ended 2007 and 2006, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.





Research and
Development.  All costs for research and development activities
are expensed as incurred.





Recently Issued Accounting
Pronouncements.  In September 2006, the FASB issued FASB
Statement No. 157, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, and is
effective for fiscal years beginning after November 15, 2007.





Shumate
does not expect the adoption of this or any other recently issued accounting
pronouncements to have a significant impact on their consolidated financial
position, results of operations, or cash flows.


44





NOTE
2 – GOING CONCERN





As shown
in the accompanying consolidated financial statements, Shumate incurred
recurring losses from operations of $5,711,806 and $2,553,836 in 2007 and 2006,
respectively, and has an accumulated deficit of $29,087,780. These conditions
raise substantial doubt as to Shumate’s ability to continue as a going
concern.  To address these concerns, Shumate has raised proceeds of
approximately $3,050,000 through a convertible note private offering in
2007.  Additionally, Shumate has sought recapitalization in debt or
equity during 2008, however there can be no assurance that it will successfully
recapitalize. In addition, management is trying to continue to increase
Shumate’s revenues and improve its results of operations to a level of
profitability including revenues and cash flow from the Hemiwedge Valve
Corporation subsidiary.  New sales representative agreements have been
executed during 2008 to assist in the sales and marketing efforts to improve our
results of operations.  As of the date of this report, Shumate
believes that it will not be able to fund its operations, working capital
requirements, and debt service requirements through fiscal year 2008 through
cash flows generated by operations. Management may also seek to raise additional
capital in the future if Shumate’s results of operations do not continue to
improve or if the need otherwise arises.  The financial statements do
not include any adjustments that might be necessary if Shumate is unable to
continue as a going concern.





NOTE
3 – SEGMENT INFORMATION





Shumate’s
reportable segments consist of its contract machining and manufacturing entity,
Shumate Machine Works, and its valve product technology entity, Hemiwedge Valve
Corporation. Segment financial information is summarized as
follows:





Shumate
                    
                    
                    Hemiwedge
                    
                    
                    CorporateYear Ended December 31, 2007
                    
                    Machine Works
                    
                    
                    Valve Corp.
                    
                    
                    Allocation
                    
                    
                    TotalRevenues
                    
                    $
                    7,928,763
                    
                    
                    $
                    1,104,851
                    
                    
                    $
                    -
                    
                    
                    $
                    9,033,614Cost
      of revenues
                    
                    
                    6,456,678
                    
                    
                    
                    565,216
                    
                    
                    
                    -
                    
                    
                    
                    7,021,894Gross
      profit
                    
                    
                    1,472,085
                    
                    
                    
                    539,635
                    
                    
                    
                    -
                    
                    
                    
                    2,011,720Interest
      expense
                    
                    
                    547,845
                    
                    
                    
                    7,841
                    
                    
                    
                    337,062
                    
                    
                    
                    892,748Depreciation
      and amortization
                    
                    
                    373,909
                    
                    
                    
                    234,539
                    
                    
                    
                    -
                    
                    
                    
                    608,448Net
      income (loss)
                    
                    
                    23,419
                    
                    
                    
                    (3,533,534
                    )
                    
                    
                    (3,700,669
                    )
                    
                    
                    (7,210,784
                    )Total
      assets
                    
                    
                    2,736,478
                    
                    
                    
                    2,177,155
                    
                    
                    
                    229,499
                    
                    
                    
                    5,143,132Expenditures
      for long-lived assets
                    
                    
                    495,029
                    
                    
                    
                    219,625
                    
                    
                    
                    -
                    
                    
                    
                    714,654Shumate
                    
                    
                    Hemiwedge
                    
                    
                    CorporateYear Ended December 31, 2006
                    
                    Machine Works
                    
                    
                    Valve Corp.
                    
                    
                    Allocation
                    
                    
                    TotalRevenues
                    
                    $
                    7,403,802
                    
                    
                    $
                    316,080
                    
                    
                    $
                    -
                    
                    
                    $
                    7,719,882Cost
      of revenues
                    
                    
                    5,813,428
                    
                    
                    
                    219,942
                    
                    
                    
                    -
                    
                    
                    
                    6,033,370Gross
      profit
                    
                    
                    1,597,217
                    
                    
                    
                    89,295
                    
                    
                    
                    -
                    
                    
                    
                    1,686,512Interest
      expense
                    
                    
                    501,271
                    
                    
                    
                    4,681
                    
                    
                    
                    249,343
                    
                    
                    
                    755,295Depreciation
      and amortization
                    
                    
                    369,557
                    
                    
                    
                    80,930
                    
                    
                    
                    -
                    
                    
                    
                    450,487Net
      income (loss)
                    
                    
                    52,936
                    
                    
                    
                    (1,984,776
                    )
                    
                    
                    (1,377,291
                    )
                    
                    
                    (3,309,131
                    )Total
      assets
                    
                    
                    3,181,994
                    
                    
                    
                    1,873,883
                    
                    
                    
                    852,829
                    
                    
                    
                    5,908,706Expenditures
      for long-lived assets
                    
                    
                    284,173
                    
                    
                    
                    685,914
                    
                    
                    
                    -
                    
                    
                    
                    970,087





NOTE
4 – RESEARCH AND DEVELOPMENT CONTRACT





In July
2006, Hemiwedge Valve Corporation entered into an agreement with At Balance
Americas, LLC, a Houston-based Managed Pressure Drilling, or MPD, services
company. At Balance Americas, LLC is an affiliate of Shell Technology Ventures,
a leading energy-focused venture capital firm with offices in Houston, Texas.
At Balance is not a
related party and the development agreement was negotiated on an arm’s length
basis.The agreement provides Hemiwedge Valve Corporation with
funding of up to $1.4 million and expertise to develop a down-hole isolation
valve, or DIV, using our Hemiwedge® valve technology.  The contract
includes three major phases with partial funding in advance of each phase, and
progress payments throughout each phase.  The table below includes
revenue and expenses recognized by Hemiwedge Valve Corporation during the
respective years ended December 31.


45





2007
                  
                  
                  2006Contractual
      Research and Development Revenue
                  
                  $
                  1,084,629
                  
                  
                  $
                  -Contractual
      Research and Development Expense
                  
                  
                  347,727
                  
                  
                  
                  -Payments
      Received
                  
                  
                  495,219
                  
                  
                  
                  400,000





NOTE
5 – PROPERTY AND EQUIPMENT





Property
and equipment consisted of the following at December 31, 2007 and
2006:





Description
                                  
                                  Life
                                  
                                  2007
                                  
                                  
                                  2006Shop
      equipment
                                  
                                  5-12
      years
                                  
                                  $
                                  4,281,177
                                  
                                  
                                  $
                                  3,786,624Other
      equipment and furniture
                                  
                                  3
      years
                                  
                                  
                                  317,912
                                  
                                  
                                  
                                  224,823Leasehold
      improvements
                                  
                                  5
      years
                                  
                                  
                                  279,104
                                  
                                  
                                  
                                  214,1674,878,193
                                  
                                  
                                  
                                  4,225,614Less:
      accumulated depreciation
                                  
                                  
                                  
                                  
                                  (2,502,132
                                  )
                                  
                                  
                                  (1,922,242
                                  )Property
      and equipment, net
                                  
                                  
                                  
                                  $
                                  2,376,061
                                  
                                  
                                  $
                                  2,303,372





Depreciation
expense in continuing operations totaled $608,448 and $450,487 in 2007 and 2006,
respectively.





NOTE
6 – INTELLECTUAL PROPERTY





On
December 5, 2005, Shumate acquired $238,500 the intellectual property rights to
the HemiwedgeÒ line of
products, including the HemiwedgeÒ valve, from Soderberg
Research and Development, Inc. and certain of its affiliates.  Shumate
contributed these intellectual property rights to Hemiwedge as a capital
contribution.  The intellectual property rights acquired consist of
all patents, trademarks, and the internet website relating to the HemiwedgeÒ product
line.  The aggregate consideration paid for the intellectual property
rights consisted of $138,500 in cash and a two-year six percent promissory note
in the principal amount of $100,000, payable in 24 equal installments of
principal and interest.  In addition, Shumate agreed to deposit (a)
$72,000 into an escrow account, the property of Soderberg Research Inc., to be
paid in the form of a monthly advance in the amount of $3,000 for each month of
the 24 month period beginning in January 2006 and (b) three percent of the net
sales proceeds collected from customers from (i) gross revenue from sales of
products to which the acquired intellectual property relates, less (ii) sales
and/or use taxes, import and/or export duties, outbound transportation costs,
and amounts allowed or credited due to returns, which payments shall begin two
years after December 2005 and continue until March 29, 2013.  The
$72,000 in monthly advances shall be credited against the three percent of the
net sales proceeds.  Amortization expense in continuing operations
totaled $29,042 and $29,038 in 2007 and 2006, respectively.


46





NOTE
7 – NOTES PAYABLE – STILLWATER NATIONAL BANK





2007
                        
                        
                        2006$1,000,000
      line of credit with Stillwater National Bank secured by a first priority
      security interest in all of Shumate’s existing and future
      assets.  The line of credit bears interest at a rate equal to
      the prime rate plus two percent.  The advances available under
      the line of credit are limited to a borrowing base of the sum of (a) 80%
      of eligible accounts receivable, and (b) 50% of eligible inventory. This
      line of credit is secured by a first priority security interest in all of
      Shumate’s existing and future assets.  The line of credit was
      amended January 25, 2008.
                        
                        $
                        764,606
                        
                        
                        $
                        778,916$3,633,053
      term note dated March 31, 2006 with Stillwater National
      Bank.  The note is an amendment and restatement of a promissory
      note in the original amount of $5,633,053 delivered to Stillwater in
      connection with the October 19, 2005 reorganization and reflects
      $2,000,000 of debt forgiveness (which was accounted for as a contribution
      to capital as Stillwater was considered a related party) by Stillwater
      agreed to at the time of the October 2005 reorganization. The note
      requires one interest only payment on March 31, 2006, and thereafter
      requires Shumate to make 24 equal monthly payments in an amount sufficient
      to fully amortize principal and interest on the note over 84
      months.  The note is due and payable on April 19, 2008, at which
      time Shumate will be required to make a balloon payment of the entire
      outstanding principal balance and all accrued interest. The note bears
      interest at a rate equal to the prime rate plus two percent, and it is
      secured by a first priority security interest in all of Shumate’s existing
      and future assets.  The term note was amended January 25,
      2008.
                        
                        
                        3,003,998
                        
                        
                        
                        3,363,957Total
                        
                        $
                        3,768,604
                        
                        
                        $
                        4,142,873





NOTE
8 – ACCRUED EXPENSES





Accrued
expenses as of December 31, 2007 and 2006 included the following:





2007
                            
                            
                            2006Accrued
      interest on notes payable
                            
                            $
                            30,800
                            
                            
                            $
                            -Payroll
      taxes and estimated penalties
                            
                            
                            216,288
                            
                            
                            
                            190,349Accrued
      vacation
                            
                            
                            -
                            
                            
                            
                            75,048Accrued
      salaries and commissions
                            
                            
                            64,435
                            
                            
                            
                            44,726Rebates
                            
                            
                            66,541
                            
                            
                            
                            60,105Failed
      Acquisition Contingency
                            
                            
                            178,995
                            
                            
                            
                            -Officer
      Indemnification
                            
                            
                            580,000Accrued
      capital expenditure
                            
                            
                            219,600
                            
                            
                            
                            -Other
                            
                            
                            191,845
                            
                            
                            
                            65,006$
                            1,548,504
                            
                            
                            $
                            435,234





On
November 5, 2007, Sunbelt Machine Works Corporation terminated that certain
Stock Purchase Agreement dated as of August 17, 2007 by and among Shumate
Industries, Inc., Sunbelt Machine Works Corporation and each of the stockholders
of Sunbelt.  In connection therewith, Shumate was required to pay
Sunbelt a termination fee of $150,000 for which we have recorded an accrued
expense of $178,995 for such contingency.





During
the year ended December 31, 2007, Shumate agreed to indemnify one of its
officers in connection with a judgment assessed against him personally resulting
from a previously discharged corporate tax liability.  This resulted
in an accrued expense of $580,000 in the 4th quarter
of 2007.


47





NOTE
9 – NOTES PAYABLE AND CAPITAL LEASE





During
the year ended December 31, 2007, Shumate sold $3,050,000 of principal amount of
convertible promissory notes with warrants to purchase 610,000 shares of its
common stock to two accredited investors.   The notes have a 1
year term and bear interest at ten percent (10%); provided, however, that
Shumate is required to prepay the note if Shumate consummates a subsequent
equity financing (as defined) within the next 12 months. Interest is payable
monthly in arrears, however Shumate has the right to defer any interest payment
and accrue same to principal. The notes are convertible into Shumate common
stock at a fixed conversion price of $1.89. In addition, if Shumate closes a
subsequent equity financing within the next 12 months, the note holders have the
option to convert the outstanding balance of such note into such financing on
the same terms as the other investors in such financing.


Under the
terms of the notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of Shumate’s
then outstanding common stock as determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended.





The notes
were issued with a warrant to purchase up to 610,000 shares of Shumate’s common
stock at an exercise price of $1.89 per share, subject to adjustment. The
warrant holders may designate a “cashless exercise option.” This option entitles
the warrant holders to elect to receive fewer shares of common stock without
paying the cash exercise price. The number of shares to be determined by a
formula based on the total number of shares to which the warrant holder is
entitled, the current market value of the common stock and the applicable
exercise price of the warrant.


Shumate determined
that the conversion feature of the note and the warrants issued were not
derivative instruments pursuant to SFAS No. 133, Accounting for Derivatives, as
amended.  Under the provisions of EITF Issue 98-5 and
00-27, Shumate discounted the fair value of warrants attached to the notes
and calculated the intrinsic value of the beneficial conversion feature using
the Black-Scholes Option Pricing Model to exceed the principal value of the
note. The resulting discount of $552,495 is being amortized over the life of the
notes using the effective interest method.  The amortized amount for
the year ended December 31, 2007 is $187,589. A summary of these convertible
notes is as follows:





Gross
      proceeds from the notes
                      
                      $
                      3,050,000Less:  discount
      on the warrants
                      
                      
                      (413,571
                      )Less:  beneficial
      conversion feature of the notes
                      
                      
                      (138,924
                      )Add:  amortization
      of discounts
                      
                      
                      187,589Add:  accrued
      interest
                      
                      
                      115,441Carrying
      amount of notes as of December 31, 2007
                      
                      $
                      2,800,535





Shumate
granted the investors in the offering registration rights for the resale of the
shares issuable upon conversion of the note and upon exercise of the warrant. To
the extent that all such shares are not registered pursuant to the granted
piggyback registration rights, Shumate agreed to register the remaining
underlying shares, if any, by January 6, 2008.





In
connection with the offering, the placement agents received $215,000 in fees. In
addition, another $10,000 in legal fees were incurred.  The net
proceeds of this offering after the payment of commissions, fees and other
expenses of the offering were approximately $2,825,000.





In
October 2007, Shumate sold $250,000 of principal amount of a promissory
note.  The note was due and payable as of December 31, 2007, and bears
interest at twelve percent (12%).  The note has been extended as a
demand loan.





In June
2006, Shumate entered into a financing agreement with an independent third party
to sell and leaseback certain machinery and equipment, which is accounted for as
a capital lease.  This lease agreement contains a residual value
guarantee at the end of the lease term.  The cost of equipment under
the capital lease is included in the balance sheet as shop equipment of
approximately $100,000 at December 31, 2007. Amortization of the assets under
the capital lease were included in the depreciation expense. Remaining payments
under the capital lease equal $51,586 at December 31, 2007.


48


Future
minimum lease payments under the capital lease are as follows:





Year
      EndingDecember
      31, 2008
                    
                    $
                    51,586Less
      amount representing interest
                    
                    
                    (11,841
                    )Present
      value of minimum lease payments
                    
                    $
                    39,745





On
December 5, 2005, Hemiwedge executed a promissory note to Soderberg Research and
Development, Inc. and certain of its affiliates in the amount of $100,000 in
connection with the purchase of intellectual property (See Note 6). The note
bears interest at the rate of six percent and is payable in twenty-four equal
installments of principal and interest beginning January 1, 2006 and ending
December 1, 2007. The balance as of December 31, 2007 was $8,798.




NOTE
10 – INCOME TAXES





Shumate
uses the liability method, where deferred tax assets and liabilities are
determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes.  Shumate has incurred significant
net losses in past years and, therefore, has no tax liability.  The
net deferred tax asset generated by the loss carry-forward has been fully
reserved.  The cumulative net operating loss carry-forward is
approximately $27,000,000 at December 31, 2007, and will expire in the years
2022 through 2027.





At
December 31, 2007, deferred tax assets consisted of the following:





Deferred tax asset
                    
                    $
                    9,445,000Valuation
      allowance
                    
                    
                    (9,445,000
                    )Net
      deferred tax asset
                    
                    $
                    -





Internal
Revenue Section 382 restricts the ability to use these carryforwards whenever an
ownership change as defined occurs.  Shumate incurred such an
ownership change both 2006 and 2005.  As the result of the ownership
change, Shumate’s use of net operating losses through the date of change is
restricted.  Losses subsequent to the date of change are not
restricted.





NOTE
11 – COMMON STOCK





On
February 22, 2006, Shumate sold 3,333,333 shares of its common stock to several
investors in a private offering for $0.60 per share.  The placement
agent received $160,000 in commissions and 250,000 warrants to purchase shares
of common stock at an exercise price of $0.63 per share.  The net
proceeds of this offering to Shumate after the payment of commissions, fees, and
other expenses totaling $115,817 of the offering were approximately
$1,725,000.





Shumate
evaluated the freestanding warrants to determine if they were within the scope
of SFAS 133 and EITF 00-19.  Part of this evaluation considered the
‘Liquidated Damages’ provision in the ‘Registration Rights Agreement’ that
covers both the warrants and the common stock.  Shumate concluded the
freestanding warrants should not be classified as a liability and therefore are
not subject to SFAS 133.





Subject
to certain conditions, Shumate has granted these February investors a right of
first refusal, for a period of one year from June 30, 2006 to participate in any
subsequent financing that Shumate conducts.  As of the date of this
report, these rights have expired.





In May
and August 2006, Shumate issued 5,000 shares of its common stock to a consultant
for marketing services, 5,000 shares to an employee and another 5,000 shares to
an officer of a subsidiary.  These shares were valued at their
combined fair value of $15,500, and stock-based compensation expense was
recorded as a result of this grant.


49


On August
8, 2006, Shumate issued 70,000 shares of its common stock to a consultant for
investor relations services.  These shares were valued at their fair
value of $84,000. Under the terms of the consulting agreement, 4,000 shares are
guaranteed while 66,000 shares are earned pro-rata over a twelve-month period
commencing July 2006.  Accordingly, $44,400 was recorded as consulting
expense for the year ended December 31, 2006 and $39,600 is recorded as deferred
compensation expense to be amortized monthly through June 2007.





Between
October 30, 2006 and December 14, 2006, Shumate sold 3,787,550 shares of its
common stock to several investors in a private offering for $1.00 per
share.  Shumate is also obligated to issue the investors 1,893,775
Class A Warrants, each exercisable at $1.25 per share.  The placement
agent received a 7% cash commission, a 3% non-accountable expense allowance, a
1% management fee, and 378,755 warrants to purchase shares of common stock at an
exercise price of $1.25 per share.  Shumate also paid legal fees of an
aggregate $22,500 to counsel for the placement agent. The net proceeds of this
offering to Shumate after the payment of commissions, fees and other expenses of
the offering totaling $612,511 were approximately $3,350,000.





Shumate
evaluated the freestanding warrants to determine if they were within the scope
of SFAS 133 and EITF 00-19.  Part of this evaluation considered the
‘Liquidated Damages’ provision in the ‘Registration Rights Agreement’ that
covers both the warrants and the common stock.  Shumate concluded the
freestanding warrants should not be classified as a liability and therefore are
not subject to SFAS 133.





Subject
to certain conditions, Shumate has granted these investors a right of first
refusal, for a period of one year from the final closing of the offering filed
in connection with this transaction, to participate in any subsequent financing
that Shumate conducts, subject to rights granted to previous
investors.  As of the dated of this report, these rights have
expired.




In the
event that during the period commencing on December 14, 2006 and ending on the
earlier to occur of: (i) March 14, 2008; or (ii) the Company and At Balance
Americas, a Shell Technology Ventures company, entering into a definitive
distribution agreement for the Company’s Hemiwedge® DIV product, the Company
sells any shares of its Common Stock or securities convertible into Common Stock
or exercisable for shares of Common Stock at less than $1.00 per share, the
Company shall be obligated to adjust, on a full-ratchet basis, the number of
shares of Common Stock issued to Investors in this Offering as if the shares of
Common Stock purchased in this Offering were purchased at such lower
price.   As of the date of this report, these rights have
expired.





In the
event that, during the period commencing on December 14, 2006 and ending on the
earlier to occur of: (i) March 14, 2008; or (ii) the Company and At Balance
Americas, a Shell Technology Ventures company entering into a definitive
distribution agreement for the Company’s Hemiwedge® DIV product, the Company
sells any shares of its Common Stock or securities convertible into Common Stock
or exercisable for shares of Common Stock at less than the exercise price of the
Class A Warrants, the Company shall be obligated to adjust, on a full-ratchet
basis, the exercise prices thereof, as applicable.  As of the date of
this report, these rights have expired.





The Class
A Warrants are subject to redemption by the Company upon 20 days prior written
notice provided: (i) the Common Stock has traded at or above $2.50 per share
during the 15 consecutive trading days prior to a written notice of redemption
by the Company; (ii) there is an effective registration statement covering the
resale of the shares of Common Stock underlying the Warrants at the time of
redemption; and (iii) the Common Stock has traded an average of 100,000 shares
per day. The redemption price shall be $0.01 per Warrant. All holders of
Warrants will have the opportunity to exercise any such Warrant prior to the
date of redemption.





Between
March 1, 2007 and March 31, 2007, Shumate issued an aggregate of 666,768 shares
of common stock for the exercise of outstanding warrants. The net proceeds of
these warrant exercises to Shumate after the payment of commissions, fees, and
other expenses of the offering were $735,560. Of the 666,768 warrants exercised,
536,300 were Class A Warrants. The Class A Warrants were exercised at a price of
$1.25 per share and resulted in approximately $653,366 in net proceeds to
Shumate after the payment of commissions, fees, and other expenses. All of the
holders of the Class A Warrants that were exercised received one share of
Shumate's common stock and one Class B Warrant as a result of such exercise. The
Class B Warrants have a term of five years and an exercise price of $2.00 per
share. The Class B Warrants include piggy-back registration rights, subject to
customary underwriter cutbacks. If the common stock underlying the Class B
Warrants is not registered by March 31, 2008, the holders will be entitled to
exercise the Class B Warrants on a cashless basis at any time that there is not
an effective registration statement covering the resale of the common stock
underlying the Class B Warrants. During the nine months ended September 30,
2007, Shumate incurred $81,019 costs of raising capital that were related to the
offering.


50





Shumate
evaluated the Class B Warrants to determine if they were within the scope of
SFAS 133 and EITF 00-19. Shumate concluded the Class B Warrants should not be
classified as a liability and therefore are not subject to SFAS
133.





Between
April 1, 2007 and December 31, 2007, Shumate issued an aggregate of 420,050
shares of common stock valued at $660,912 for consulting services, professional
fees, and hiring incentives.





Between
July 1, 2007 and September 30, 2007, Shumate issued an aggregate of 13,752
shares of common stock for the exercise of outstanding Class A Warrants at an
exercise price of $1.25 per share, resulting in net proceeds of
$17,190.





Between
July 1, 2007 and September 30, 2007, Shumate issued an aggregate of 150,000
shares of common stock for the exercise of non-qualified stock options at an
exercise price of $0.65 per share.  The stock options were exercised
by payment by the option holder of 54,776 shares of outstanding common stock
valued at $97,500 on the date of exercise.





Between
July 1, 2007 and September 30, 2007, Shumate incurred $24,454 in offering
costs.





In
December, 2007, the company issued 60,000 shares of restricted stock as a hiring
incentive.  5,000 shares vest each quarter beginning in the first
quarter of 2008, for a three year vesting schedule.





NOTE
12 – DISCONTINUED OPERATIONS





On March
9, 2005, Excalibur Holdings, Inc., a wholly-owned subsidiary of Shumate and the
parent corporation of Shumate Machine, filed a voluntary petition for protection
under Chapter 7 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court, Southern District of Texas. As a result of this bankruptcy filing, 100%
of the capital stock of Shumate Machine became the sole asset of the bankruptcy
estate. The capital stock of Shumate Machine was pledged to secure the
obligations of Excalibur Holdings to its senior lender, Stillwater. On October
19, 2005, Stillwater transferred the capital stock of Shumate Machine to Shumate
as part of the reorganization of Shumate. In November 2005, the court discharged
Excalibur Holdings of all of its debts and liabilities.





NOTE
13 – STOCK OPTIONS AND WARRANTS





Shumate
currently has two stock option plans: (a) the 2001 Stock Option Plan reserved
285,714 common shares and 300,571 stock options have been granted through
December 31, 2007 of which 296,429 options have expired unexercised, and (b) the
2005 Stock Incentive Plan reserved 10,000,000 shares, of which 4,783,690 shares
have been issued to date and 1,796,000 options have been granted through
December 31, 2007.  In addition, there were 48,571 non-plan options
outstanding as of December 31, 2006.





During
the year ended December 31, 2006, Shumate granted 805,000 options at exercise
prices ranging from $0.65 to $1.35 per share for services rendered and valued at
the options’ fair value totaling $772,734.  Of this amount, $322,793
and $146,227 was recorded as compensation expense in the years ended December
31, 2006 and 2007 respectively.  $142,006 of the fair value will not
be recognized based on non-vested options for employees that were no longer
employed as of December 31, 2007.  The remaining $161,708 was deferred
to recognize over the future periods in which the options vest and the services
are being performed.  The weighted average term in which the
unrecognized expense will be amortized is 1.5 years.





During
the year ended December 31, 2006, Shumate granted 12,000 warrants to consultants
at the exercise price at $1.50 per share for services. These warrants have a
life of seven years and vest immediately.  Shumate valued and recorded
these warrants at their fair value of $14,282 during the year.





During
the year ended December 31, 2006, Shumate granted 250,000 warrants at the
exercise prices of $0.63 per share to brokers for financing costs and services
and granted 2,272,530 warrants at the exercise prices of $1.25 per share to
investors associated with the private offering. These warrants vest immediately
and have a life of five years. These warrants have a relative fair value of
$1,984,361.





51





Variables
used in the Black-Scholes option-pricing model during the year ended December
31, 2006 include (1) 4.19% - 4.99% risk-free interest rate, (2) 3 year option
life is the expected remaining life of the options, (3) expected volatility
ranged from 195% to 206%, and (4) zero expected dividends.





During
2006, 87,857 warrants were expired unexercised.





During
the year ended December 31, 2007, Shumate granted 991,000 options to its
employees and non-employee directors at exercise prices ranging from $1.00 to
$2.25 per share for services rendered and valued at the options' fair value
totaling $728,170. Of this amount, $516,645 was recorded as compensation expense
during the year ended December 31, 2007 and $211,525 was deferred to recognize
over the future periods in which the options vest and the services will be
performed.  The weighted average term in which the unrecognized
expense will be amortized is 2.4 years.





During
the first quarter of 2007, Shumate determined that additional working capital
was needed to fund its continuing operations. Shumate decided to initiate a
capital raising effort via a private offering to a limited number of accredited
investors during a limited period of time. In exchange for the exercise of any
or all of the investors' Class A warrants, the investors would receive the
applicable shares of common stock and Class B warrants. In connection therewith,
Shumate granted 536,300 warrants at an exercise prices of $2.00 per share to
investors associated with the exercise of Class A Warrants. These warrants
vested immediately and have a life of five years. These warrants have a fair
value of $890,571.





Variables
used in the Black-Scholes option-pricing model during the year ended December
31, 2007, include (1) 2.85% - 5.00% risk-free interest rate, (2) 2.5 to 3.5 year
option life is the expected remaining life of the options, (3) expected
volatility of 81% - 182%, and (4) zero expected dividends.





During
the year ended December 31, 2007, Shumate also recognized $146,227 option
expense for options granted in the prior year that vested in the current
year.





During
2007, 150,000 options were exercised and 163,047 expired
unexercised.  In the same period 680,520 warrants were exercised and
891,045 expired unexercised.





Summary
information regarding options and warrants is as follows:





Weighted
                              
                              
                              Aggregate
                              
                              
                              
                              
                              
                              Weighted
                              
                              
                              AggregateAverage
                              
                              
                              Intrinsic
                              
                              
                              
                              
                              
                              Average
                              
                              
                              IntrinsicShare Price
                              
                              Options
                              
                              
                              ExercisePrice
                              
                              
                              Value
                              
                              
                              Warrants
                              
                              
                              ExercisePrice
                              
                              
                              ValueOutstanding
      atDecember
      31, 2005
                              
                              
                              53,857
                              
                              
                              $
                              8.95
                              
                              
                              
                              
                              
                              
                              201,712
                              
                              
                              $
                              7.94Year
      ended December 31, 2006:Granted
                              
                              
                              805,000
                              
                              
                              
                              1.06
                              
                              
                              
                              
                              
                              
                              2,534,530
                              
                              
                              
                              1.19Forfeited
                              
                              
                              (1,000
                              )
                              
                              
                              4.20
                              
                              
                              
                              
                              
                              
                              (87,857
                              )
                              
                              
                              6.99Outstanding
      atDecember
      31, 2006
                              
                              
                              857,857
                              
                              
                              
                              1.55
                              
                              
                              $
                              222,900
                              
                              
                              
                              2,648,385
                              
                              
                              
                              1.51
                              
                              
                              $
                              356,802Year
      ended December 31, 2007:Granted
                              
                              
                              991,000
                              
                              
                              
                              1.57
                              
                              
                              
                              
                              
                              
                              
                              2,023,490
                              
                              
                              
                              1.69Exercised
                              
                              
                              (150,000
                              )
                              
                              
                              0.65
                              
                              
                              
                              
                              
                              
                              
                              (680,520
                              )
                              
                              
                              1.13Forfeited
                              
                              
                              (163,047
                              )
                              
                              
                              3.66
                              
                              
                              
                              
                              
                              
                              
                              (891,045
                              )
                              
                              
                              2.29Outstanding
      atDecember
      31, 2007
                              
                              
                              1,535,810
                              
                              
                              $
                              1.42
                              
                              
                              $
                              5,000
                              
                              
                              
                              3,100,310
                              
                              
                              $
                              1.49
                              
                              
                              $
                              20,320




52




Options
outstanding and exercisable as of December 31, 2007:





Outstanding
                            
                            
                            ExercisableExercise
                            
                            
                            Number
                            
                            
                            Remaining
                            
                            
                            NumberPrice
                            
                            
                            of Shares
                            
                            
                            Life (years)
                            
                            
                            of Shares$
                            4.20
                            
                            
                            
                            3,143
                            
                            
                            
                            0.41
                            
                            
                            
                            3,1430.75
                            
                            
                            
                            100,000
                            
                            
                            
                            3.04
                            
                            
                            
                            33,3341.00
                            
                            
                            
                            100,000
                            
                            
                            
                            3.22
                            
                            
                            
                            100,0001.20
                            
                            
                            
                            50,000
                            
                            
                            
                            0.09
                            
                            
                            
                            50,0001.35
                            
                            
                            
                            150,000
                            
                            
                            
                            3.45
                            
                            
                            
                            50,0001.33
                            
                            
                            
                            75,000
                            
                            
                            
                            3.62
                            
                            
                            
                            25,0001.20
                            
                            
                            
                            6,667
                            
                            
                            
                            0.08
                            
                            
                            
                            6,6671.21
                            
                            
                            
                            50,000
                            
                            
                            
                            3.70
                            
                            
                            
                            50,0001.15
                            
                            
                            
                            10,000
                            
                            
                            
                            3.79
                            
                            
                            
                            3,3331.75
                            
                            
                            
                            20,000
                            
                            
                            
                            3.95
                            
                            
                            
                            -1.75
                            
                            
                            
                            75,000
                            
                            
                            
                            4.02
                            
                            
                            
                            75,0001.90
                            
                            
                            
                            32,000
                            
                            
                            
                            4.02
                            
                            
                            
                            -2.25
                            
                            
                            
                            10,000
                            
                            
                            
                            4.07
                            
                            
                            
                            -1.90
                            
                            
                            
                            60,000
                            
                            
                            
                            4.36
                            
                            
                            
                            60,0001.80
                            
                            
                            
                            500,000
                            
                            
                            
                            4.61
                            
                            
                            
                            500,0001.00
                            
                            
                            
                            294,000
                            
                            
                            
                            4.98
                            
                            
                            
                            294,0001,535,810
                            
                            
                            
                            4.05
                            
                            
                            
                            1,250,477





Warrants
outstanding and exercisable as of December 31, 2007:





Outstanding
                            
                            
                            ExercisableExercise
                            
                            
                            Number
                            
                            
                            Remaining
                            
                            
                            NumberPrice
                            
                            
                            of Shares
                            
                            
                            Life (years)
                            
                            
                            of Shares$
                            0.63
                            
                            
                            
                            119,532
                            
                            
                            
                            3.15
                            
                            
                            
                            119,5321.50
                            
                            
                            
                            12,000
                            
                            
                            
                            3.59
                            
                            
                            
                            12,0001.25
                            
                            
                            
                            1,398,936
                            
                            
                            
                            3.96
                            
                            
                            
                            1,398,9362.00
                            
                            
                            
                            536,300
                            
                            
                            
                            4.25
                            
                            
                            
                            536,3001.25
                            
                            
                            
                            263,542
                            
                            
                            
                            4.42
                            
                            
                            
                            263,5421.89
                            
                            
                            
                            410,000
                            
                            
                            
                            4.28
                            
                            
                            
                            410,0001.25
                            
                            
                            
                            60,000
                            
                            
                            
                            4.63
                            
                            
                            
                            60,0001.89
                            
                            
                            
                            200,000
                            
                            
                            
                            4.84
                            
                            
                            
                            200,0001.50
                            
                            
                            
                            100,000
                            
                            
                            
                            4.94
                            
                            
                            
                            100,0003,100,310
                            
                            
                            
                            4.16
                            
                            
                            
                            3,100,310





NOTE
14 – MAJOR CUSTOMERS





Two
customers accounted for 71% of total revenues in 2007 and 77% of total revenues
in 2006.





NOTE
15 – TERMINATION OF SUNBELT STOCK PURCHASE AGREEMENT





On
November 5, 2007, Sunbelt Machine Works Corporation terminated that certain
Stock Purchase Agreement dated as of August 17, 2007 by and among Shumate
Industries, Inc., Sunbelt Machine Works Corporation and each of the stockholders
of Sunbelt.  In connection therewith, Shumate was required to pay
Sunbelt a termination fee of $150,000 for which we have recorded an expense of
$333,575 for the year ended December 31, 2007 for prepaid acquisition costs
accrued in connection with the stock purchase agreement.





53





NOTE
16 – RELATED PARTY TRANSACTIONS





On
February 22, 2006, in connection with our private placement offering, Red Rock
Interests, Ltd. purchased 85,000 shares of our common stock for a purchase price
of $51,000. Steven B. Erikson, who serves as a director of our company, is the
President and a shareholder of Red Rock Interests, Ltd. Red Rock Interests, Ltd.
participated in the private placement offering on terms identical to all other
purchasers in such offering.





In the
same private placement offering, Virgil Swift, the brother of A. Earl Swift,
purchased 100,000 shares of our common stock for a purchase price of $60,000.
Virgil Swift participated in the private placement offering on terms identical
to all other purchasers in such offering.





As part
of an amended note agreement with Stillwater in March 2006 (see note 7 for
details), StillwaterNational Bank & Trust Company forgave $2,000,000 of indebtness
resulting in $2,000,000 contribution to capital given Stillwater was considered
a related party at the time.





On
November 3, 2006, in connection with our private placement offering, the Francis
Jungers Trust purchased an aggregate of 110,000 shares of our common stock and
55,000 warrants to purchase shares of our common stock for an aggregate purchase
price of $110,000. Frank Jungers, who serves as a director of our company, is
the grantor of the Francis Jungers Trust and serves as its Trustee. The Francis
Jungers Trust participated in the private placement offering on terms identical
to all other purchasers in such offering.





In the
same private placement offering, Randall Jungers, the son of Francis Jungers,
purchased an aggregate of 200,000 shares of our common stock and 100,000
warrants to purchase shares of our common stock for an aggregate purchase price
of $200,000. Randall Jungers participated in the private placement offering on
terms identical to all other purchasers in such offering.





In
connection with the election and appointment of Mr. Jungers to our board of
directors in January, 2007, we granted Mr. Jungers an option to purchase up to
75,000 shares of our common stock at an exercise price of $1.75 per share
pursuant to our 2005 Stock Incentive Plan. The options were fully vested and
became exercisable immediately upon their grant. The options expire on the date
that is five years from the date of grant.





Spectrum
Law Group, LLP provides legal services to us. One of the partners at Spectrum
Law Group, LLP is the son-in-law of Frank Marshik, one of our directors and
stockholders. Spectrum Law Group, LLP billed us $93,000 in fees in 2005 and
$82,500 in fees in 2006.





On March
26, 2007, the Francis Jungers Trust exercised 55,000 Class A Warrants and in
connection therewith we issued 55,000 shares of our common stock and 55,000
Class B Warrants to the Francis Jungers Trust.





On March
28, 2007 the Marshik Family Trust exercised 12,000 Class A Warrants and in
connection therewith we issued 12,000 shares of our common stock and 12,000
Class B Warrants to the Marshik Family Trust.





On May 9,
2007, we granted Frank X. Marshik, one of our independent directors, a
non-qualified stock option to purchase 60,000 shares of common stock at an
exercise price of $1.90 per share under our 2005 Stock Incentive Plan. The term
of the option is five years.





On May 9,
2007, the board of directors adopted a compensation policy for outside,
independent directors, pursuant to which we will pay each independent director
who serves on a committee of the board of directors, other than the chairman of
such committee, $500 for each committee meeting attended by such independent
director, either in person or telephonically; provided, however, that such
payment shall only be made for committee meetings where written minutes are
maintained.  In addition, we will pay each independent director who
serves as chairman of a committee of the board of directors $750 for each such
committee meeting attended by such independent director, either in person or
telephonically; provided, however, that such payment shall only be made for
committee meetings where written minutes are maintained.




54




On August
9, 2007, the board of directors approved grants of non-qualified stock options
to purchase 60,000 shares of common stock at an exercise price of $1.80 per
share to each of our outside directors, Leo Womack, Steve Erikson, Francis
Jungers and Frank Marshik under our 2005 Stock Incentive Plan.  The
term of each option is five years.





On August
9, 2007, the board of directors approved the issuance of 13,450 shares of common
stock under our 2005 Stock Incentive Plan to Kenton Chickering III as
compensation under a September 12, 2006 consulting agreement.





In
December 2007, the board of directors agreed to indemnify our Chief Financial
Officer, Matthew C. Flemming, for a judgment assessed against him resulting from
a previously discharged corporate tax liability.  We accrued an
expense of $580,000 to reflect this contingency.





On
January 25, 2008, our President, Larry Shumate, entered into that certain
security agreement with Stillwater National Bank & Trust Company to secure
the loans under the January 2008 Amended Loan Agreement with
Stillwater.  Mr. Shumate granted Stillwater a security interest in
certain of his personal property with an aggregate value of $179,000 as
collateral for payment.





In March
2008, Shumate borrowed $50,000 each from directors Frank Jungers, Kenton
Chickering III and Steven B. Erikson, through Red Rock Interests, Ltd., for a
total of $150,000. The loan was made pursuant to 12% demand promissory
notes.  The principal plus interest in the amount of $1,088 per loan
($51,088 each and $153,264 in the aggregate) was paid in full by Shumate in May
2008.





NOTE
17 – COMMITMENTS AND CONTINGENCIES





Shumate’s
executive offices are in Conroe, Texas under following two operating
leases:





On April
1, 2006, Shumate and the lessor terminated an existing lease scheduled to expire
on June 30, 2009 and entered into a new lease with an expiration date of March
31, 2011. The base rent is payable at $18,600 per month. The new lease grants to
Shumate an option to purchase the premises at the end of the lease term for an
agreed-upon purchase price or current appraised value. If it exercises this
option, Shumate is entitled to a credit in an amount equal to 5% of all lease
payments paid during the term.  Effective February 1,
2007, the lease was amended. 5,000 square feet was added to the lease, and the
base rent increased to $22,100 per month.  Future minimum lease
payments under the lease increased to $265,200 annually in 2008 through 2010,
and $66,300 in 2011.





In
December 2005, Shumate entered into an operating lease with a third party
landlord. This lease expires November 30, 2008 and is payable at $14,149 per
month. The lease grants to Shumate an option to purchase the premises for a
purchase price of $1,825,000, against which Shumate shall be entitled to a
credit against the purchase price in an amount equal to the amount necessary to
amortize the purchase price at seven percent over a period of 240 months. The
landlord also granted to Shumate a right of first refusal with respect to the
premises. In addition, Shumate entered into a sublease agreement to sublease of
a portion of the premises. The sublease is a three-month sublease, with
automatic extensions for the following 33 months, at a rate of approximately
$4,000 per month. Future net minimum lease payments under the lease as of
December 31, 2007 are $155,639 in 2008. Future net minimum lease receivables
under the sublease as of December 31, 2007 are $44,000 in 2008.





Rent
expense was $383,488 and $249,031 in 2007 and 2006, respectively.





NOTE
18 – SUBSEQUENT EVENTS





On
January 25, 2008, Shumate entered into an Amended and Restated Loan Agreement
with Stillwater National Bank and Trust Company (the "Amended Loan
Agreement").





The
Amended Loan Agreement amends and restates the Prior Agreement as
follows:




55




1. Term Loan. Shumate’s current Term
Note dated October 19, 2005 in favor of Stillwater had an outstanding principal
balance of $3,003,998 as of January 25, 2008 and a maturity date of April 19,
2008. Stillwater has agreed to lend to Shumate (along with its co-borrowers
Shumate Machine Works, Inc. and Hemiwedge Valve Corporation) $3,329,000 pursuant
to a new term note dated January 25, 2008, which funds advanced under the new
term note will be used to refinance the old term note and provide working
capital. The new term note requires Shumate to make 26 equal monthly payments
(beginning on February 28, 2008) in an amount sufficient to fully amortize
principal and interest on the amended and restated note over 64 months. The new
term note is due and payable on April 19, 2010. The new term note bears interest
at a rate equal to the prime rate plus two percent, and it is secured by a first
priority security interest in all of Shumate’s existing and future assets as
well as a security interest in certain personal assets of the President of
Shumate.





2. Revolving Loan. Shumate’s current
revolving promissory note dated October 19, 2005 in favor of Stillwater, had an
outstanding principal balance of $893,676 as of January 25, 2008 and a maturity
date of April 19, 2008. Stillwater has agreed to lend to Shumate (along with its
co-borrowers Shumate Machine Works, Inc. and Hemiwedge Valve Corporation)
$1,000,000 pursuant to a new revolving promissory note dated January 25, 2008,
which funds advanced under the new revolving promissory will be used to
refinance the old revolving promissory note and provide working capital. The
initial balance on the line of credit is the balance of Shumate’s existing line
of credit with Stillwater ($893,676 principal balance as of January 25, 2008).
The advances available under the new revolving promissory note are limited to a
borrowing base of the sum of (a) 85% of eligible accounts receivable, and (b)
50% of eligible inventory. The new revolving promissory note bears interest at a
rate equal to the prime rate plus two percent, and it is secured by a first
priority security interest in all of Shumate’s existing and future assets as
well as a security interest in certain personal assets of the President of
Shumate. On the 28th day of each month, beginning January 28,
2008,  Shumate will pay all interest accrued on the new revolving
promissory note. The amount Shumate can borrow on the line of credit is subject
to qualifying accounts receivable and inventory. The new revolving promissory
note will mature and become fully due and payable on April 19,
2009.





In March
2008, Shumate borrowed $150,000 from several directors of the Company. The loan
principal is due on demand and bears interest at 12% per annum. The principal
plus interest in the amount of $1,088 has been paid in full by Shumate in May
2008.





On May
15, 2008, our wholly owned subsidiary, Shumate Machine Works entered into a
series of simultaneous transactions pursuant to which it purchased the property
underlying its lease (the “Original Lease”) with Brewer Family Charitable
Remainder Annuity Trust #1 located at 1011 Beach Airport Road, Conroe, Texas
77301.  The terms of the Original Lease included an option to purchase
the underlying property.  Shumate Machine Works purchased the property
for $1,726,949 pursuant to a warranty deed.





Concurrently
with the purchase of the property, Shumate Machine Works entered into a sale and
simultaneous lease transaction with Trader Properties LLC.  Shumate
Machine Works sold the property to Trader Properties for an aggregate purchase
price of $2,180,000 pursuant to a general warranty deed with vendor’s
lien.  As such, Shumate Machine works received net cash of $319,
617.





The terms
of the Commercial Lease Agreement dated May 15, 2008 between Hemiwedge Valve
Corporation and Trader Properties is for a term of 10 years with a monthly rent
of $24,000 per month, which shall be increased by 2% each year for the term of
the lease.  Hemiwedge Valve Corporation is required to maintain public
liability insurance of not less than $1,000,000 during the term of the
lease.  To secure performance under the commercial lease, Hemiwedge
Valve Corporation granted Trader Properties a lien and security interest against
all of Hemiwedge Valve Corporation’s non-exempt personal property that is in the
leased premises.





In May
15, 2008, Shumate Industries has guaranteed payment and performance of the lease
pursuant to a Guaranty Agreement dated May 15, 2008 with Trader
Properties.  In addition, Shumate Industries agreed to issue Trader
Properties a warrant to purchase 100,000 shares of its common stock at an
exercise price of $0.25 per share prior to June 15, 2008.





Shumate
borrowed $100,000 from a third party under a promissory note. This note is due
on demand and bears interest at 12% per annum.





On
February 14, 2008, Shumate converted approximately $28,000 of accounts payable
to a promissory note. This note is due on demand and bears interest at 10% per
annum.




56




Subsequent
to December 31, 2007, Shumate issued 369,000 shares of common stock to several
individuals for their services. These shares were valued and recorded at their
fair value $155,640.




NOTE
19 – RESTATEMENT





Our
financial statements presented in our Annual Report on Form 10-KSB/A for the
year ended December 31, 2007 previously accounted for $2 million in debt
forgiveness as income (related to promissory notes issued to Stillwater National
Bank and Trust Company) under our consolidated statement of operations for the
fiscal year ended December 31, 2006.   Management subsequently
determined it more appropriate to record the $2 million in debt forgiveness as
additional paid in capital based on a determination that Stillwater was a
related party at the time of the debt forgiveness.  This changed our
financial statements as follows: (i) $2 million in debt forgiveness income was
removed from the statement of operations under the year ended December 31, 2006
presentation resulting in an increase to net loss of $2,000,000 and an increase
in net loss per share of $0.13 per share from $0.09 to $0.22, (ii) the balance
sheets for both December 31, 2006 and 2007 were changed to increase accumulated
deficit and additional paid in capital by $2 million, (iii) on the Statement of
Changes in Stockholders Equity (Deficit), the net loss for the year ended
December 31, 2006 and additional paid in capital were increased by $2 million
(iv) on the Statement of Cash Flows the increase in net loss of $2 million for
the year ended December 31, 2006, was offset by the removal of the $2 milllion
of debt forgiveness income.




57





Item
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.





None.





Item
8A. CONTROLS AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




Our
management has established and maintains a system of disclosure controls and
procedures to provide reasonable assurances that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.




As a
result of a normal periodic review of our financial statements by the staff of
the Securities and Exchange Commission, management subsequently determined that
it was more appropriate to record the $2 million in debt forgiveness (related to
promissory notes issued to Stillwater National Bank and Trust Company) as
additional paid in capital.  Previously we had accounted for $2
million in debt forgiveness as income under our consolidated statement of
operations for the fiscal year ended December 31, 2006.   We are,
therefore, with this filing including restatements as of December 31, 2006 and
2007 and for the year ended December 31, 2006.




In light
of our decision to restate our financial statements, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
under the Exchange Act as of December 31, 2007. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, due to the
restatement discussed above, our disclosure controls and procedures as of
December 31, 2007 were not effective in ensuring that the information required
to be disclosed by us in reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting as that term is defined in Rule 13a-15(f)
of the Exchange Act. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. Our
control environment is the foundation for our system of internal control over
financial reporting and is an integral part of our Code of Business Conduct and
Ethics and our Code of Ethics for the Chief Executive Officer, Chief Financial
Officer and Chief Accounting Officer. Our internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
our transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit timely
preparation of our financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.




In order
to evaluate the effectiveness of our internal control over financial reporting
as of December 31, 2007, as required by Section 404 of the Sarbanes-Oxley Act of
2002, our management conducted an assessment, including testing, based on the
criteria set forth in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.




In
connection with the filing of this Amendment No. 2 to Form 10-KSB and under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted a re-evaluation of
the effectiveness of our internal control over financial reporting and, based on
that evaluation, concluded that as a result of the result of the restatements
discussed above, as of December 31, 2007, our internal control over financial
reporting was not effective.  Controls over the application of
accounting policies, including debt forgiveness, are within the scope of
disclosure controls. Therefore management has concluded that there were material
weaknesses in the Company’s disclosure controls as of December 31,
2007.




58




These
deficiencies have been disclosed to our Board of
Directors.  Additional effort is needed to fully remedy these items
and we are seeking to improve and strengthen our control process including
increased training of our accounting staff with respect to generally accepted
accounting principles and providing additional training to our management
regarding debt forgiveness and documentation of oral agreements in accordance
with generally accepted accounting principles.




Notwithstanding
the material weakness in the Company’s internal control over financial reporting
and the Company’s ineffective disclosure controls and procedures discussed
above, management believes that the financial statements included in this
Amendment No. 2 to Annual Report on Form 10-KSB present fairly, in all material
respects, our financial position, results of operations and cash flows for the
years presented in accordance with the generally accepted accounting
principles.




It should
be noted that a control system, no matter how well designed and operated, can
provide only reasonable, not absolute assurance that the objectives of the
control system are met.  As a result, there can be no assurance that a
control system will succeed in preventing all possible instances of error and
fraud.  The Company’s disclosure controls and procedures are designed
to provide reasonable assurances of achieving their objective, and the
conclusions of our Chief Executive Officer and Chief Financial Officer are made
at the “reasonable assurance” level.




This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.





Item
8B. OTHER INFORMATION.





None.





59





PART
III





Item
9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





Set forth
below is certain information concerning our directors and executive
officers:




Name
            
            Age
            
            PositionLarry
      C. Shumate
            
            54
            
            President,
      Chief Executive Officer and ChairmanMatthew
      C. Flemming
            
            39
            
            Chief
      Financial Officers and directorRussell
      T. Clark
            
            41
            
            Vice
      President, Chief Operating Officer and directorFrancis
      X. Marshik
            
            80
            
            DirectorSteven
      B. Erikson
            
            39
            
            DirectorLeo
      B. Womack
            
            64
            
            DirectorKenton
      Chickering III
            
            71
            
            DirectorFrancis
      Jungers
            
            80
            
            Director




Larry C. Shumateis our
President and Chief Executive Officer and is the current Chairman of the Board
of Directors.  Mr. Shumate founded Shumate Machine Works in 1978 and
has more than 27 years of manufacturing and management
experience.  Mr. Shumate has been the President of Shumate Machine
Works since its inception and became our President and Chief Executive Officer
in 2004.  Mr. Shumate has served as a director since April
2004.





Matthew C. Flemming is a
director and our Chief Financial Officer, Treasurer, Secretary, and Executive
Vice-President.  From June 1999 to March 2001, he served as Chief
Executive Officer of WorldByNet, Inc. a Houston, Texas based privately held
Internet start-up company. From January 1994 to May 1999, Mr. Flemming served as
Chief Executive Officer of FARO Pharmaceuticals, Inc., a privately held
specialty products company.  From May 1991 to December 1993, he was a
Series 7 licensed financial advisor with Eppler, Guerin and Turner, a regional
investment banking firm in the Southwest at that time.  Mr. Flemming
received a Bachelor of Arts in Finance from the University of
Houston.  Mr. Flemming is a former officer of Excalibur Holdings,
Inc., Excalibur Aerospace, Excalibur Steel, and Excalibur Services, all former
direct or indirect subsidiaries of our company, prior to their respective
filings for bankruptcy protection.  Mr. Flemming has served as a
director and as Chief Financial Officer since April 2002.





Russell T. Clark is a director
and our Vice President and Chief Operating Officer.  Mr. Clark has
served as the Chief Operating Officer of Shumate Machine Works since 1998,
developing operating procedures, production systems and controls and managing
manufacturing personnel for growth.  From 1988 to 1998, Mr. Clark
worked at Baker Hughes in a variety of positions.  From 1996 to 1998
he was Quality Assurance Manager for the western hemisphere for the Navitrak
product line, and from 1988 to 1996, Mr. Clark served as Senior Quality Manager
of Baker Hughes Develco and Senior Quality Engineer of Baker Hughes
MWD.  Mr. Clark has served as a director and Chief Operating Officer
since April 2004.





Francis X. Marshik is a
director.  Mr. Marshik retired in 1986 from M.W. Kellogg, an
engineering, construction and fabrication company, where he served as its Senior
Vice President of Global Business Development since 1980.  From 1974
to 1980, Mr. Marshik was Commercial Vice President of M.W. Kellogg in London,
and from 1968 to 1972, he was the head of the Far East as General Manager of
Japan.  From 1950 to 1966, Mr. Marshik held various positions at C.F.
Braun, an engineering company.  He received a Bachelor of Science from
Oregon State University.  Mr. Marshik has served as a director since
April 2002.





Steven B. Erikson is a
director.  Mr. Erikson is a co-founder of Flowchem, Ltd., a specialty
chemical provider to the pipeline industry, and has been its president since
2001.  From 1998 to 2000, Mr. Erikson was the president of Red Rock
Interests, Ltd., a financial advisory and investment company.  From
1995 to 1998, he was an associate with Jeffries & Co. in the Corporate
Finance – Energy Group.  From 1990 to 1993, Mr. Erikson was a senior
consultant with PriceWaterhouseCoopers in the Bankruptcy and Turnaround
Group.  Mr. Erikson received a Bachelor of Arts in Economics from
Colorado College and a Masters of Business Administration from Rice
University.





60





Leo B. Womack is a
director.  Mr. Womack has been the President and a director of Gulf
Equities Realty Advisors, Inc., a diversified real estate portfolio management
company, since 1986.  He has also been the Chairman and Chief
Financial Officer of Fairway Medical Technologies, Inc., a medical device
company and a portfolio company of the Baylor College of Medicine Venture Fund,
since 1996.  He has been a director of Valves Incorporated of Texas, a
specialty lubricants manufacturer for pipelines, since 1975.  From
1969 to 1978, Mr. Womack was a managing partner of Womack, Gilman, Ritzwaller,
& Co., which later merged with Fox & Company, a national accounting
firm.  From 1965 to 1969, he was a senior accountant at Arthur
Andersen & Co.  Mr. Womack has been nominated to be a director of
O.I. Corporation, a publicly traded company.  Mr. Womack is licensed
as a certified public accountant and a real estate broker.  He
received a bachelor of arts from Texas A&M University.





Kenton “Ken” Chickering III is
a director.  Mr. Chickering became a director of our company on
September 12, 2006.  From 1976 to 1999, Mr. Chickering held various
positions with Daniel Industries and Daniel Valve Co., including Executive Vice
President, Vice President of Sales and Marketing 1984-1988, and President of
Daniel Valve Company from 1988-2003. In 1999, Emerson Electric Co. (NYSE:EMR)
purchased Daniel Valve Company. Later it was sold to SPX Corporation (NYSE: SPW)
in 2002.  From 2003 to 2005, Mr. Chickering was Vice President of
Development for SPX Valves & Controls, a division of SPX.  Daniel
Valve Company is a global manufacturer and marketer of valves for applications
such as pipelines, loading and unloading terminals.  From 1962 to
1976, Mr. Chickering was the Regional Manager for the eastern U.S. and Saudi
Arabia for General Valve Co., a company that manufactured and marketed an
expanding plug valve for pipeline service, which now is a part of Cameron
International.  Prior thereto, Mr. Chickering served three years as a
petroleum officer in the U.S. Air Force and was a petroleum engineer with Humble
Oil, a company that was subsequently acquired by Exxon.  Mr.
Chickering received his B.S. in Petroleum Engineering from the University of
Oklahoma in 1957.  Mr. Chickering was the Chairman of the Valve
Manufacturing Association in 1998.  Mr. Chickering was also the
Pipeline Committee Chairman of the ASME Petroleum Division in 1990 and the
Chairman of the Petroleum Division Executive Committee in 1996.





Francis “Frank”
Jungersis a
director.  Mr. Jungers also serves as a director of Horizon Lines, Inc., a
publicly traded company, Horizon Lines Holding and H-Lines Finance, and Esco
Corporation, a private metals company. He also is a former Chairman of the Board
and Chief Executive Officer of Arabian American Oil Company (Aramco), a
petroleum producer.  During his career, Mr. Jungers has served as a
director of AES Corporationand
Georgia Pacific Corporation. Mr. Jungers has served as a director since January
2007.





Director
Independence





Our Board of Directors has determined
that Messrs. Marshik, Womack, Erikson, and Jungers are “independent” as defined
under the standards set forth in Section 121A of the American Stock Exchange
Company Guide.  In making this determination, the Board of Directors
considered all transactions set forth under “Certain Relationships and Related
Transactions” below.  All members of each of our Audit, Compensation,
and Nomination and Governance Committees are independent directors, except that
Mr. Flemming, who is the Chairperson of the Nomination and Governance Committee,
is not independent.





Involvement
in Certain Legal Proceedings





None of
our directors or executive officers has, during the past five
years:





·
            been
      convicted in a criminal proceeding or been subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offences);





·
            been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities, futures, commodities or
      banking activities; or





·
            been
      found by a court of competent jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended, or
      vacated.




61




During
2004, Excalibur Steel, Excalibur Services, and Excalibur Aerospace, and during
2005 Excalibur Holdings, Inc., had their debts and liabilities discharged in
bankruptcy.  Mr. Flemming and Mr. Marshik, who are currently members
of our Board of Directors and, in Mr. Flemming’s case, an officer, were also
directors and, in Mr. Flemming’s case, an officer, of our company during these
periods. Excalibur Steel, Excalibur Services, Excalibur Aerospace, and Excalibur
Holdings, Inc. are all former direct or indirect subsidiaries of our
company.





None of
our remaining officers or directors has had any bankruptcy petition filed by or
against any business of which he was a general partner or executive officer,
either at the time of the bankruptcy or within two years prior to that
time.





Information
about our Board and its Committees.





Our Board
of Directors held 4 formal meetings during fiscal 2007, and the Board of
Directors acted by unanimous written consent on 10 occasions during fiscal
2007.





Audit
Committee.  Our Board of Directors established an Audit
Committee which became active in April 2002.  Since 2004 until August
2, 2006, our entire Board of Directors has served to act as the Audit
Committee.  On August 2, 2006, our Board of Directors appointed Leo B.
Womack, Steven B. Erikson, and Frank X. Marshik to the Audit Committee and
appointed Mr. Womack as the Chairman of the Audit Committee.  Each of
these directors continues to serve on the Audit Committee in the same
capacity.  All members of our Audit Committee are “independent” under
American Stock Exchange standards.  We have determined that Mr. Womack
is an “audit committee financial expert” as such term is defined under the rules
and regulations of the Securities Exchange Act of 1934, as amended.





The Audit
Committee provides assistance to our board in satisfying its fiduciary
responsibilities relating to our financial statements, financial reporting
process, systems of internal accounting and financial controls and the annual
independent audit of our financial statements.  The Audit Committee is
responsible for appointing or replacing the independent auditors, and approves
all audit engagement fees and terms and all non-audit engagements with the
independent auditors.  The Audit Committee operates under a written
charter adopted by our Board of Directors.  Our Audit Committee held 4
meetings, all in conjunction with formal board meetings, in fiscal
2007.





Compensation
Committee.  On August 2, 2006, our Board of Directors
established a Compensation Committee, appointed Steven B. Erikson, Leo B.
Womack, and Frank X. Marshik to the Compensation Committee, and appointed Mr.
Erikson as the Chairman of the Compensation Committee.  Each of these
directors continues to serve on the Compensation Committee in the same
capacity.  All members of our Compensation Committee are “independent”
under American Stock Exchange standards.





The
Compensation Committee’s basic responsibility is to review the performance and
development of our management in achieving corporate goals and objectives and to
assure that our senior executives are compensated effectively in a manner
consistent with our strategy, competitive practice, and the requirements of the
appropriate regulatory bodies. Toward that end, this committee oversees,
reviews, and administers all of our compensation, equity, and employee benefit
plans and programs. In addition, The Compensation Committee has the authority
and responsibility to determine all aspects of executive compensation packages
for executive officers and makes recommendations to the Board of Directors
regarding the compensation of non-employee directors.  This committee
held acted by unanimous written consent on 5 occasions during fiscal
2007.





Nomination and
Governance Committee.





On August
2, 2006, our Board of Directors established a Nominating and Governance
Committee, appointed Matthew C. Flemming, Leo B. Womack, and Steven B. Erikson
to the Nominating and Governance Committee, and appointed Mr. Flemming as the
Chairman of the Nominating and Governance Committee.  Each of these
directors continues to serve on the Nominating and Governance Committee in the
same capacity.  All members of our Nomination and Governance Committee
are “independent” under American Stock Exchange standards, except that Mr.
Flemming, who is the Chairperson of the Nomination and Governance Committee, is
not independent.





The
Nomination and Governance Committee is responsible for overseeing, reviewing and
making periodic recommendations concerning our corporate governance policies,
and for recommending to the full Board of Directors candidates for election to
the Board of Directors. This committee held one meeting during the last fiscal
year in conjunction with a formal board meeting.




62




Nominees for the Board of Directors
should be committed to enhancing long-term stockholder value and must possess a
high level of personal and professional ethics, sound business judgment, and
integrity. The Board of Directors’ policy is to encourage selection of directors
who will contribute to our overall corporate goals.  The Nomination
and Governance Committee may from time to time review the appropriate skills and
characteristics required of board members, including such factors as business
experience, diversity, and personal skills in oil & gas, technology,
engineering, finance, marketing, sales, international business, financial
reporting and other areas that are expected to contribute to an effective Board
of Directors.  In evaluating potential candidates for the Board of
Directors, the Nomination and Governance Committee considers these factors in
the light of the specific needs of the Board of Directors at that
time.





In
recommending candidates for election to the Board of Directors, the Nomination
and Governance Committee considers nominees recommended by directors, officers,
employees, stockholders and others, using the same criteria to evaluate all
candidates. The Nomination and Governance Committee reviews each candidate’s
qualifications, including whether a candidate possesses any of the specific
qualities and skills desirable in certain members of the Board of
Directors.  Evaluations of candidates generally involve a review of
background materials, internal discussions, and interviews with selected
candidates as appropriate.  Upon selection of a qualified candidate,
the Nomination and Governance Committee would recommend the candidate for
consideration by the full Board of Directors.  The Nomination and
Governance Committee may engage consultants or third-party search firms to
assist in identifying and evaluating potential nominees.  To recommend
a prospective nominee for the Nomination and Governance Committee’s
consideration, submit the candidate’s name and qualifications to our Secretary
in writing to the following address: Shumate Industries, Inc., Attn: Secretary,
12060 FM 3083, Conroe, Texas 77031.  When submitting candidates for
nomination to be elected at the Company’s annual meeting of stockholders,
stockholders must also follow the notice procedures and provide the information
required by our bylaws.





In
particular, for the Nomination and Governance Committee to consider a candidate
recommended by a stockholder for nomination at the 2008 Annual Meeting of
Stockholders, the recommendation must be delivered or mailed to and received by
our Secretary between December 1, 2007 and December 31, 2007 (or, if the 2008
annual meeting is not held within 30 days of the anniversary of the date of the
2007 annual meeting, within 10 days after our public announcement of the date of
the 2008 annual meeting).  The recommendation must include the
following information to be considered at an annual meeting:





·
            The
      stockholder’s name and address and the beneficial owner, if any, on whose
      behalf the nomination is proposed;





·
            The
      stockholder’s reason for making the nomination at the annual meeting, and
      the signed consent of the nominee to serve if
  elected;





·
            The
      number of shares owned by, and any material interest of, the record owner
      and the beneficial owner, if any, on whose behalf the record owner is
      proposing the nominee;





·
            A
      description of any arrangements or understandings between the stockholder,
      the nominee and any other person regarding the nomination;
    and





·
            Information
      regarding the nominee that would be required to be included in our proxy
      statement by the rules of the Securities and Exchange Commission,
      including the nominee’s age, business experience for the past five years
      and any other directorships held by the
nominee.





63





Report of the Audit
Committee





Our Audit Committee has issued the
following report:





Management
is responsible for our internal controls, financial reporting process, and
compliance with laws and regulations and ethical business
standards.  The independent auditor is responsible for performing an
independent audit of our consolidated financial statements in accordance with
generally accepted auditing standards and issuing a report
thereon.  The Audit Committee’s responsibility is to monitor and
oversee these processes on behalf of the Board of Directors.  In this
context, the Audit Committee has reviewed and discussed with management and the
independent auditors our audited financial statements.  The Audit
Committee has discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communication with
Audit Committees).  In addition, the Audit Committee has received from
the independent auditors the written disclosures required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit
Committees) and discussed with them their independence from us and our
management.  Moreover, the Audit Committee has considered whether the
independent auditor’s provision of other non-audit services to us is compatible
with the auditor’s independence.  In reliance on the reviews and
discussions referred to above, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in our annual report
on Form 10-K for the year ended December 31, 2007 for filing with the
Securities and Exchange Commission.  By recommending to the Board of
Directors that the audited financial statements be so included, the Audit
Committee is not opining on the accuracy, completeness, or fairness of the
audited financial statements.





Leo B.
Womack, Chairman


Steven B.
Erikson


Frank X.
Marshik





AUDIT
COMMITTEE





Communications
with the Board of Directors





Stockholders
can send communications to the Board of Directors by sending a certified or
registered letter to the Chairman of the Board, care of the Secretary, at our
main business address set forth above.  Communications that are
threatening, illegal, or similarly inappropriate, and advertisements,
solicitations for periodical or other subscriptions, and other similar
communications will generally not be forwarded to the Chairman.





Item
10. EXECUTIVE COMPENSATION





The
following table sets forth the compensation paid to the Chief Executive Officer
and our other executive officers for services rendered during the fiscal years
ended December 31, 2007 and 2006.





Summary
Compensation Table





Stock
                                                
                                                
                                                Option
                                                
                                                
                                                All OtherName and Position
                                                
                                                Year
                                                
                                                Salary
                                                
                                                
                                                Bonus
                                                
                                                
                                                Awards ($)
                                                
                                                
                                                Awards ($)
                                                
                                                
                                                Compensation
                                                
                                                
                                                Total ($)Larry
      C. Shumate
                                                
                                                2007
                                                
                                                $
                                                172,885
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                8,100
                                                (1)
                                                
                                                $
                                                180,985Chairman,
      President and
                                                
                                                2006
                                                
                                                $
                                                150,000
                                                
                                                
                                                $
                                                70,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                11,770
                                                (2)
                                                
                                                $
                                                231,770Chief
      Executive OfficerMatthew
      C. Flemming
                                                
                                                2007
                                                
                                                $
                                                166,154
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                23,666
                                                (3)
                                                
                                                $
                                                189,820Executive
      Vice President,
                                                
                                                2006
                                                
                                                $
                                                140,000
                                                
                                                
                                                $
                                                67,500
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                26,950
                                                (4)
                                                
                                                $
                                                234,450Chief
      Financial Officer, Secretary and TreasurerRussell
      T. Clark
                                                
                                                2007
                                                
                                                $
                                                142,885
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                8,059
                                                (5)
                                                
                                                $
                                                150,944Vice
      President and
                                                
                                                2006
                                                
                                                $
                                                120,000
                                                
                                                
                                                $
                                                40,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                17,770
                                                (6)
                                                
                                                $
                                                177,770Chief
      Operating OfficerKenton
      Chickering
                                                
                                                2007
                                                
                                                $
                                                129,116
                                                (7)
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                20,800
                                                (8)
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                10,000
                                                (9)
                                                
                                                $
                                                159,916President
      – Hemiwedge
                                                
                                                2006
                                                
                                                
                                                N/A
                                                
                                                
                                                
                                                N/A
                                                
                                                
                                                
                                                N/A
                                                
                                                
                                                
                                                N/A
                                                
                                                
                                                
                                                N/A
                                                
                                                
                                                
                                                N/AValve
      Corporation(since
      January 2007)




64




(1)
              Includes
      $8,100 for car allowance.





(2)
              Includes
      $6,000 for car allowance and $5,770 as payment of cash for unused accrued
      vacation.





(3)
            Includes
      $7,800 for car allowance, $4,400 for gas allowance, $3,850 for call phone
      allowance and $7,616 as payment of cash for unused vacation
      time.





(4)
            Includes
      $6,000 for car allowance, $4,800 for gas allowance, $4,200 for cell phone
      allowance, and $10,770 as payment of cash for unused accrued
      vacation.





(5)
            Includes$6,000 for car allowance and $2,059 as payment of cash for unused
      vacation time.





(6)
            Includes
      $6,000 for car allowance and $11,770 as payment of cash for unused accrued
      vacation.





(7)
            Includes
      $21,640 earned by Mr. Chickering for consulting services rendered to us in
      2006 but paid in 2007.





(8)
            Mr.
      Chickering received a stock award of 13,450 shares of our common stock as
      compensation for consulting services rendered in 2006 but paid in
      2007.  The value of the stock was determined at the time of
      grant and represents the compensation costs of the stock award for
      financial reporting purposes for the year under FAX
  123R.





(9)
            Includes
      $5,000 for a car allowance and $5,000 for country club
    dues.




Outstanding
Equity Awards


There
were no outstanding equity awards, unexercised options, unvested stock, or
equity incentive plan awards as of December 31, 2007 for any of the executive
officers named in the Summary Compensation Table above.





Employment
Agreements





On May
10, 2007, we entered into employment agreements with each of Larry C. Shumate,
Matthew C. Flemming and Russell T. Clark. A description of the material terms of
each agreement is set forth below.





Larry C. Shumate.We entered
into an employment agreement with Larry C. Shumate pursuant to which we employ
Mr. Shumate as our President and Chief Executive Officer. The agreement is for
an initial term of three years and provides for an annual base salary during the
term of the agreement of $185,000, subject to potential upwards adjustments at
the discretion of the Compensation Committee of the Board of Directors. Mr.
Shumate may also receive bonuses at the discretion of the Compensation Committee
payable in cash, options or common stock.





The
agreement also contains the following material provisions: (i) reimbursement for
all reasonable travel and other out-of-pocket expenses incurred in connection
with his employment; (ii) four (4) weeks paid vacation leave, which shall
entitle Mr. Shumate to a cash payment for any unused vacation time at the end of
each fiscal year; (iii) medical, dental and life insurance benefits; (iv) an
$800 per month automobile allowance; (v) a severance payment of six (6) month’s
salary at the then-applicable base salary rate in the event that we terminate
Mr. Shumate’s employment without cause or if Mr. Shumate’s employment is
terminated due to death or disability; and (vi) 24 month non-compete/non
solicitation terms.




65




Matthew C. Flemming.We
entered into an employment agreement with Matthew C. Flemming pursuant to which
we employ Mr. Flemming as our Executive Vice President and Chief Financial
Officer. The agreement is for an initial term of three years and provides for an
annual base salary during the term of the agreement of $180,000, subject to
potential upwards adjustments at the discretion of the Compensation Committee of
the Board of Directors. Mr. Flemming may also receive bonuses at the discretion
of the Compensation Committee payable in cash, options or common
stock.





The
agreement also contains the following material provisions: (i) reimbursement for
all reasonable travel and other out-of-pocket expenses incurred in connection
with his employment; (ii) four (4) weeks paid vacation leave, which shall
entitle Mr. Flemming to a cash payment for any unused vacation time at the end
of each fiscal year; (iii) medical, dental and life insurance benefits; (iv) an
$800 per month automobile allowance; (v) a severance payment of six (6) month’s
salary at the then-applicable base salary rate in the event that we terminate
Mr. Flemming’s employment without cause or if Mr. Flemming’s employment is
terminated due to death or disability; and (vi) 24 month non-compete/non
solicitation terms.





Russell T. Clark.We entered
into an employment agreement with Russell T. Clark pursuant to which we employ
Mr. Clark as our Vice President and Chief Operating Officer. The agreement is
for an initial term of three years and provides for an annual base salary during
the term of the agreement of $155,000, subject to potential upwards adjustments
at the discretion of the Compensation Committee of the Board of Directors. Mr.
Clark may also receive bonuses at the discretion of the Compensation Committee
payable in cash, options or common stock.





The
agreement also contains the following material provisions: (i) reimbursement for
all reasonable travel and other out-of-pocket expenses incurred in connection
with his employment; (ii) four (4) weeks paid vacation leave, which shall
entitle Mr. Clark to a cash payment for any unused vacation time at the end of
each fiscal year; (iii) medical, dental and life insurance benefits; (iv) an
$500 per month automobile allowance; (v) a severance payment of six (6) month’s
salary at the then-applicable base salary rate in the event that we terminate
Mr. Clark’s employment without cause or if Mr. Clark’s employment is terminated
due to death or disability; and (vi) 24 month non-compete/non solicitation
terms.





Potential
Payments upon Termination




Messrs.
Shumate, Flemming and Clark have entered into an employment agreement. Under the
terms of their respective employment agreements, each of Messr. Shumate,
Flemming and Clark are entitled to a severance payment of six (6) month’s salary
at the then-applicable base salary rate in the event that Shumate terminates
their employment without cause or in the event that their employment is
terminated due to death or disability.




The
following table sets forth quantitative information with respect to potential
payments to be made to Messrs. Shumate, Flemming and Clark upon termination in
various circumstances. The potential payments are based on the terms of each of
the Employment Agreement discussed above. For a more detailed description of the
Employment Agreement, see the “Employment Agreements” section
above.




Name
                        
                        Potential Payment upon Termination
      (1)Larry
      C. Shumate
                        
                        $
                        92,500
                        (2)Matthew
      C. Flemming
                        
                        
                        90,000
                        (3)Russell
      T. Clark
                        
                        
                        77,500
                        (4)





(1) 
Employee entitled to six months severance at the then applicable base salary
rate.





(2) 
Based on Mr. Shumate’s current annual base salary of
$185,000.




66




(3) 
Based on Mr. Flemming’s current annual base salary of
$180,000





(4) 
Based on Mr. Clark’s current annual base salary of $155,000





Compensation
of Directors





The
following table sets forth the compensation paid to each director (other than
compensation set forth under Executive Compensation) for services rendered
during the fiscal year ended December 31, 2007.











Fees Earned orPaid in
                
                
                Stock
                
                
                Option
                
                
                All OtherName
                
                Cash
                
                
                Awards ($)
                
                
                Awards ($)
                
                
                Compensation
                
                
                Total ($)Frank
      Marshik
                
                
                —
                
                
                
                —
                
                
                $
                124,036
                (1)
                
                
                —
                
                
                $
                124,036Leo
      B. Womack
                
                
                —
                
                
                
                —
                
                
                $
                46,548
                (2)
                
                
                —
                
                
                $
                46,658Steven
      B. Erikson
                
                
                —
                
                
                
                —
                
                
                $
                46,548
                (3)
                
                
                —
                
                
                $
                46,658Kenton
      Chickering III
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Francis
      Jungers
                
                
                —
                
                
                
                —
                
                
                $
                142,586
                (4)
                
                
                —
                
                
                $
                142,586





(1)
            On
      May 9, 2007, Mr. Marshik was granted a stock option to purchase up to
      60,000 shares of our common stock at a price of $1.90 per shares for his
      services as an independent director.  These options vested on
      May 9, 2007.  In addition, on August 9, 2007, Mr. Marshik was
      granted a stock option to purchase up to 60,000 shares of our common stock
      at a price of $1.89 per shares for his services as an independent
      director.  These options vested on August 9,
      2007.  All of these options remained outstanding on December 31,
      2007.  The value represents compensation costs of stock options
      for financial reporting purposes for the year under FAS
    123R





(2)
            On
      August 9, 2007, Mr. Womack was granted a stock option to purchase up to
      60,000 shares of our common stock at a price of $1.89 per share for his
      services as an independent director.  These options vested on
      August 9, 2007.  All of these options remained outstanding as of
      December 31, 2007.  The value represents the compensation costs
      of stock options for financial reporting purposes for the year under
      FAS 123R.





(3)
            On
      August 9, 2007, Mr. Erikson was granted a stock option to purchase up to
      60,000 shares of our common stock at a price of $1.89 per share for his
      services as independent director.  These options vested on
      August 9, 2007.  All of these options remained outstanding as of
      December 31, 2007.  The value represents the compensation costs
      of stock options for financial reporting purposes for the year under
      FAS 123R.





(4)
            On
      January 5, 2007, Mr. Jungers was granted a stock option to purchase up to
      60,000 shares of our common stock at a price of $1.75 per shares for
      agreeing to serve as our board of directors.  These options
      vested on June 6, 2007 the date which Mr. Jungers was elected to our
      board.  In addition, on August 9, 2007, Mr. Jungers was granted
      a stock option to purchase up to 60,000 shares of our common stock at a
      price of $1.89 per shares for his services as an independent
      director.  These options vested on August 9,
      2007.  All of these options remained outstanding on December 31,
      2007.  The value represents compensation costs of stock options
      for financial reporting purposes for the year under FAS
    123R.





All
directors receive reimbursement for reasonable out-of-pocket expenses in
attending Board of Directors meetings and for promoting our
business.





From time
to time we may engage certain members of the Board of Directors to perform
services on our behalf.  In such cases, we compensate the members for
their services at rates no more favorable than could be obtained from
unaffiliated parties.  Other than as set forth above, we did not
engage any members of the Board of Directors to perform services our behalf in
2007.




67




Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors,
executive officers, and stockholders holding more than 10% of our outstanding
common stock, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in beneficial ownership of our
common stock.  Executive officers, directors and greater-than-10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file.  To our knowledge, based solely
on review of the copies of such reports furnished to us for the period ended
December 31, 2007, all Section 16(a) reports required to be filed by
our executive officers, directors, and greater-than-10% stockholders were filed
on a timely basis, except that (1) Messrs. Jungers and
Erikson were late in filing their Form 4s in connection with their respective
receipt of options for their service on the Board of Directors, (2) Messrs.
Womack and Marshik did not file a Form 4 in connection with their receipt of
options for their service on the Board of Directors (such transactions were
reported on a Form 5) and (3)  Mr. Chickering was late in filing his
Form 4 in connection with his acquisition of shares for services
rendered.





Code
of Ethics





We have
adopted a code of ethics that applies to the principal executive officer and
principal financial and accounting officer.  We will provide to any
person without charge, upon request, a copy of our code of
ethics.  Requests may be directed to our principal executive offices
at 12060 FM 3083, Conroe, Texas 77301.





Item
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth information as of May 14, 2008 as to each person or
group who is known to us to be the beneficial owner of more than 5% of our
outstanding voting securities and as to the security and percentage ownership of
each of our executive officers and directors and of all of our officers and
directors as a group.  As of May, 2008 we had 20,947,071 shares of
common stock outstanding.





Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power over
securities.  Except in cases where community property laws apply or as
indicated in the footnotes to this table, we believe that each stockholder
identified in the table possesses sole voting and investment power over all
shares of common stock shown as beneficially owned by the
stockholder.





Shares of
common stock subject to options or warrants that are currently exercisable or
exercisable within 60 days of the date of this Memorandum are considered
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person.





Name And Address(1)
                  
                  Number Of
                    Shares
                    Beneficially
                    Owned
                  
                  Percentage
                    OwnedLarry
      C. Shumate
                  
                  
                  1,760,100
                  
                  8.40
                  %Matthew
      C. Flemming
                  
                  
                  1,116,350
                  (2)
                  5.33
                  %Russell
      T. Clark
                  
                  
                  1,418,400
                  
                  6.77
                  %Frank
      X. Marshik
                  
                  
                  540,339
                  (3)
                  2.56
                  %Steven
      B. Erikson
                  
                  
                  205,000
                  (4)
                  *Leo
      B. Womack
                  
                  
                  226,292
                  (5)
                  1.07
                  %Kenton
      Chickering III
                  
                  
                  136,090
                  (6)
                  *Francis
      Jungers
                  
                  
                  527,000
                  (7)
                  2.50
                  %All
      directors and officers as a group
                  
                  
                  5,929,571
                  
                  27.53
                  %


*Less
than 1%.


(1)
            The
      address is c/o Shumate Industries, Inc., 12060 FM 3083, Conroe, Texas
      77301.




(2)
            Mr.
      Flemming’s 1,116,350 shares have been pledged to Stillwater National Bank
      and Trust to secure payment for a loan collateralized by the
      shares.




(3)
            Includes
      270,910 shares held by the Marshik Family Trust, of which Mr. Marshik is a
      grantor and a trustee, 137,429 shares held by Mr. Marshik’s IRA, 12,000
      shares underlying presently exercisable warrants, 120,000 shares
      underlying presently exercisable options. Mr. Marshik’s address is 8515
      Costa Verde Boulevard, #907, San Diego, CA
  92112.




68




(4)
            Includes
      95,000 shares held by Red Rock Interests, Ltd., of which Mr. Erikson is
      President and shareholder, 50,000 shares underlying presently exercisable
      options and 60,000 shares underlying options approved by the Board but not
      yet granted. Mr. Erikson’s address is c/o Shumate Industries, Inc. 12060
      FM 3083, Conroe, Texas 77301.




(5)
            Includes
      110,792 shares held by a trust of which Mr. Womack is a trustee, 110,000
      shares underlying presently exercisable options, 5,500 shares underlying
      presently exercisable warrants. Mr. Womack’s address is 710 North Post Oak
      Road, Suite 400, Houston, Texas
77024.




(6)
            Includes
      100,000 shares underlying presently exercisable
  options.




(7)
            Includes
      357,000 shares held by the Francis Jungers Trust, of which Mr. Jungers is
      a grantor and a trustee, 8,000 shares held by Mr. Jungers’ IRA, 9,000
      shares held by the Julie Jungers Trust, of which Mr. Jungers’ spouse is a
      grantor and a trustee, 135,000 shares underlying presently exercisable
      options.





Item
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





On
October 19, 2005, we completed a financial restructuring of our company. As part
of this restructuring, we issued 2,368,000 shares of our common stock to
Stillwater National Bank, representing approximately 20% of our then issued and
outstanding shares, in exchange for the cancellation of debt in the amount of
$2,368,000, and we executed a convertible promissory note in the amount of
$2,500,000 in favor of Stillwater.  According to the terms of this
note, Stillwater may, at its election, convert the principal amount of the note
plus all accrued interest into shares of our common stock at a conversion rate
of $1.00 per share. Stillwater also transferred to us all of the common stock it
held in Shumate Machine Works.





We used
$303,000 of the restructured debt to purchase machines from Larry C. Shumate,
our President and Chief Executive Officer, and from A. Earl Swift, a former
director.





Upon
completion of the debt restructuring, we owed Stillwater a total of
approximately $8,100,000 (not including a revolving credit line of
$1,000,000).  We received a release from Stillwater for the balance of
any debt we owed (except to the extent that the debt was amended and restated,
issued or guaranteed in the restructuring), which debt totaled approximately
$3,813,000.





In
conjunction with the debt restructuring, Stillwater loaned $350,000 to Matthew
C. Flemming, our Chief Financial Officer. $100,000 of this loan was used to pay
Stillwater money owed by Mr. Flemming pursuant to the terms of a personal line
of credit. $250,000 of the loan was used by Mr. Flemming to purchase 250,000
shares of our common stock.  Mr. Flemming had also personally
guaranteed our loans to Stillwater.  On October 19, 2005, Mr. Flemming
owed approximately $10,000,000 under this personal guarantee of our corporate
debt. As part of the restructuring of our debt, Stillwater released Mr. Flemming
from the personal guarantee.





Also in
conjunction with the debt restructuring, each of our executive officers, in
return for their personal guarantees on new bank debt, and each of our
non-employee directors, at the time of the restructuring, had received
restricted stock awards that vested upon completion of the restructuring, as
follows:





69




Larry
      C. Shumate
              1,500,000
      sharesMatthew
      C. Flemming
              1,000,000
      sharesRussell
      T. Clark
              1,250,000
      sharesFrank
      X. Marshik
              200,000
      shares





In
addition, several of our officers and directors, both former and current,
received shares of our common stock, either directly or indirectly, of common
stock upon conversion of unsecured notes which they held for loans made to us,
on the same terms and conditions as all other holders of unsecured notes, as
follows:




Larry
      C. Shumate
            
            
            132,600
      sharesMatthew
      C. Flemming
            
            
            16,350
      sharesRussell
      T. Clark
            
            
            88,400
      sharesFrank
      X. Marshik
            
            
            126,000
      sharesA.
      Earl Swift
            
            
            957,568
      sharesWilliam
      S.H. Stuart*
            
            
            202,517
      sharesDavid
      Rains
            
            
            57,500
      shares





*notes
held by WSHS, Inc., a corporation controlled by William S.H. Stuart





On
December 5, 2005, A. Earl Swift, our former director and a significant
stockholder, purchased 416,667 shares of our common stock in a private placement
at a purchase price of $0.60 per share for gross proceeds of
$250,000.  On January 10, 2006, we granted Mr. Swift an option to
purchase 150,000 shares of our common stock at an exercise price of $0.65 per
share, the fair market value on the date of grant.  The term of the
option is five years. The grant was made as an inducement to Mr. Swift to
re-join our Board of Directors. Mr. Swift died on May 30, 2006.  In
recognition of his past service to us, our Board of Directors vested this option
immediately.





On
February 22, 2006, in connection with our private placement offering, Red Rock
Interests, Ltd. purchased 85,000 shares of our common stock for a purchase price
of $51,000. Steven B. Erikson, who serves as a director of our company, is the
President and a shareholder of Red Rock Interests, Ltd. Red Rock Interests, Ltd.
participated in the private placement offering on terms identical to all other
purchasers in such offering.





In the
same private placement offering, Virgil Swift, the brother of A. Earl Swift,
purchased 100,000 shares of our common stock for a purchase price of $60,000.
Virgil Swift participated in the private placement offering on terms identical
to all other purchasers in such offering.





On
November 3, 2006, in connection with our private placement offering, the Francis
Jungers Trust purchased an aggregate of 110,000 shares of our common stock and
55,000 warrants to purchase shares of our common stock for an aggregate purchase
price of $110,000. Frank Jungers, who serves as a director of our company, is
the grantor of the Francis Jungers Trust and serves as its Trustee. The Francis
Jungers Trust participated in the private placement offering on terms identical
to all other purchasers in such offering.





In the
same private placement offering, Randall Jungers, the son of Francis Jungers,
purchased an aggregate of 200,000 shares of our common stock and 100,000
warrants to purchase shares of our common stock for an aggregate purchase price
of $200,000. Randall Jungers participated in the private placement offering on
terms identical to all other purchasers in such offering.





In
connection with the election and appointment of Mr. Jungers to our board of
directors in January, 2007, we granted Mr. Jungers an option to purchase up to
75,000 shares of our common stock at an exercise price of $1.75 per share
pursuant to our 2005 Stock Incentive Plan. The options were fully vested and
became exercisable immediately upon their grant. The options expire on the date
that is five years from the date of grant.




Spectrum
Law Group, LLP provides legal services to us. One of the partners at Spectrum
Law Group, LLP is the son-in-law of Frank Marshik, one of our directors and
stockholders. Spectrum Law Group, LLP billed us $93,000 in fees in 2005 and
$82,500 in fees in 2006.





On March 26, 2007, the Francis Jungers
Trust exercised 55,000 Class A Warrants and in connection therewith we issued
55,000 shares of our common stock and 55,000 Class B Warrants to the Francis
Jungers Trust.





On March 28, 2007 the Marshik Family
Trust exercised 12,000 Class A Warrants and in connection therewith we issued
12,000 shares of our common stock and 12,000 Class B Warrants to the Marshik
Family Trust.





On May 9,
2007, we granted Frank X. Marshik, one of our independent directors, a
non-qualified stock option to purchase 60,000 shares of common stock at an
exercise price of $1.90 per share under our 2005 Stock Incentive Plan. The term
of the option is five years.





70


On May 9,
2007, the board of directors adopted a compensation policy for outside,
independent directors, pursuant to which we will pay each independent director
who serves on a committee of the board of directors, other than the chairman of
such committee, $500 for each committee meeting attended by such independent
director, either in person or telephonically; provided, however, that such
payment shall only be made for committee meetings where written minutes are
maintained.  In addition, we will pay each independent director who
serves as chairman of a committee of the board of directors $750 for each such
committee meeting attended by such independent director, either in person or
telephonically; provided, however, that such payment shall only be made for
committee meetings where written minutes are maintained.
 
 On August
9, 2007, the board of directors approved grants of non-qualified stock options
to purchase 60,000 shares of common stock at an exercise price of $1.80 per
share to each of our outside directors, Leo Womack, Steve Erikson, Francis
Jungers and Frank Marshik under our 2005 Stock Incentive Plan.  The
term of each option is five years.
 
 On August
9, 2007, the board of directors approved the issuance of 13,450 shares of common
stock under our 2005 Stock Incentive Plan to Kenton Chickering III as
compensation under a September 12, 2006 consulting agreement.
 
 In
December 2007, the board of directors agreed to indemnify our Chief Financial
Officer, Matthew C. Flemming, for a judgment assessed against him resulting from
a previously discharged corporate tax liability.  We accrued an
expense of $580,000 to reflect this contingency.
 
 On
January 25, 2008, our President, Larry Shumate, entered into that certain
security agreement with Stillwater National Bank & Trust Company to secure
the loans under the January 2008 Amended Loan Agreement with
Stillwater.  Mr. Shumate granted Stillwater a security interest in
certain of his personal property with an aggregate value of $179,000 as
collateral for payment.
 
 In March
2008, Shumate borrowed $50,000 each from directors Frank Jungers, Kenton
Chickering III and Steven B. Erikson, through Red Rock Interests, Ltd., for a
total of $150,000. The loan was made pursuant to 12% on demand
notes.  The principal plus interest in the amount of $1,088 per loan
($51,088 each and $153,264 in the aggregate) was paid in full by us in May
2008.
 
 We
believe that the foregoing transactions were in our best interests. Consistent
with Section 144 of the Delaware General Corporation Law, it is our current
policy that all transactions between us and our officers, directors and their
affiliates will be entered into only if such transactions are approved by a
majority of the disinterested directors, are approved by vote of the
stockholders, or are fair to us as a corporation as of the time it is us at is
authorized, approved or ratified by the board. We will conduct an appropriate
review of all related party transactions on an ongoing basis, and, where
appropriate, we will utilize our audit committee for the review of potential
conflicts of interest.
 
 Item
13. EXHIBITS.
 
 (a)           Exhibits
 
 Exhibit No.
                
                Description2.1
                
                Agreement
      and Plan of Merger by and among Global Realty Management Group, Inc., GRMG
      Acquisition Corporation, Excalibur Holdings, Inc., and Michael D. Farkas,
      incorporated by reference to Amendment No. 1 to Shumate’s Registration
      Statement on Form SB-2 filed on September 5, 2002 (File No.
      333-88974).2.2
                
                Agreement
      and Plan of Merger by and among Shumate Machine Works, Inc., Larry C.
      Shumate, Russ Clark, Excalibur Holdings, Inc., and Excalmergeco, Inc.,
      incorporated by reference to Amendment No. 1 to Shumate’s Registration
      Statement on Form SB-2 filed on September 5, 2002 (File No.
      333-88974).2.3
                
                Asset
      Purchase Agreement by and among Hemiwedge Valve Corporation, Soderberg
      Research and Development, Inc., Inprop, Inc., and Jeanette Soderberg,
      incorporated by reference to Shumate’s Current Report on Form 8-K filed on
      December 6, 2005.
  71
 
 3.1
                
                Certificate
      of Incorporation of Excalibur Industries, Inc. (now known as Shumate
      Industries, Inc.), incorporated by reference to Amendment No. 1 to
      Shumate’s Registration Statement on Form SB-2 filed on September 5, 2002
      (File No. 333-88974).3.2
                
                Certificate
      of Amendment to Certificate of Incorporation of Excalibur Industries, Inc.
      (now known as Shumate Industries, Inc.), incorporated by reference to
      Shumate’s Current Report on Form 8-K filed on October 26,
      2005.3.3
                
                Bylaws
      of Excalibur Industries, Inc. (now known as Shumate Industries, Inc.),
      incorporated by reference to Amendment No. 1 to Shumate’s Registration
      Statement on Form SB-2 filed on September 5, 2002 (File No.
      333-88974).4.1
                
                Specimen
      Certificate of Shumate Industries, Inc.’s common stock, incorporated by
      reference to Shumate’s Annual Report on Form 10-KSB for the year ended
      December 31, 2005.4.2
                
                Form
      of common stock purchase warrant, incorporated by reference to Amendment
      No. 1 to Shumate’s Registration Statement on Form SB-2 filed on September
      5, 2002 (File No. 333-88974).4.3
                
                Convertible
      promissory note (Stillwater National Bank), incorporated by reference to
      Shumate’s Annual Report on Form 10-KSB for the year ended December 31,
      2005.4.4
                
                Amended
      and restated promissory note (Term Note – Stillwater National Bank),
      incorporated by reference to Shumate’s Amendment No. 1 to Current Report
      on Form 8-K, filed on November 7, 2005.4.5
                
                Stock
      Purchase Agreement by and between Shumate Industries, Inc. and A. Earl
      Swift, incorporated by reference to Shumate’s Annual Report on Form 10-KSB
      for the year ended December 31, 2005.4.6
                
                Form
      of Securities Purchase Agreement among Shumate Industries, Inc., and
      various purchasers, incorporated by reference to Shumate’s Current Report
      on Form 8-K filed on February 23, 2006.4.7
                
                Form
      of Registration Rights Agreement among Shumate Industries, Inc., and
      various purchasers, incorporated by reference to Shumate’s Current Report
      on Form 8-K filed on February 23, 2006.4.8
                
                Common
      stock purchase warrant (First Montauk Securities Corp.), incorporated by
      reference to Shumate’s Current Report on Form 8-K filed on February 23,
      2006.10.1
                
                Restructuring
      Agreement between Shumate Industries, Inc., Shumate Machine Works, Inc.,
      Matthew Flemming, Larry Shumate, Russ Clark, and Stillwater National Bank
      and Trust Company, incorporated by reference to Shumate’s Amendment No 1.
      to Current Report on Form 8-K, filed on November 7,
  2005.10.2
                
                Promissory
      Note (Line of Credit – Stillwater National Bank), incorporated by
      reference to Shumate’s Annual Report on Form 10-KSB for the year ended
      December 31, 2005.10.3
                
                Security
      Agreement, incorporated by reference to Shumate’s Annual Report on Form
      10-KSB for the year ended December 31, 2005.10.4
                
                Lockbox
      Agreement, incorporated by reference to Shumate’s Annual Report on Form
      10-KSB for the year ended December 31, 2005.10.5
                
                Settlement
      and Release Agreement, incorporated by reference to Shumate’s Current
      Report on Form 8-K filed on October 26, 2005.10.6
                
                Promissory
      Note (Soderberg Research and Development), incorporated by reference to
      Shumate’s Current Report on Form 8-K filed on December 6,
      2005.
  72
 
 10.7
                
                2001
      Stock Option Plan of Excalibur Holdings, Inc., incorporated by reference
      to Amendment No. 1 to Shumate’s Registration Statement on Form SB-2 filed
      on September 5, 2002 (File No. 333-88974).10.8
                
                2003
      Stock Grant Plan, incorporated by reference to Shumate’s Registration
      Statement on Form S-8, filed on June 26, 2003 (File No.
      333-106521).10.9
                
                2003
      Employee Stock Incentive Plan, incorporated by reference to Shumate’s
      Registration Statement on Form S-8, filed on August 1, 2003 (File No.
      333-107548).10.10
                
                2003
      Non-Employee Directors and Consultants Retainer Stock Plan, incorporated
      by reference to Shumate’s Registration Statement on Form S-8, filed on
      August 1, 2003 (File No. 333-107548).10.11
                
                2005
      Stock Incentive Plan, incorporated by reference to Shumate’s Registration
      Statement on Form S-8, filed on May 3, 2005 (File No.
      333-124568).10.12
                
                Improved
      property commercial lease between Paul & Sherry Vick dba P & S
      Properties LLC and Shumate Machine Works, incorporated by reference to
      Shumate’s Annual Report on Form 10-KSB for the year ended December 31,
      2005.10.13
                
                Lease
      agreement with option to purchase by and between the Brewer Family
      Charitable Remainder Annuity Trust No. 1 and Shumate Machine Works,
      incorporated by reference to Shumate’s Annual Report on Form 10-KSB for
      the year ended December 31, 2005.10.14
                
                Second
      Amended and Restated Renewal Promissory Note (Line of Credit – Stillwater
      National Bank), incorporated by reference to Shumate’s Annual Report on
      Form 10-KSB for the year ended December 31, 2006.10.15
                
                Amended
      and Restated Loan Agreement dated as of January 25, 2008 between Shumate
      Industries, Inc, Shumate Machine Works, Inc., Hemiwedge Valve Corporation,
      Larry Shumate and Stillwater National Bank and Trust Company, incorporated
      by reference to Shumate’s Current Report on Form 8-K filed on January 31,
      2008.10.16
                
                Promissory
      Note dated January 25, 2008, incorporated by reference to Shumate’s
      Current Report on Form 8-K filed on January 31, 2008.10.17
                
                Promissory
      Note dated January 25, 2008, incorporated by reference to Shumate’s
      Current Report on Form 8-K filed on January 31, 2008.10.18
                
                Lockbox
      Agreement dated January 25, 2008, incorporated by reference to Shumate’s
      Current Report on Form 8-K filed on January 31, 2008.10.19
                
                Security
      Agreement dated as of January 25, 2008 between Shumate Machine Works,
      Inc., Hemiwedge Valve Corporation, and Stillwater National Bank and Trust
      Company, incorporated by reference to Shumate’s Current Report on Form 8-K
      filed on January 31, 2008.10.20
                
                Security
      Agreement dated as of January 25, 2008 between Larry Shumate and
      Stillwater National Bank and Trust Company, incorporated by reference to
      Shumate’s Current Report on Form 8-K filed on January 31,
    200810.21
                
                Employment
      Agreement dated May 10, 2007 between Larry C. Shumate and Shumate
      Industries, Inc., incorporated by reference to Shumate’s Quarterly Report
      on Form 10-QSB for the period ended March 31,
  2007.
  73
 
 10.22
                          
                          Employment
      Agreement dated May 10, 2007 between Matthew C. Flemming and Shumate
      Industries, Inc., incorporated by reference to Shumate’s Quarterly Report
      on Form 10-QSB for the period ended March 31, 2007.10.23
                          
                          Employment
      Agreement dated May 10, 2007 between Russell T. Clark and Shumate
      Industries, Inc., incorporated by reference to Shumate’s Quarterly Report
      on Form 10-QSB for the period ended March 31, 2007.21.1
                          
                          Subsidiaries
      of Shumate Industries, Inc., incorporated by reference to Shumate’s Annual
      Report on Form 10-KSB for the year ended December 31,
  2005.23.1
                          
                          Consent
      of Independent Public Accountants, Malone & Bailey,
  PC.31.1
                          
                          Certification
      of Larry C. Shumate pursuant to Rule 13a-14(a).31.2
                          
                          Certification
      of Matthew C. Flemming pursuant to Rule 13a-14(a).32.1
                          
                          Certification
      of Larry C. Shumate pursuant to 18 U.S.C Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                          
                          Certification
      of Matthew C. Flemming pursuant to 18 U.S.C Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 
 Item
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
 Appointment of
Auditors
 
 Our Board
of Directors selected Malone & Bailey, PC, independent
accountants, as our auditors for the year ending December 31, 2007. 
Malone & Bailey, PC previously audited our consolidated financial statements
for the fiscal year ended December 31, 2006 and 2005.  Representatives
of Malone & Bailey, PC are not expected to attend this stockholder’s
meeting.
 
 Audit Fees
 
 Malone
& Bailey, PC billed us $70,000 in fees for our 2007 annual audit
and $51,750 in fees for our 2006 annual audit, $67,685 in fees for the review of
our quarterly financial statements in 2007 and $43,320 in fees for
the review of our quarterly financial statements
for 2006.
 
 Audit-Related
Fees
 
 We did
not pay any fees to Malone & Bailey, PC for assurance and related
services that are not reported under Audit Fees above in 2007 or
2006.
 
 Tax Fees
 
 We did
not pay any fees to Malone & Bailey, PC for tax compliance, tax
advice or tax planning in 2007 or 2006.
 
 All Other Fees
 
 For 2007,
Malone & Bailey, PC, billed us $47,124 for work in connection with the
evaluation of a potential acquisition and $10,890 for support related to SEC
matters. In 2006, Malone & Bailey, PC, billed us $19,450 for work in
connection with our registration statements on Form SB-2.
  74
  Pre-Approval
Policies and Procedures
 
 We have
implemented pre-approval policies and procedures related to the provision of
audit and non-audit services.  Under these procedures, our audit committee
pre-approves all services to be provided by Malone & Bailey, PC and the
estimated fees related to these services.
 
 All
audit, audit related, and tax services were pre-approved by the audit committee,
which concluded that the provision of such services by Malone & Bailey, PC
was compatible with the maintenance of that firm’s independence in the conduct
of its auditing functions.  Our pre-approval policies and procedures
provide for the audit committee’s pre-approval of specifically described audit,
audit-related, and tax services on an annual basis, but individual engagements
anticipated to exceed pre-established thresholds must be separately
approved.  The policies and procedures also require specific approval
by the audit committee if total fees for audit-related and tax services would
exceed total fees for audit services in any fiscal year.  The policies
and procedures authorize the audit committee to delegate to one or more of its
members pre-approval authority with respect to permitted
services.
  75
  SIGNATURES
  In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this amended report to be signed on its behalf by the
undersigned, thereunto duly authorized.
  SHUMATE
      INDUSTRIES, INC.By:
                /s/ Kenton C. Chickering,
    IIIKenton
      C. Chickering, III, Chairman, President
                  and
      Chief Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
amended report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
 
 Signatures
                              
                              Title
                              
                              Date/s/ Kenton C. Chickering,
    III
                              
                              Chairman
      of the Board, President,
                              
                              December
      19, 2008Kenton
      C. Chickering, III
                              
                              Chief
      Executive Officer/s/ Matthew C. Flemming
                              
                              Executive
      Vice President, Chief
                              
                              December
      19, 2008Matthew
      C. Flemming
                              
                              Financial
      Officer, Treasurer,Secretary,
      and Director/s/ Russell T. Clark
                              
                              Vice
      President, Chief Operating OfficerRussell
      T. Clark
                              
                              and
      Director
                              
                              December
      19, 2008/s/ Leo B. Womack
                              
                              Director
                              
                              December
      19, 2008Leo
      B. Womack
  76