**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-KSB**




(Mark
      One)




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




For
      the
      fiscal year ended December 31, 2006




o
            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.)**12060
                FM 3083**
              **Conroe,
                Texas 77301**
              ****(Address
                of principal executive offices, including zip code)


Registrant’s
      telephone number, including area code: (936) 539-9533


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.  Yes x No




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. o




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




The
      issuer’s revenues for the most recent fiscal year were $7,719,882.




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant was approximately $14,188,654 as of March
      14,
      2007. 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 9,212,268 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
      March 14, 2007, 19,419,933 shares of our common stock were issued and
      outstanding.




Documents
      Incorporated by Reference: Proxy statement for the issuer’s 2007 annual
      meeting.




Transitional
      Small Business Disclosure Format: No.









**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.





We
      currently employ 83 people at two plants totaling approximately 90,000 square
      feet in Conroe, Texas, just north of Houston. Our executive offices are located
      at 12060 FM 3083, Conroe, Texas 77301. Our telephone number is (936) 539-9533
      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:




o
            Expandable
                tubing manufacturing - launchers and liner hangers for oil & gas field
                service applications;


o
              Blowout
                  preventers and their spare service parts;
 o
              Top
                  drive assemblies, sub-assemblies and their spare service
                  parts;
 o
              Directional
                  drilling products;
 o
              Exploration
                  products for research and
                  development;
 o
              Natural
                  gas measurement equipment, including fittings and
                  valves;
 o
              Control
                  and check valves; and
 o
              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, gas measuring valves, and exploration 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.


-2-




Our
      customers include 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, 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.





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 decrease in maintenance and service downtime reduction from a few
      days to a few hours, depending on the application and sizes. We also believe
      this is a significant cost-reduction benefit to users, especially in high-end
      pipeline or severe service applications, where replacement parts are frequently
      needed and supply disruption from shutting down a line during service may result
      in significant costs and loss of revenues.








-3-


*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.





*Reduced
      torque providing easier actuation*





Many
      flow
      control valves require expensive actuators that turn, throttle, or modulate
      the
      valve for its service and application. Some actuators cost more that the valves
      they modulate. We believe that our Hemiwedge® Cartridge valve design requires
      less torque to actuate and therefore requires less expensive actuators. By
      design, our Hemiwedge® Cartridge valve has approximately one-half of the
      friction points for the wedge against the sealing surface as compared to
      engineering ball valves that seal from all four sides. We believe that our
      Hemiwedge® Cartridge valve reduces torque and will provide an important
      advantage to our customers.





The
      Hemiwedge® Cartridge valve is suitable for a wide range of applications with
      several trims available. As such, the technology is applicable to most areas
      of
      industrial valve use in upstream and downstream energy markets worldwide.





We
      have
      substantially concluded the engineering, design, and development of the
      Hemiwedge® Cartridge valve, have built an initial inventory, and have launched
      the initial product line in late December 2006. Since the valve is still in
      the
      initial launch stages, we have not yet determined in field experience how long
      the valve will last under normal operating conditions and operating pressures
      or
      how much less torque the valve requires than those valves currently available
      in
      the market.


-4-




**Fiscal
      2006 and First Quarter 2007 Developments**





In
      2006,
      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 2006. As a result, we increased revenues by approximately $2.7
      million, or 55%. In addition, we were able to continue the successful
      implementation of our cost-cutting program, which, combined with our increase
      in
      revenue, resulted in a reduction of our operating loss by approximately
      $463,000. In March 2006, our senior lender, Stillwater National Bank, agreed
      to
      forgive $2,000,000 of indebtedness under an amended and restated term note,
      as a
      result of which we recognized $2,000,000 million of debt forgiveness income.
      In
      total, we realized a net loss of $1.3 million in the fiscal year
      2006.





While
      we
      have improved our results from operations in 200 6,
      we
      continue to have substantial indebtedness outstanding. As of December 31, 2006,
      we had outstanding indebtedness to Stillwater National Bank of approximately
      $4.1 million. On December 1, 2006, we delivered $525,000 to Stillwater National
      Bank, which Stillwater accepted as full payment of a $2.5 million secured
      convertible promissory note. In connection with this payment, Stillwater agreed
      to the cancellation of the entire remaining outstanding principal balance on
      the
      convertible promissory note and approximately $272,000 of accrued
      interest.





In
      February 2006, we closed the sale of 3,333,333 shares of our common stock to
      institutional and accredited retail investors in a private offering pursuant
      to
      exemption from registration under Section 4(2) of the Securities Act of 1933,
      as
      amended. We used the net proceeds from the financing for the initial launch
      of
      our new Hemiwedge® valve technology, working capital and general corporate
      purposes. First Montauk Securities Corporation, an NASD member firm, acted
      as
      placement agent in connection with the sale of 2,500,000 shares of common stock,
      and we placed the remaining 833,333 shares of common stock. The purchase price
      per share of common stock was $0.60. First Montauk received $165,000 in
      commissions and 250,000 warrants to purchase shares of common stock at an
      exercise price of $0.63 per share. We also paid legal fees of $10,000 to counsel
      for First Montauk. The net proceeds of this offering to us, after the payment
      of
      commissions, fees and other expenses of the offering, were approximately
      $1,810,000.





In
      July
      2006, we entered into an agreement with At Balance Americas, LLC, a
      Houston-based Managed Pressure Drilling, or MPD, services company. At Balance
      Americas, LLC is a wholly-owned subsidiary of Shell Technology Ventures, a
      leading energy-focused venture capital firm with offices in Houston, Texas.
      The
      agreement provides us with funding of up to $1.4 million and expertise to
      develop a down-hole isolation valve, or DIV, using our Hemiwedge®
      valve technology. Upon completion of the milestones outlined in the development
      agreement, we have agreed to an exclusive world-wide distribution agreement
      of
      our Hemiwedge® DIV product with At
      Balance Americas, which
      will be used in their MPD services. We believe MPD will become a dominant
      drilling technique world-wide as it increases recovery of hydrocarbons and
      improves productivity by eliminating the damaging effects of conventional
      over-balanced drilling and heavy weight drilling muds. In connection with this
      development agreement, we granted At
      Balance Americas and its
      parent company, Shell Technology Ventures, a right of first refusal, subject
      to
      the rights of our February 2006 private placement investors, to participate
      in
      any financing that we commence until July 2008. Also in connection with this
      agreement, Hemiwedge Valve Corporation retains any new intellectual property
      created as a result of this new product engineering and design. Upon the signing
      of a distribution agreement at the conclusion of the development agreement,
      we
      also agreed to issue to At
      Balance Americas 10 year
      term warrants to purchase our common stock. The number of warrants issued is
      determined by dividing the total amount funded by At
      Balance Americas for
      development of the DIV product by $3.00. Each warrant will be exercisable at
      a
      price of $3.00 per share.





Between
      October 30, 2006 and December 14, 2006, we sold 3,787,550 shares of our common
      stock and 1,893,775 Class A Warrants to purchase shares of our common stock
      to
      institutional and accredited retail investors in a private offering pursuant
      to
      exemption from registration under Section 4(2) of the Securities Act of 1933,
      as
      amended. First Montauk Securities Corporation acted as placement agent in
      connection with the sale of the securities. First Montauk received $416,630
      in
      commissions and 378,755 warrants to purchase shares of our common stock at
      an
      exercise price of $1.25 per share. We also paid legal fees of $22,500 to counsel
      for First


-5-




Montauk.
      We received net proceeds from this offering of approximately $3,350,000 after
      the payment of commissions, fees, and other expenses of the
      offering.





We
      granted the investors in this offering a right of participation, for a period
      of
      one (1) year from the final closing of the offering, to participate in any
      subsequent equity financing that we conduct, subject to rights granted to
      previous investors.





We
      have
      agreed that the investors in this offering will be entitled to certain
      anti-dilution rights. In the event that, during the period beginning on December
      14, 2006 and ending on the earlier to occur of: (i) the date that is fifteen
      (15) months after the date of the final closing; or (ii) the Company and At
      Balance Americas, a Shell Technology Ventures company, entering into a
      definitive distribution agreement for our Hemiwedge®
      DIV product ,
      we sell
      any shares of our common stock (or securities convertible into common stock
      or
      exercisable for shares of common stock) at a purchase price of less than $1.00
      per share (or the then-effective purchase price), we shall be obligated to
      adjust , on a full-ratchet basis, the number of shares of common stock issued
      to
      the investors in this offering as if the shares of common stock purchased in
      this offering were purchased at such lower price. These anti-dilution rights
      are
      subject to certain exceptions, including options and shares granted to officers,
      directors, employees, and consultants.




The
      Class
      A Warrants are subject to redemption by us upon 20 days prior written notice
      provided: (i) our 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 us;
      (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.


On
        March
        14, 2007, we agreed that we would issue new Class B Warrants to any of the
        investors in this 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 A Warrants have an exercise price of $1.25 per share. At 5:00 p.m Central
        Daylight Time, this offering will terminate. If this offer is accepted by
        all of
        the holders of the Class A Warrants and all of the Class A Warrants are
        exercised, we will receive approximately $2,367,220 in proceeds and issue
        new
        Class B Warrants covering 1,893,775 shares of our common stock. No holder
        of a
        Class A Warrant is required to exercise all or any portion of their Class
        A
        Warrants. Resale of the shares of common stock underlying the Class A Warrants
        are included on a current registration statement, but the shares of common
        stock
        underlying any Class B Warrants that are issued will not be registered. The
        Class B Warrants will have a term of five years and an exercise price of
        $2.00
        per share. The Class B Warrants will 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. This is a private offering
        to
        holders of Class A Warrants solely to accredited investors, as required by
        Section 4(2) of the Securities Act.





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 2007 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.





**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
      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


-6-


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:


o
              an
                  agreement to amend and restate a series of notes issued to Stillwater
                  National Bank, or Stillwater, into one term note;
 o
              the
                  extension of our current line of credit with
                  Stillwater;
 o
              the
                  issuance of a convertible note to
                  Stillwater;
 o
              the
                  issuance of a note, by our senior lender, to our Chief Financial
                  Officer
                  to advance funds to purchase shares of our common stock for
                  $250,000;
 o
              the
                  conversion of a portion of our debt to Stillwater into 20% of our
                  then-outstanding common stock after giving effect to the
                  restructuring;
 o
              our
                  reacquisition of the capital stock of our operating subsidiary,
                  Shumate
                  Machine Works;
 o
              a
                  release from Stillwater for any indebtedness not covered
                  above;
 o
              the
                  exchange of our outstanding unsecured notes, including principal
                  and
                  accrued interest, for our common stock; and
 o
              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.




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.


-7-




**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.





**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.


-8-


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.





*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
      2007*  *Drilling
      and Production Outlook* report,
      Spears and Associates, a leading energy market research firm, stated that U.S.
      drilling and completion spending was $125.2 billion for 2006, up 47% from the
      year 2005, and that U.S. well service and work-over or production spending
      was
      $15.9 billion in 2006, up 3% from 2005.





*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 2006 was projected at approximately $8.2 billion in the United
      States, up almost 4% from 2005, and $43.4 billion worldwide, up approximately
      5%
      from 2005.


-9-





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:





*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 higher
      precision products for our customers.* As
      a
      result of higher commodity prices, activity levels and pricing for our
      customers, we will continue to expand our operations at SMW 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.





** *Launching
      and growing our proprietary new Hemiwedge® valve product line and developing
      strategic alliances with other companies to leverage our valve technology into
      market segments where we have little or no expertise.* We have
      launched our Hemiwedge *®* technology with the Hemiwedge *®* Cartridge valve product line, a surface-level flow control valve, targeting
      mid-stream pipeline operators in late December 2006. Additionally, we intend
      to
      license 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 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. As of the date
      hereof, we are not in negotiations to acquire any products.





*Growing
      through acquisitions.* We
      believe that acquisition opportunities exist for niche-oriented businesses
      within the energy field services industry, including divisions and subsidiaries
      within larger energy field service companies that remain from past mergers,
      acquisitions and consolidations which may be for sale. As a growth strategy,
      we
      seek such divestiture candidates that would be complementary to our existing
      business lines. As of the date hereof, we are not in negotiations to acquire
      any
      such companies.





**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 2006, we expended approximately
      $---182,000 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.


-10-


For
      our
      valve division, we intend to target the high end of the pipeline, transmission
      stations, oil & gas, power, and mining markets, where there is a demand for
      flow control or process control valves. These target markets seek rapid
      maintenance benefits that our Hemiwedge® Cartridge valve system and flow control
      properties are designed to provide. Although we believe that our valve product
      line provides significantly improved functionality for high-end flow control
      applications, we intend to price our valves competitively relative to other
      high-end 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 inside sales
      support, catalogs, web site, and internal 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 seventy seven percent of our revenues for fiscal year 2006. 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 anticipated valve product business
      are
      engaged in fragmented and highly competitive industry segments. We estimate
      that
      there are more than 800 machine shops in the greater 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 2006 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.





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 2 unexpired United States patents,
      1
      expired United States patent, 1 pending United


-11-


States
      patent application, and 1 registered United States trademark. We have also
      filed
      international patent applications for the inventions embodied in the pending
      United States patent application. We have also developed several new inventions
      to the technology which have been propagated within new patent applications
      during 2006.





These
      intellectual property rights are of considerable importance to the proposed
      Hemiwedge® Cartridge valve product line, and we consider them, in the aggregate,
      to be material to our valve product division. 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.





**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 83 people in Conroe, Texas. Of the total, approximately 12
      are
      in administration, 8 are in engineering and drafting, 5 are in sales, marketing
      and distribution, and 58 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.


-12-




**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, 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 of $2,553,836 and $3,017,593 in 2006 and 2005, respectively, we
      have
      an accumulated deficit of $19,876,997, and working capital of $338,874 as of
      December 31, 2006. 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,
      a
      term loan, and a convertible note. As of December 31, 2006, we owed total
      indebtedness of approximately $4,302,000 (not including accrued interest) to
      Stillwater National Bank, our senior lender, Soderberg Research and Development,
      the note payable from our acquisition of the Hemiwedge® intellectual property in
      December 2005 and various lenders such as a premium finance note for the annual
      premium of $51,000 for our directors and officers liability policy. Although
      our
      cash flows from operations are currently sufficient to service our debt
      obligations, we may not be able to continue to service our debt in the future.
      If we were unable to service our debt in the future and failed 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, Stillwater National Bank could exercise its rights and remedies under
      the
      loan agreement, which could include seizing all of our assets. Any such action
      would have a material adverse effect on our business and prospects.


-13-




***We
      will likely need to finance our operations and a full-scale launch of the
      Hemiwedge® products through additional bank borrowings under our existing line
      of credit 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. Currently,
      we do not believe that we will be able to fund our operations, working capital
      requirements, and debt service requirements throughout the 2007 fiscal year
      from
      existing working capital, available borrowings and cash flows generated from
      operations. We believe we will need to obtain a larger line of credit for
      inventory and accounts receivable financing resulting from the launch of our
      Hemiwedge® product. Under our current line of credit, we may not borrow against
      Hemiwedge accounts receivable or inventory. We cannot guarantee you that we
      will
      be able to obtain a larger line of credit.





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 $778,916 at December 31, 2006,
      which, at the time, $847,638 was the approximate 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
      2006,
      two of our customers accounted for approximately 77% of our sales. At December
      31, 2006, two customers accounted for approximately 49% of our trade accounts
      receivable balance. This trend is continuing in the 2007 fiscal year. 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 a new valve product line called the Hemiwedge® valve.
      The Hemiwedge® Cartridge valve, our surface level valve targeting the flow
      control market, was launched in December 2006. Other applications of the
      Hemiwedge® technology are still in the engineering,
      design, and development stage. T his
      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 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.





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





We
      have
      incurred substantial expenses to acquire and fund the development of our
      Hemiwedge® valve product. We only began generating product revenue in the late
      fourth quarter of 2006 in this subsidiary in


-14-




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 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 we have 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
      had
      to 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
      National Bank in order to change our senior management. Beginning on March
      31,
      2006, these covenants imposed certain requirements in our balance sheet
      liquidity ratio and income statement debt coverage ratio which was tested as
      of
      December 31, 2006. For the year ended December 31, 2006, we were not in
      compliance with these covenants and our lender issued a waiver for the period
      tested. There can be no assurance that we will be in compliance with these
      covenants in future periods or that Stillwater National Bank will issue a waiver
      for any future periods in which we are not in compliance with these covenants.
      Any 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 National Bank could seek to foreclose on our
      assets in an effort to seek repayment under the loans. If Stillwater National
      Bank 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.





***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,
      2006, a one percent increase in Stillwater’s prime rate would increase our
      annual debt service and interest expense by approximately $43,000.





***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


-15-




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 and/or acquire 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 through acquisition or license. We believe acquiring other 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
      may not be able to identify quality strategic acquisition candidates, and if
      we
      do make strategic acquisitions, we may not be able to successfully integrate
      their operations.***





We
      may
      seek to acquire companies or product lines within the energy field services
      market or a related market. For any acquisition, we will be required to
      assimilate the operations, products, and personnel of the acquired business
      and
      train, retain and motivate its key personnel. We may be unable to maintain
      uniform standards, controls, procedures and policies if we fail in these
      efforts. Similarly, acquisitions may subject us to liabilities and risks that
      are not known or identifiable at the time of the acquisition or may cause
      disruptions in our operations and divert management’s attention from day-to-day
      operations, which could impair our relationships with our current employees,
      customers and strategic partners. We may have to incur debt or issue equity
      securities to pay for any future acquisitions. The issuance of equity securities
      could be substantially dilutive to our shareholders. We currently have no
      agreements or commitments concerning any such additional acquisitions, and
      we
      may not be able to identify any companies that satisfy our acquisition
      criteria.





***We
      face significant competition in our markets.***





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.





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





We
      have
      obtained, and are in the process of obtaining, U.S. and foreign patents and
      patent applications for our Hemiwedge® products. Our success will depend in part
      on our ability to obtain patent protection for our Hemiwedge® products, 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


-16-




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.





***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 and 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 2005 and 2006, 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.


-17-




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





Our
      success in developing Hemiwedge Valve Corporation may depend on our ability
      to
      attract and retain other qualified management, 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 successful in recruiting or
      retaining personnel of the requisite caliber or in adequate numbers to enable
      us
      to conduct the Hemiwedge® business as planned.





***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.***





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 two leased facilities are both
      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.




**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 14, 2007, the average daily trading volume of our common stock
      was
      approximately 41,000 shares. As of March 14, 2007, 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.


-18-





***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.





***We
      have granted a right of first refusal and anti-dilution rights to certain
      investors in our December 2006 private placement.***





Between
      October 30, 2006 and December 14, 2006, we sold 3,787,550 shares of our common
      stock and 1,893,775 Class A Warrants to purchase shares of our common stock
      to
      institutional and accredited retail investors in a private offering pursuant
      to
      exemption from registration under Section 4(2) of the Securities Act of 1933,
      as
      amended. We granted the investors in this offering a right of participation,
      for
      a period of one (1) year from the final closing of the offering, to participate
      in any subsequent equity financing that we conduct, subject to rights granted
      to
      previous investors. This may inhibit our ability to raise additional capital
      in
      the future.





In
      addition, we agreed that the investors in this offering will be entitled to
      certain anti-dilution rights, so that, subject to certain exceptions, if we
      sell
      any shares of our common stock (or securities convertible into common stock
      or
      exercisable for shares of common stock) at a purchase price of less than $1.00
      per share (or the then-effective purchase price), we shall be obligated to
      adjust , on a full-ratchet basis, the number of shares of common stock issued
      to
      the investors in this offering as if the shares of common stock purchased in
      this offering were purchased at such lower price. If shares are issued pursuant
      to these anti-dilution rights, they 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.





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





As
      of the
      date of this report, we have granted options and warrants to purchase an
      aggregate of 3,489,024 shares of our common stock to various persons and
      entities, of which options and warrants to purchase up to 2,965,358 shares
      of
      our common stock are currently exercisable. The exercise prices on these options
      and warrants range from $0.63 per share to $10.50 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.





***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
      29% 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


-19-




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.





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.


-20-




**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.


-21-




**Item
      2. PROPERTIES**  ****




Our
      subsidiary, Shumate Machine Works, leases 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 $1,825,000. 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. Along with the option to purchase, the
      lessor granted to Shumate Machine Works a right of first refusal with respect
      to
      the premises. Shumate Machine Works has sublet a portion of the premises. The
      sublease agreement has a term of three months, with automatic extensions for
      the
      following 33 months, at a rate of approximately $4,000 per month. In January,
      2007, Shumate Machine Works completed an expansion of this manufacturing
      facility.





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**





None.





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





None.


-22-




**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, 2004 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.





2005
                (OTC Bulletin Board)
            
            High
                Bid
            
            Low
                BidFirst
                quarter
            
            $
            0.49
            
            $
            0.21Second
                quarter
            
            
            0.56
            
            
            0.21Third
                quarter
            
            
            0.56
            
            
            0.42Fourth
                quarter
            
            
            0.90
            
            
            0.40




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





As
      of
      March 14, 2007, there were approximately 400 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.


-23-


**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,
      2006:





**(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)
            
            
            829,286
            
            $
            1.09
            
            
            4,457,860Equity
                compensation plans not approved by security holders
                (3)(4)(5)(6)
            
            
            60,571
            
            $
            7.89
            
            
            —Total
            
            
            889,857
            
            $
            1.55
            
            
            4,457,860





**(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 to date, we have issued 4,717,140 shares
                under
                the plan, and there are options to purchase 825,000 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,
                2006,
                there were options to purchase 4,286 shares outstanding under this
                plan.




**(3)**
            **Individual
                Option and Warrant Grants.**We
                have granted options and warrants on an individual basis. Of the
                options
                we have granted on an individual basis, there are currently options
                to
                purchase in the aggregate up to 48,571 shares of our common stock
                at a
                weighted average price of $9.45 per share. 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.




-24-




**(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.





**(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**





None.


-25-




**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’s mission
      is to leverage its existing infrastructure, expertise, and customer channels
      to
      grow its business and bring new technologies to the energy markets.





We
      currently employ 83 people at two plants totaling approximately 90,000 square
      feet in Conroe, Texas, north of Houston. Our executive offices are located
      at
      12060 FM 3083, Conroe, Texas 77301. Our telephone number is (936) 539-9533
      and
      our Internet address is www.shumateinc.com .





*Contract
      Machining and Manufacturing - Shumate Machine Works*





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





The
      diverse line of products we manufacture includes the following:





·
            Expandable
                tubing manufacturing - launchers and liner hangers for oil & gas field
                service
                applications


·
            Blowout
                preventers and their spare service parts


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


·
            Directional
                drilling products


·
            Exploration
                products for research and
                development


·
            Natural
                gas measurement equipment, including fittings and
                valves


·
            Control
                and check valves, and


·
            Subsea
                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, gas measuring valves, and exploration


-26-




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 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.





*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. The Hemiwedge® 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.





The
      patented design of the Hemiwedge® valve combines the benefits of quarter turn
      valves with the durability of gate valves. The Hemiwedge® 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 unique design features in the combination of the Hemiwedge shut
      off
      and stationary core make the Hemiwedge® valve unique.





We
      have
      substantially concluded the engineering, design, and development of the
      Hemiwedge® Cartridge valve, have built an initial inventory, and we launched the
      product line in late December 2006. Since the valve is still in the initial
      launch stages, we have not yet determined in field experience how long the
      valve
      will last under normal operating conditions and operating pressures or how
      much
      less torque the valve requires than those valves currently available in the
      market.





**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


-27-




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.





As
      a
      result of this amendment, we recorded debt forgiveness income in the amount
      of
      $2,000,000 in the first quarter of 2006.





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.


*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.


-28-




*Concentration
      of credit risk*





At
      December 31, 2006, two customers accounted for 49% of our total accounts
      receivable. 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.





**Fiscal
      2005 - Discontinued Operations**





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.





In
      accordance with the provisions related to discontinued operations specified
      within Statement of Financial Accounting Standards No. 144, “Accounting for the
      Impairment or Disposal of Long-Lived Assets,” the results of operations and
      financial position of the Tulsa-based companies and Excalibur Holdings were
      separately reported as discontinued operations on our consolidated financial
      statements and in the related discussions and comparisons between current and
      prior fiscal years.





**Results
      of Continuing Operations**





*Basis
      of Presentation*





The
      results of operations set forth below for the years ended December 31, 2006
      and
      2005 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
                Ended
            
            Year
                EndedDecember
                31,
            
            December
                31,2006
            
            2005Net
                sales
            
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            78.2
            
            
            99.1Gross
                income (loss)
            
            
            21.8
            
            
            0.9Selling,
                general and administrative
            
            
            44.4
            
            
            49.8Depreciation
            
            
            1.1
            
            
            0.6Bad
                debt expense (recovery)
            
            
            (.3
            )
            
            1.2Research
                and development
            
            
            9.7
            
            
            10.1Operating
                income (loss)
            
            
            (33.1
            )%
            
            (60.8
            )%




-29-




**Comparison
      of the Years ended December 31, 2006 and 2005**





**Net
      sales.** ** Net
      sales increased by $2,755,338, or an increase of 55.5%, to $7,719,882 for the
      year ended December 31, 2006, from $4,964,544 for the year ended December 31,
      2005.





On
      a
      segmental reporting basis, Shumate Machine Works sales increased by $2,439,258,
      or an increase of 49%, to $7,403,802 fo r
      the
      year ended December 31, 2006 ,
      compared to $4,964,544 for
      the
      year ended December 31, 2005 .
      Continued increases in commodity prices, particularly in the energy sector,
      and
      activity levels in the energy field services industry resulted in increased
      demand for the products we manufacture. As a result of this increased demand,
      pricing and volumes have increased for Shumate products and components. 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 2007 **.**





Hemiwedge
      Valve Corporation recorded initial revenues of $316,080. These revenues reflect
      amounts earned for achieving certain milestones under the development agreement
      with At Balance Americas LLC as well as initial Hemiwedge® Cartridge valve sales
      from late December 2006. Hemiwedge Valve Corporation also recorded deferred
      revenue on its balance sheet at year end 2006 from a $400,000 milestone payment
      which will be recognized as additional revenues in fiscal year 2007 under the
      development agreement if further milestones are met.





**Cost
      of Sales.** Consolidated cost of sales increased by $1,113,712 or 22.6%, to $6,033,370,
      for
      the year ended December 31, 2006, from $4,919,658 for the year ended December
      31, 2005. As a percentage of net sales, cost of sales decreased to 78.2% of
      net
      sales for the year ended December 31, 2006 versus 99.1% of sales for the year
      ended December 31, 2005. Cost of sales for Shumate Machine Works increased
      by
      $824,933, while initial cost of sales for Hemiwedge Valve Corporation totaled
      $219,942. 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
      better control of our direct labor costs and better pricing of our products. As
      a
      result, we generated a gross profit of $1,686,512, with a gross profit margin
      of
      21.8%, for fiscal 2006. 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 $953,481 to $3,427,349 for
      the
      year ended December 31, 2006, from $2,473,868 for the year ended December 31,
      2005. As a percentage of net sales, selling, general and administrative expenses
      were 44.4% for the year ended December 31, 2006, as compared to 49.8% for the
      comparable period in 2005. Our selling, general, and administrative expenses
      have increased primarily due to wage expense and consulting fees relating to
      the
      commencement of operations and start up expenses in recently formed Hemiwedge
      Valve Corporation. Other increases were related to administrative payroll,
      advertising, travel, and property tax expenses. In addition, we incurred
      approximately $396,975 in non-cash stock and option awards associated with
      FASB
      123R in the fiscal year ended December 31, 2006.





**Depreciation.** Depreciation
      expense increased by $123,937 to $450,487 for the year ended December 31, 2006
      from $326,550 for the year ended December 31, 2005, primarily due to new
      equipment purchases and 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. During for the year ended December 31, 2005, we charged
      off
      accounts receivable in the amount of $58,088 to bad debt expense. We did not
      charge off any accounts receivable in the fiscal year ended December 31, 2006.





**Research
      and development.** Research
      and development expense increased by $247,376 to $750,639 for the year ended
      December 31, 2006 from $503,263 for the year ended December 31, 2005. We
      anticipate that we


-30-




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, patent and other intellectual property filing costs,
      legal fees, prototyping costs, costs of new materials, and other research and
      development costs.





**Operating
      loss.** We
      incurred an operating loss of $2,553,836 for the year ended December 31, 2006,
      a
      decrease of $463,757 as compared to an operating loss of $3,017,593 for the
      year
      ended December 31, 2005.





On
      a
      segmental reporting basis, Shumate Machine Works recorded $554,207 in operating
      income for the year ended December 31, 2006. This operating income results
      from
      increased revenues in Shumate Machine Works.





Hemiwedge
      Valve Corporation recorded an operating loss of $1,980,095 for the year ended
      December 31, 2006. This operating loss was primarily due to the start-up nature
      of the Hemiwedge operations, including significant expenses in research and
      development.





In
      addition, we incurred general corporate overhead expenses of $1,127,948 for
      the
      year ended December 31, 2006.





Operating
      income in Shumate Machine was offset by an increase in start-up and research
      and
      development expenditures in Hemiwedge Valve Corporation as well as our corporate
      overhead expenses. While we continued to narrow our operating loss in fiscal
      2006, 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 launch our Hemiwedge® products, we
      anticipate that revenues from the sales of our Hemiwedge® products will improve
      our results of operations.





**Debt
      forgiveness income** .
      We
      recognized $2,000,000 in debt forgiveness income during the year ended December
      31, 2006 as a result of the amendment of our loan agreement with Stillwater
      National Bank. In 2005, we recorded $4,427,157 in debt forgiveness income from
      continuing operations as a result of debt forgiveness by Stillwater National
      Bank and other third party lenders during the restructuring in October
      2005.





**Interest
      expense.** Interest
      expense decreased by $413,080 to $755,295 for the year ended December 31, 2006,
      from $1,168,375 for the year ended December 31, 2005. Our interest expense
      decrease resulted primarily from the significant reduction of our outstanding debt and debt servicing requirements
      due to the restructuring of our company in October 2005.





**Provision
      for income taxes.** We
      generated a net loss of $1,309,131 for the year ended December 31, 2006 compared
      to net income of $1,978,484 for the year ended December 31, 2005. While we
      generated net income in 2004 and 2005, 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 working capital of $338,874 at
      December 31, 2006. We had cash of $1,547,326 as of December 31, 2006, compared
      to having cash of $214,218 at December 31, 2005.





We
      used
      $1,885,632  of
      net
      cash in operating activities for the year
      ended December 31,
      2006, compared to using $3,111,549 in the year ended December 31,
      2005. Cash used in operating activities is primarily due to an increase in
      inventory and non-cash recognition for debt forgiveness income. This was offset
      by non-cash charges for amortization and depreciation, issuances of stock,
      stock
      options and warrants, increases in accounts payable, accrued expenses and
      deferred revenue, and decreases in accounts receivable.


-31-


Net
      cash
      flows used in investing activities was $895,087 for the year ended December 31,
      2006, compared to $576,697 in the year ended December 31,
      2005. Cash of $916,735 was used for the purchase of property and equipment
      and
      $53,352 was used for patent investments. Proceeds from the sale of fixed assets
      totaled $75,000.





Net
      cash
      flows provided by financing activities were $4,113,827 for the year ended December 31,
      2006, compared to net cash provided by financing activities of $3,724,642 in
      the
      year ended December 31,
      2005. Cash provided by financing activities is due to net proceeds from sales
      of
      common stock of $5,060,012, offset by payments on notes payable of $887,486
      and
      net decrease in draws on bank credit line of $58,699.




**Bank
      Credit Facility**





The
      primary source of our financing has been our credit facility with Stillwater
      National Bank. As set forth above under the heading “Reorganization,” our credit
      facility with Stillwater National Bank was restructured on October 19,
      2005.





Additionally,
      on March 31, 2006, Shumate entered into a First Amendment to Loan Agreement
      and
      Guarantor’s Consent with Stillwater National Bank (“Stillwater”) pursuant to
      which Stillwater agreed to forgive $2,000,000 of indebtedness under an amended
      and restated term promissory note that we had previous 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 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 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.





On
      April
      13, 2006, we entered into a letter agreement with Stillwater National Bank
      (“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 investor(s) 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 (v) 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.





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% pf 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.


-32-




**2006
      Private Placements**





In
      February 2006, we closed the sale of 3,333,333 shares of our common stock to
      institutional and accredited retail investors in a private offering pursuant
      to
      exemption from registration under Section 4(2) of the Securities Act of 1933,
      as
      amended. We intend to use the net proceeds from the financing for the initial
      launch of our new Hemiwedge® valve technology, working capital and general
      corporate purposes. First Montauk Securities Corporation, an NASD member firm,
      acted as placement agent in connection with the sale of 2,500,000 shares of
      common stock, and we placed the remaining 833,333 shares of common stock. The
      purchase price per share of common stock was $0.60. First Montauk received
      $165,000 in commissions and 250,000 warrants to purchase shares of common stock
      at an exercise price of $0.63 per share. We also paid legal fees of $10,000
      to
      counsel for First Montauk. The net proceeds of this offering to us, after the
      payment of commissions, fees and other expenses of the offering, were
      approximately $1,810,000.





Between
      October 30, 2006 and December 14, 2006, we sold 3,787,550 shares of our common
      stock and 1,893,775 Class A Warrants to purchase shares of our common stock
      to
      institutional and accredited retail investors in a private offering pursuant
      to
      exemption from registration under Section 4(2) of the Securities Act of 1933,
      as
      amended. First Montauk Securities Corporation acted as placement agent in
      connection with the sale of the securities. First Montauk received $416,630
      in
      commissions and 378,755 warrants to purchase shares of our common stock at
      an
      exercise price of $1.25 per share. We also paid legal fees of $22,500 to counsel
      for First Montauk. We received net proceeds from this offering of approximately
      $3,350,000 after the payment of commissions, fees, and other expenses of the
      offering.





We
      granted the investors in this offering a right of participation, for a period
      of
      one (1) year from the final closing of the offering, to participate in any
      subsequent equity financing that we conduct, subject to rights granted to
      previous investors.





We
      have
      agreed that the investors in this offering will be entitled to certain
      anti-dilution rights. In the event that, during the period beginning on December
      14, 2006 and ending on the earlier to occur of: (i) the date that is fifteen
      (15) months after the date of the final closing; or (ii) the Company and At
      Balance Americas, LLC, a Shell Technology Ventures company, entering into a
      definitive distribution agreement for our Hemiwedge®
      DIV product ,
      we sell
      any shares of our common stock (or securities convertible into common stock
      or
      exercisable for shares of common stock) at a purchase price of less than $1.00
      per share (or the then-effective purchase price), we shall be obligated to
      adjust , on a full-ratchet basis, the number of shares of common stock issued
      to
      the investors in this offering as if the shares of common stock purchased in
      this offering were purchased at such lower price. These anti-dilution rights
      are
      subject to certain exceptions, including options and shares granted to officers,
      directors, employees, and consultants.




The
      Class
      A Warrants are subject to redemption by us upon 20 days prior written notice
      provided: (i) our 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 us;
      (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.


On
        March
        14, 2007, we agreed that we would issue new Class B Warrants to any of the
        investors in this 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 A Warrants have an exercise price of $1.25 per share. At 5:00 p.m Central
        Daylight Time, this offering will terminate. If this offer is accepted by
        all of
        the holders of the Class A Warrants and all of the Class A Warrants are
        exercised, we will receive approximately $2,367,220 in proceeds and issue
        new
        Class B Warrants covering 1,893,775 shares of our common stock. No holder
        of a
        Class A Warrant is required to exercise all or any portion of their Class
        A
        Warrants. Resale of the shares of common stock underlying the Class A Warrants
        are included on a current registration statement, but the shares of common
        stock
        underlying any Class B Warrants that are issued will not be registered. The
        Class B Warrants will have a term of five years and an exercise price of
        $2.00
        per share. The Class B Warrants will 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. This is a private offering
        to
        holders of Class A Warrants solely to accredited investors, as required by
        Section 4(2) of the Securities Act.





**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.





We
      have
      working capital of $338,874 as of December 31,
      2006, which takes into account private placements of our common stock completed
      in 2006 resulting in net proceeds to us of approximately
      $5,060,000.


-33-


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
      $778,916 at December 31, 2006, and at the time, $847,638 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 2007 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.





In
      addition, we have completed the beta development of the Hemiwedge® technology
      and have commenced the commercialization of the Hemiwedge® Cartridge valve
      product. We believe that we will be able to fund the initial launch of the
      Hemiwedge® valve products through existing working capital and cash flows
      generated from operations. However, our existing working capital and cash flows
      generated from operations will not be sufficient to conduct a full-scale launch
      of the Hemiwedge® Cartridge valve product line, including an inventory buildup,
      or an expansion of the product line. In order to conduct full implementation
      of
      the product line, we need to obtain additional 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.





In
      the
      event we seek to conduct full implementation of the product line, or in the
      event we seek to acquire another technology-oriented company or other new
      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 finance our operations through additional
      bank borrowings under our Stillwater line of credit or other capital financings.
      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. I n
      such
      circumstances, we would 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.





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 equity 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 financing during 2006, 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 our bank debt contains restrictions as to the payment of
      dividends.


-34-




**Off-Balance
      Sheet Arrangements**




None.


-35-




**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 sheet of Shumate Industries,
      Inc.
      as of December 31, 2006 and the related consolidated statements of operations,
      changes in stockholders’ equity and cash flows for the each of the two years
      then ended. 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
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall 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 financial position of Shumate as of December
      31,
      2006 and the results of its operations and cash flows for the two years then
      ended in conformity with accounting principles generally accepted in the United
      States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      Shumate will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, Shumate suffered recurring losses from
      operations and has an accumulated deficit, 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.






MALONE
      & BAILEY, PC


www.malone-bailey.com


Houston,
      Texas





March
      21,
      2007


F-1




**SHUMATE
                  INDUSTRIES, INC.****CONSOLIDATED
                  BALANCE SHEET****December
                  31, 2006**
  **ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,547,326Accounts
                  receivable, net of allowance for doubtful accounts of
                  $40,000
              
              
              554,134Inventory
              
              
              893,650Prepaid
                  expense and other current assets
              
              
              198,753Total
                  current assets
              
              
              3,193,863Fixed
                  assets, net of accumulated depreciation of $1,922,242
              
              
              2,303,372Patents,
                  net of accumulated amortization of $29,038
              
              
              307,331Deposits
              
              
              104,140Total
                  assets
              
              $
              5,908,706**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              652,980Accrued
                  expenses
              
              
              435,234Deferred
                  revenue
              
              
              400,000Current
                  portion of notes payable - other
              
              
              75,370Current
                  portion of capital lease obligation
              
              
              31,924Current
                  portion of term note payable - Stillwater National Bank
              
              
              480,565Line
                  of credit - Stillwater National Bank
              
              
              778,916Total
                  current liabilities
              
              
              2,854,989Long
                  term liabilities:Long
                  term portion of capital lease obligation
              
              
              51,838Term
                  note payable - Stillwater National Bank
              
              
              2,883,392Total
                  long term liabilities
              
              
              2,935,230Total
                  liabilities
              
              
              5,790,219Commitments
                  and contingencies
              
              
              —Stockholders'
                  equity: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,19,322,277
                  shares issued and outstanding
              
              
              19,322Additional
                  paid-in-capital
              
              
              20,015,762Deferred
                  compensation
              
              
              (39,600
              )Accumulated
                  deficit
              
              
              (19,876,997
              )Total
                  stockholders' equity
              
              
              118,487Total
                  liabilities and stockholders' equity
              
              $
              5,908,706


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


F-2




**SHUMATE
                  INDUSTRIES, INC.****CONSOLIDATED
                  STATEMENTS OF OPERATIONS****For
                  the Years Ended December 31, 2006 and
                  2005**
  2006
              
              2005REVENUES
              
              $
              7,719,882
              
              $
              4,964,544COST
                  OF REVENUES:Cost
                  of revenues
              
              
              5,665,243
              
              
              4,620,368Depreciation
                  expense
              
              
              368,127
              
              
              299,290Total
                  cost of revenues
              
              
              6,033,370
              
              
              4,919,658GROSS
                  PROFIT
              
              
              1,686,512
              
              
              44,886OPERATING
                  EXPENSES:Selling,
                  general and administrative expense
              
              
              3,427,349
              
              
              2,473,868Depreciation
                  expense
              
              
              82,360
              
              
              27,260Bad
                  debt expense (recovery)
              
              
              (20,000
              )
              
              58,088Research
                  and development
              
              
              750,639
              
              
              503,263Total
                  operating expenses
              
              
              4,240,348
              
              
              3,062,479LOSS
                  FROM OPERATIONS
              
              
              (2,553,836
              )
              
              (3,017,593
              )OTHER
                  INCOME (EXPENSE):Debt
                  forgiveness income
              
              
              2,000,000
              
              
              4,427,157Interest
                  expense
              
              
              (755,295
              )
              
              (1,168,375
              )Restructuring
                  cost
              
              
              —
              
              
              (100,000
              )NET
                  INCOME (LOSS) FROM CONTINUING OPERATIONS
              
              
              (1,309,131
              )
              
              141,189DISCONTINUED
                  OPERATIONS:Debt
                  forgiveness income
              
              
              —
              
              
              1,837,295NET
                  INCOME (LOSS)
              
              $
              (1,309,131
              )
              $
              1,978,484Basic
                  net income (loss) per share
              
              $
              (0.09
              )
              $
              0.33Diluted
                  net income (loss) per share
              
              
              (0.09
              )
              
              0.31Basic
                  net income (loss) per share resulting from continuing
                  operations
              
              $
              (0.09
              )
              $
              0.02Diluted
                  net income (loss) per share resulting from continuing
                  operations
              
              
              (0.09
              )
              
              0.02Basic
                  net income per share resulting from discontinued
                  operations
              
              $
              —
              
              $
              0.31Diluted
                  net income per share resulting from discontinued
                  operations
              
              
              —
              
              
              0.28Weighted
                  average shares outstanding - basic
              
              
              15,367,674
              
              
              5,956,531Weighted
                  average shares outstanding - diluted
              
              
              15,367,674
              
              
              6,456,531


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


F-3




**SHUMATE
                  INDUSTRIES, INC.****CONSOLIDATED
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  (DEFICIT)****For
                  the Years Ended December 31, 2006 and
                  2005**
  AdditionalCommon
                  Stock
              
              Paid-In
              
              Deferred
              
              AccumulatedShares
              
              Par
              
              Capital
              
              Compensation
              
              Deficit
              
              TotalBalances
                  at December 31, 2004
              
              
              2,433,485
              
              $
              2,433
              
              $
              8,554,852
              
              $
              —
              
              $
              (20,546,350
              )
              $
              (11,989,065
              )Common
                  stock issued for services
              
              
              4,956,932
              
              
              4,957
              
              
              470,042
              
              
              
              
              
              
              
              
              474,999Common
                  stock issued for debt
              
              
              4,059,310
              
              
              4,059
              
              
              2,754,515
              
              
              
              
              
              
              
              
              2,758,574Common
                  stock issued for cash
              
              
              666,667
              
              
              667
              
              
              499,333
              
              
              
              
              
              
              
              
              500,000Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,978,484
              
              
              1,978,484Balances
                  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
              
              
              (39,600
              )
              
              
              
              
              59,900Common
                  stock issued for cash,net
                  of offering costs
              
              
              7,120,883
              
              
              7,121
              
              
              5,052,891
              
              
              
              
              
              
              
              
              5,060,012Option
                  and warrant expense
              
              
              
              
              
              
              
              
              337,075
              
              
              
              
              
              
              
              
              337,075Related
                  party debt forgiveness
              
              
              
              
              
              
              
              
              2,247,639
              
              
              
              
              
              
              
              
              2,247,639Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,309,131
              )
              
              (1,309,131
              )Balances
                  at December 31, 2006
              
              
              19,322,277
              
              $
              19,322
              
              $
              20,015,762
              
              $
              (39,600
              )
              $
              (19,876,997
              )
              $
              118,487




F-4




**SHUMATE
                  INDUSTRIES, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****For
                  the Years Ended December 31, 2006 and
                  2005**
  2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income (loss)
              
              $
              (1,309,131
              )
              $
              1,978,484Adjustments
                  to reconcile net income (loss) to netcash
                  used in operating activities:Debt
                  forgiveness income - continuing operations
              
              
              (2,000,000
              )
              
              (4,427,157
              )Debt
                  forgiveness income - discontinued operations
              
              
              —
              
              
              (1,837,295
              )Depreciation
                  expense
              
              
              450,487
              
              
              326,550Bad
                  debt expense (recovery)
              
              
              (20,000
              )
              
              58,088Non-cash
                  issuances of stock as compensation
              
              
              59,900
              
              
              474,999Non-cash
                  issuance of stock options and warrants
              
              
              337,075
              
              
              —Changes
                  in:Accounts
                  receivable
              
              
              425,782
              
              
              (350,938
              )Inventory
              
              
              (611,550
              )
              
              (103,569
              )Other
                  assets
              
              
              (107,111
              )
              
              (54,936
              )Accounts
                  payable
              
              
              189,839
              
              
              (813,341
              )Accrued
                  expenses
              
              
              299,077
              
              
              (199,729
              )Deferred
                  revenue
              
              
              400,000
              
              
              —Pre-petition
                  liabilities of bankrupt subsidiary
              
              
              —
              
              
              1,837,295Net
                  cash used in operating activities
              
              
              (1,885,632
              )
              
              (3,111,549
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of fixed assets
              
              
              (916,735
              )
              
              (393,680
              )Proceeds
                  from sale of fixed assets
              
              
              75,000
              
              
              -Purchase
                  of patents
              
              
              (53,352
              )
              
              (183,017
              )Net
                  cash used in investing activities
              
              
              (895,087
              )
              
              (576,697
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Net
                  change of bank credit line
              
              
              (58,699
              )
              
              —Proceeds
                  from bank term loan
              
              
              —
              
              
              3,276,905Payments
                  on notes payable
              
              
              (887,486
              )
              
              (52,263
              )Proceeds
                  from sales of common stock, net of offering cost
              
              
              5,060,012
              
              
              500,000Net
                  cash provided by financing activities
              
              
              4,113,827
              
              
              3,724,642NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              1,333,108
              
              
              36,396CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              214,218
              
              
              177,822CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              1,547,326
              
              $
              214,218Supplemental
                  disclosures:Cash
                  paid for income taxes
              
              $
              —
              
              $
              —Cash
                  paid for interest
              
              
              500,302
              
              
              139,769Non-cash
                  investing and financing transactions:Stock
                  issued for accounts payable and debt
              
              $
              —
              
              $
              2,758,574Purchase
                  of patents with note payable
              
              
              —
              
              
              100,000Related
                  party debt forgiveness income
              
              
              2,247,639
              
              
              —


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


F-5




**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 are derived from an agreement to perform contractual research
        and
        development services. The revenue is recognized as the services are performed
        and related costs are incurred and recorded.
 
 **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  F-6
 uncollectible
        amounts. The allowance was $40,000 and $60,000 as of December 31, 2006 and
        December 31, 2005, 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.
 
 **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 $307,331 and $283,017 at December 31, 2006 and
        2005,
        respectively. Amortization expense of $29,038 was charged to operations during
        2006. Because the patents were acquired in late 2005, no amortization expense
        was charged to operations during 2005.
 
 **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 805,000 options issued to employees and non-employee directors during
        the
        year ending December 31, 2006, and there were no options issued to employees
        or
        non-employee directors during the year ended December 31, 2005. See Note
        13 for
        details.  F-7
  **Basic
        and Diluted Net Income per Share** .
        The
        basic net income per common share is computed by dividing the net income
        by the
        weighted average number of common shares outstanding. Diluted net income
        per
        common share is computed by dividing the net income adjusted on an “as if
        converted” basis, by the weighted average number of common shares outstanding
        plus potential dilutive securities. Diluted earnings per common share for
        the
        years of 2006 and 2005 were determined on the assumption that the convertible
        note payable was converted upon issuance on October 19, 2005.
 
 2006
              
              2005Net
                  income (loss)
              
              $
              (1,309,131
              )
              $
              1,978,484Add:
                  adjustment for interest on convertiblenote
                  payable
              
              
              —
              
              
              47,500Net
                  income (loss), including assumed conversions
              
              $
              (1,309,131
              )
              $
              2,025,984Weighted
                  average number of shares outstanding
              
              
              15,367,674
              
              
              5,956,531Add:
                  shares assumed to be issued under theconvertible
                  note payable
              
              
              —
              
              
              500,000Weighted
                  average number of shares adjustedfor
                  dilutive shares
              
              
              15,367,674
              
              
              6,456,531
 **Stock
        Split** . All
        references to common stock and per share data have been retroactively restated
        to account for the 1 for 7 reverse stock split that occurred on October 19,
        2005
        as if the split occurred on the first day of the first period
        presented.
 
 **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.
 F-8
  **NOTE
        2 - GOING CONCERN**
 
 As
        shown
        in the accompanying consolidated financial statements, Shumate incurred
        recurring losses from operations of $2,553,836 and $3,017,593 in 2006 and
        2005,
        respectively, and has an accumulated deficit of $19,876,997. These
        conditions raise substantial doubt as to Shumate’s ability to continue as a
        going concern. To address these concerns, Shumate has raised net proceeds
        of
        approximately $1,810,000 and $3,350,000 through private offerings in 2006.
        In
        addition, management is trying to continue to increase Shumate’s revenues and
        improve its results of operations to a level of profitability. 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 2007 through existing working capital of $338,874 and 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 - REORGANIZATION**
 
 On
        October 19, 2005, Shumate completed a restructuring
        of our company, resulting in a significant reduction of our outstanding debt
        and
        providing Shumate 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 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.
  **NOTE
        4 - 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, which did not commence operations until the fourth quarter of
        2005.
 
 Segment
        financial information is summarized as follows:
 
 Shumate
              
              Hemiwedge
              
              CorporateYear
                  ended December 31, 2006
              
              Machine
                  Works
              
              Valve
                  Corp.
              
              Allocation
              
              TotalRevenues
              
              $
              7,403,802
              
              $
              316,080
              
              $
              —
              
              $
              7,719,882Cost
                  of revenues
              
              
              5,445,301
              
              
              219,942
              
              
              —
              
              
              5,665,243Gross
                  profit
              
              
              1,597,217
              
              
              89,295
              
              
              —
              
              
              1,686,512Interest
                  expense
              
              
              501,271
              
              
              4,681
              
              
              249,343
              
              
              755,295Depreciation
                  and amortization
              
              
              369,557
              
              
              80,930
              
              
              —
              
              
              450,487
  F-9
  Debt
                  forgiveness income
              
              
              2,000,000
              
              
              —
              
              
              —
              
              
              2,000,000Net
                  income (loss)
              
              
              2,052,936
              
              
              (1,984,776
              )
              
              (1,377,291
              )
              
              (1,309,131
              )Total
                  assets
              
              
              3,181,994
              
              
              1,873,883
              
              
              852,829
              
              
              5,908,706Expenditures
                  for long-lived assets
              
              
              284,173
              
              
              685,914
              
              
              —
              
              
              970,087
  Shumate
              
              Hemiwedge
              
              CorporateYear
                  ended December 31, 2005
              
              Machine
                  Works
              
              Valve
                  Corp.
              
              Allocation
              
              TotalRevenues
              
              $
              4,964,544
              
              $
              —
              
              $
              —
              
              $
              4,964,544Cost
                  of revenues
              
              
              4,620,368
              
              
              —
              
              
              —
              
              
              4,620,368Gross
                  profit
              
              
              44,886
              
              
              —
              
              
              —
              
              
              44,886Interest
                  expense
              
              
              657,324
              
              
              —
              
              
              511,051
              
              
              1,168,375Depreciation
                  and amortization
              
              
              326,106
              
              
              444
              
              
              —
              
              
              326,550Debt
                  forgiveness income
              
              
              —
              
              
              —
              
              
              4,427,157
              
              
              4,427,157Net
                  loss
              
              
              (1,937,622
              )
              
              —
              
              
              3,916,106
              
              
              1,978,484Total
                  assets
              
              
              3,388,867
              
              
              276,730
              
              
              —
              
              
              3,665,597Expenditures
                  for long-lived assets
              
              
              365,705
              
              
              210,992
              
              
              —
              
              
              576,697
  **NOTE
        5 - PROPERTY AND EQUIPMENT**
 
 Property
        and equipment consisted of the following at December 31, 2006 and
        2005:
  Description
              
              Life
              
              2006
              
              2005Shop
                  equipment
              
              
              5-12
                  years
              
              $
              3,786,624
              
              $
              3,206,467Other
                  equipment and furniture
              
              
              3
                  years
              
              
              224,823
              
              
              79,773Leasehold
                  improvements
              
              
              5
                  years
              
              
              214,167
              
              
              22,6414,225,614
              
              
              3,308,881Less:
                  accumulated depreciation
              
              
              
              
              
              (1,922,242
              )
              
              (1,455,868
              )Property
                  and equipment, net
              
              
              
              
              $
              2,303,372
              
              $
              1,853,013
 Depreciation
        expense in continuing operations totaled $450,487 and $326,550 in 2006 and
        2005,
        respectively.
  **NOTE
        6 - INTELLECTUAL PROPERTY**
 
 On
        December 5, 2005, Shumate acquired for $238,500 the intellectual property
        rights
        to the Hemiwedge Ò line of
        products, including the Hemiwedge Ò 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 Hemiwedge Ò 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 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 $29,038 and $0 in 2006 and 2005, respectively.
 F-10
 
 At
        December 31, 2006, Shumate also has patent costs of $97,869 unrelated to
        the
        intellectual property rights described above.
  **NOTE
        7 - NOTES PAYABLE - STILLWATER NATIONAL BANK**
 
 2006
              
              2005$1,000,000
                  line of credit with Stillwater National Bank securedby
                  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.
              
              $
              778,916
              
              $
              837,615$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
                  by
                  Stillwater.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.
              
              
              3,363,957
              
              
              5,633,053$2,500,000
                  convertible note dated October 19, 2005 with Stillwater National
                  Bank. On
                  April 13, 2006, Stillwater National Bank offered to accept $500,000
                  in
                  full payment of the note including accrued interest. 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 remained the same. On December 1, 2006, Shumate delivered
                  $525,000 to Stillwater National Bank as full payment of the $2.5
                  million
                  debenture. In connection with this payment, Stillwater National
                  Bank
                  agreed to the cancellation of the entire remaining outstanding
                  principal
                  and approximately $272,639 of accrued interest due and owing under
                  the
                  terms of the debenture at December 1, 2006. Debt forgiveness in
                  the amount
                  of $2,247,639 was charged to additional paid in capital during
                  the forth
                  quarter.
              
              
              —
              
              
              2,500,000Total
              
              $
              4,142,873
              
              $
              8,970,668
  **NOTE
        8 - ACCRUED EXPENSES**
 
 Accrued
        expenses as of December 31, 2006 and 2005 included the following:
 
 2006
              
              2005Accrued
                  interest on notes payable
              
              $
              —
              
              $
              45,252Payroll
                  taxes and estimated penalties
              
              
              190,349
              
              
              244,616Accrued
                  vacation
              
              
              75,048
              
              
              15,770Accrued
                  salaries and commissions
              
              
              44,726
              
              
              —Rebates
              
              
              60,105
              
              
              42,013Other
              
              
              65,006
              
              
              61,145Total
              
              $
              435,234
              
              $
              408,796
 **NOTE
        9 - NOTES PAYABLE AND CAPITAL LEASE**
 
 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  F-11
 equipment
        under the capital lease is included in the balance sheet as fixed assets
        of
        approximately $100,000 at December 31, 2006. Amortization of assets under
        capital leases will be included in depreciation expense. Remaining payments
        under the capital lease equal $83,762 at December 31, 2006.
 
 Future
        minimum lease payments under the capital lease are as follows:
 
 Year
                  EndingDecember
                  31, 2007
              
              $
              31,924December
                  31, 2008
              
              
              51,83883,762Less
                  amount representing interest
              
              
              (36,038
              )Net
                  value of minimum lease payments
              
              $
              47,724
 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, 2006 was $51,496.
 
 Four
        unsecured notes payable to third parties totaling $315,000 and related accrued
        interest in the amount of $60,625 were converted to 370,392 shares of common
        stock on October 19, 2005. Shumate recognized a total of $202,207 debt
        forgiveness income in these transactions.
  **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 $18,000,000 at December 31,
        2006,
        and will expire in the years 2022 through 2026.
 
 At
        December 31, 2006, deferred tax assets consisted of the following:
 
 Deferred
                  tax asset
              
              $
              6,120,000Valuation
                  allowance
              
              
              (6,120,000
              )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
 F-12
  date
        of
        change is restricted. Losses subsequent to the date of change are not
        restricted.
  **NOTE
        11 - COMMON STOCK**
 
 On
        April
        29, 2005, Shumate adopted its 2005 Stock Incentive Plan (the “Plan”). Shumate is
        permitted to issue up to 33,000,000 shares of common stock under the Plan
        in the
        form of stock options, restricted stock awards, and stock awards to employees,
        non-employee directors, and outside consultants.
 
 On
        May
        11, 2005, Shumate granted restricted stock awards for 4,285,500 post-split
        shares of common stock under the Plan, including restricted stock awards
        of
        3,950,000 post-split shares to its officers and directors. These shares were
        recorded at their par value at $30,000 based on the appraisal performed by
        an
        independent third party consultant. Under the terms of the restricted stock
        awards, the shares would not vest until Shumate closed a plan of reorganization
        between Shumate, its subsidiaries, certain affiliated parties, and Stillwater,
        with respect to the restructuring of various notes issued to Stillwater.
        This
        restructuring was completed on October 19, 2005.
 
 In
        October 2005, Shumate issued 370,392 shares of common stock to several third
        parties for release of $315,000 in unsecured notes payable and related accrued
        interest of $60,625.
 
 In
        October 2005, Shumate issued 1,320,918 shares of common stock to several
        related
        parties for release of $1,095,799 in unsecured notes payable and related
        accrued
        interest of $225,120.
 
 In
        October 2005, Shumate issued 2,368,000 shares of common stock to Stillwater
        in
        exchange for release of $2,368,000 of outstanding indebtedness to
        Stillwater.
 
 In
        October 2005, in conjunction with the debt restructuring, Shumate issued
        250,000
        shares of common stock to its Chief Financial Officer for cash totaling
        $250,000.
 
 In
        December 2005, Shumate issued 416,667 shares of common stock for cash totaling
        $250,000.
 
 During
        the fourth quarter of 2005, Shumate issued 671,432 shares of common stock
        to
        consultants for their services. These shares were recorded at their value
        of
        $444,999.
 
 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.
 F-13
  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.
 
 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.
 
 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.
  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 AtBalance
        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.
 F-14
  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 AtBalance
        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.
 
 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.
  **NOTE
        12 - DISCONTINUED OPERATIONS / DEBT FORGIVENESS INCOME**
 
 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. Shumate recorded
        $1,837,295 in 2005 for debt forgiveness income resulting from the discharge
        of
        the debts and liabilities of Excalibur Holdings in the bankruptcy
        proceedings.
 
 As
        a
        result of the reorganization of Shumate discussed in Note 3, Shumate recognized
        $4,222,743 in debt forgiveness income from Stillwater transactions and $204,414
        in debt forgiveness income related to third party notes payable in
        2005.
 
 Under
        the
        terms of an amended and restated promissory note payable, Shumate recognized
        $2,000,000 in debt forgiveness income from Stillwater in 2006. See Note 7
        for
        details.
  **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, 2006 (“date”) of which 296,285 options have expired unexercised,
        and (b) the 2005 Stock Incentive Plan reserved 10,000,000 shares, of which
        4,717,140 shares have been issued to date and 805,000 options have been granted
        through December 31, 2006. In addition, there are 48,571 non-plan options
        outstanding as of December 31, 2006.
 F-15
  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 was recorded as compensation expense and $449,941
        was
        deferred to recognize over the future periods in which the options vest and
        the
        services are being performed.
 
 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.
 
 Variables
        used in the Black-Scholes option-pricing model include (1) 4.19% - 4.99%
        risk-free interest rate, (2) option life is the expected remaining life of
        the
        options as of each year end, (3) expected volatility ranged from 195% to
        206%,
        and (4) zero expected dividends.
 
 During
        2006, 87,857 warrants were expired unexercised.
 
 During
        2005, no options or warrants were granted.
 F-16
  Summary
        information regarding options and warrants is as follows:
 
 Weighted
              
              
              
              Weightedaverage
              
              
              
              averageOptions
              
              Share
                  Price
              
              Warrants
              
              Share
                  PriceOutstanding
                  atDecember
                  31, 2004
              
              
              54,214
              
              $
              8.89
              
              
              201,712
              
              $
              7.94Year
                  ended December 31, 2005:Forfeited
              
              
              (357
              )
              
              4.20
              
              
              —
              
              
              —Outstanding
                  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
              
              
              2,648,385
              
              $
              1.51
 Options
        outstanding and exercisable as of December 31, 2006:
  -
                  -
                  Outstanding - -
              
              ExercisableNumber
              
              Remaining
              
              NumberExercise
                  Price
              
              of
                  Shares
              
              life
              
              of
                  Shares$
                  4.20
              
              
              4,286
              
              
              1
                  year
              
              
              3,5247.00
              
              
              14,286
              
              
              0.3
                  years
              
              
              14,28610.50
              
              
              34,285
              
              
              0.5
                  years
              
              
              34,2850.65
              
              
              150,000
              
              
              4
                  years
              
              
              150,0000.75
              
              
              100,000
              
              
              4
                  years
              
              
              —1.00
              
              
              100,000
              
              
              4
                  years
              
              
              100,0001.35
              
              
              150,000
              
              
              4
                  years
              
              
              —1.33
              
              
              75,000
              
              
              4
                  years
              
              
              —1.20
              
              
              170,000
              
              
              4
                  years
              
              
              —1.21
              
              
              50,000
              
              
              4
                  years
              
              
              50,0001.15
              
              
              10,000
              
              
              4
                  years
              
              
              —857,857
              
              
              
              
              
              352,095
   Warrants
        outstanding and exercisable as of December 31, 2006:
 
 -
                  -
                  Outstanding - -
              
              ExercisableNumber
              
              Remaining
              
              NumberExercise
                  Price
              
              of
                  Shares
              
              life
              
              of
                  Shares$
                  6.30 - $7.00
              
              
              45,848
              
              
              0.3
                  years
              
              
              45,848$8.40
                  - $10.50
              
              
              68,007
              
              
              0.3
                  years
              
              
              68,007$0.63
              
              
              250,000
              
              
              4
                  years
              
              
              250,000$1.25
              
              
              2,272,530
              
              
              4
                  years
              
              
              2,272,530$1.50
              
              
              12,000
              
              
              4
                  years
              
              
              12,0002,648,385
              
              
              
              
              
              2,648,385
  F-17
  **NOTE
        14 - MAJOR CUSTOMERS**
 
 Two
        customers accounted for 77% of total revenues in 2006 and 71% of total revenues
        in 2005.
  **NOTE
        15 - COMMITMENTS**
 
 Shumate’s
        executive offices are in Conroe, Texas. 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. Future minimum lease payments under the lease as of December 31,
        2006
        are $223,200 annually in 2007 through 2010 and $55,800 in 2011. Effective
        February 1, 2007, the lease was amended. See Note 16 for details.
 
 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, 2006 are $169,788 in 2007 and $155,639 in 2008. Future net minimum
        lease receivables under the sublease as of December 31, 2006 are $48,000
        in 2007
        and $44,000 in 2008.
 
 Rent
        expense was $249,031 and $271,680 in 2006 and 2005, respectively.
  **NOTE
        16 - SUBSEQUENT EVENTS**
 
 On
        February 8, 2007 and effective January 19, 2007, Shumate renewed its $1,000,000
        secured revolving line of credit facility with Stillwater. The amount Shumate
        can borrow under this line of credit subjects 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. This 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.
  Effective
        February 1, 2007, the lease for Shumate's
        executive offices 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 $261,700 annually in 2007, $265,200 annually in 2008
        through 2010, and $63,000 in 2011.
 F-18




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





None.





**Item
      8A. CONTROLS AND PROCEDURES.**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports that we file under the
      Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
      and reported within the time periods specified in the Securities and Exchange
      Commission’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 based on the definition of “disclosure controls and procedures” in
      Rule 13a-15(e). In designing and evaluating the disclosure controls and
      procedures, our management recognized that any controls and procedures, no
      matter how well designed and operated, can provide only reasonable assurance
      of
      achieving the desired control objectives, and management necessarily was
      required to apply its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures.




At
      the
      end of the period covered by this Annual Report on Form 10-KSB, 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 the design and operation of our disclosure controls
      and
      procedures. Based on the foregoing, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective to ensure that all material information required to be disclosed
      in
      this Annual Report on Form 10-KSB has been made known to them in a timely
      fashion. ****





Our
      Chief
      Executive Officer and Chief Financial Officer have also evaluated whether any
      change in our internal controls occurred during the last fiscal quarter and
      have
      concluded that there were no changes in our internal controls or in other
      factors that occurred during the last fiscal quarter that has materially
      affected, or is reasonably likely to materially affect, these
      controls.





**Item
      8B. OTHER INFORMATION.**





None.


-36-




**PART
      III**





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





The
      information under the caption “Election of Directors” and “Management -
      Executive Officers and Directors” in the proxy statement for our 2007 annual
      meeting is incorporated herein by reference.





The
      information under the caption “Section 16(a) Beneficial Ownership Reporting
      Compliance” in the proxy statement for our 2007 annual meeting is incorporated
      herein by reference.





**Item
      10. EXECUTIVE COMPENSATION**





The
      information under the caption “Executive Compensation” in the proxy statement
      for our 2007 annual meeting is incorporated herein by reference.





**Item
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      information under the captions “Common Stock Ownership of Certain Beneficial
      Owners and Management” in the proxy statement for our 2007 annual meeting is
      incorporated herein by reference.





**Item
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





The
      information under the caption “Related Party Transactions” in the proxy
      statement for our 2007 annual meeting is incorporated herein by
      reference.





**Item
      13. EXHIBITS AND REPORTS ON FORM 8-K.**




(a)  Exhibits




Exhibit
              No.
            Description  2.1
            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.




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).




-37-


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.




-38-




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), filed herewith.




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, filed
                herewith.




31.1
            Certificationof
                Larry C. Shumate pursuant to Rule 13a-14(a),
                filed herewith.




31.2
            Certificationof
                Matthew C. Flemming pursuant to Rule 13a-14(a),
                filed herewith.




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,
                filed herewith.




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,
                filed herewith.









**Item
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





The
      information under the caption “Accountant Fees and Services” in the proxy
      statement for our 2007 annual meeting is incorporated herein by
      reference.


-39-




**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/
      Larry
      C. Shumate


Larry
      C.
      Shumate, 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/
                Larry C. Shumate
            
            Chairman
                of the Board, President,
            
            March
                30, 2007Larry
                C. Shumate
            
            Chief
                Executive Officer/s/
                Matthew C. Flemming
            
            Executive
                Vice President, Chief
            
            March
                30, 2007Matthew
                C. Flemming
            
            Financial
                Officer, Treasurer,Secretary,
                and Director/s/
                Russell T. Clark
            
            Vice
                President, Chief Operating OfficerRussell
                T. Clark
            
            and
                Director
            
            March
                30, 2007/s/
                Frank X. Marshik
            
            Director
            
            March
                30, 2007Frank
                X. Marshik/s/
                Leo B. Womack
            
            Director
            
            March
                30, 2007Leo
                B. Womack/s/
                Kenton Chickering III
            
            Director
            
            March
                30, 2007Kenton
                Chickering III




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