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


**WASHINGTON,
      D.C. 20549**




**AMENDMENT
      NO. 1 TO**




**FORM
      10-KSB**




(Mark
      One)




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




For
      the
      fiscal year ended December 31, 2007




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES
                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
o




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 $9,033,614.




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




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




Documents
      Incorporated by Reference: None.




Transitional
      Small Business Disclosure Format: No.







**EXPLANATORY
      NOTE**




This
      Amendment No. 1 to annual report on Form 10-KSB is being filed to provide the
      financial statements required by Item 310 of Regulation S-B; management’s
      discussion and analysis required by Item 303 of Regulation S-B; disclosure
      controls and procedures required by Item 307 of Regulation S-B; internal control
      over financial reporting required by Item 308 of Regulation S-B; directors,
      executive officer, control persons and corporate governance; compliance with
      Section 16(a) of the Exchange Act required by Items 401, 405, 406 and 407(c)(3),
      (d)(4) and (d)(5) of Regulation S-B; executive compensation required by Item
      402
      of Regulation S-B; security ownership of certain beneficial owners and
      management and related stockholder matters required by Item 201(d) of Regulation
      S-B and by Item 403 of Regulation S-B; certain relationships and related
      transactions, and director independence required by Item 404 of Regulation
      S-B
      and Item 407(a) of Regulations S-B and certifications required under Rule 13a-14
      of the Securities Exchange Act of 1934, as amended, and Section 1350 of the
      Sarbanes-Oxley Act of 2002. These items
      were not available for filing with the annual report on Form 10-KSB filed by
      us
      on April 15, 2008.




**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 87 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:





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


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


·
            Measurement
                while drilling (MWD) products;


·
            Directional
                drilling products;·
            Completion
                tools;


·
            Exploration
                products for research and
                development;


·
            Natural
                gas measurement equipment, including fittings and
                valves;


·
            Power
                frames for centrifugal pumps and mud motors;
                and


·
            Sub-sea
                control equipment.




2


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




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





*Valve
      Product Technology – Hemiwedge Valve Corporation*





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


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





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





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





*New
      cartridge replacement design reduces maintenance downtime and minimizes supply
      disruptions*





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




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.





Hemiwedge®
      Down hole Isolation valve




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


4


Hemiwedge®
      Sub sea high pressure valve





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





**Fiscal
      2007 and Fiscal 2008 Developments**





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





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


.


*March
      2007 Warrant Solicitation*





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





*2007
      Bridge Notes*





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





*Amended
      Stillwater Credit Facility*





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





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


5


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





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





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





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





*Transactions
      Relating to Beach Road Facility*





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





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





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


6




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





**Business
      Development**





*Organization*





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





*Acquisition
      of Hemiwedge Assets*





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





*Reorganization*





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





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


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


·
            the
                issuance of a convertible note to
                Stillwater;


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


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


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


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


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


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




7





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





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





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





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





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





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





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


8




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





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





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





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





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





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





*Bankruptcies*





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





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





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





**Our
      Markets**





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


9





*Contract
      Machining and Manufacturing – Shumate Machine Works*





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





*Valve
      Product Technology – Hemiwedge Valve Corporation*





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





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





**Our
      Strategy**





Strategies
      to achieve our growth objectives include the following:





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





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





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





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


10




**Sales
      and Marketing; Customers**





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





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





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





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





**Raw
      Materials**





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





**Competition**





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


11





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





**Intellectual
      Property**





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





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





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





**Government
      Regulation and Environmental Matters**





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





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





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





**Safety**





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


12





**Risk
      Management and Insurance**





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





**Employees**





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





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





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





***Our
      business might fail, even after our 2005
      restructuring.***





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





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





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





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





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


13




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





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





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





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





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





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





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





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


14




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





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





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





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





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





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





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





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


15




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





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





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





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





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





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





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





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





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





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





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





***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.


16




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





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





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





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





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





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





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





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


17




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





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




18


**INVESTMENT
      RISKS**





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





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





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





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





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





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





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





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





***We
      have no immediate plans to pay dividends.***





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


19


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





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





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





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





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





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





***Our
      stock price is volatile.***





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




·
            our
                developing business;





·
            a
                continued negative cash flow;





·
            relatively
                low price per share;





·
            relatively
                low public float;





·
            variations
                in quarterly operating results;





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





·
            the
                number of holders of our common stock;
                and





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


20





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





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





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





***There
      are delays in order communication on the OTCBB.***





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





***There
      is a risk of market fraud on the OTCBB.***





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





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





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





***Increased
      dealer compensation could adversely affect our stock
      price.***





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




21


**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.




22


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




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





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





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





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





**Item
      3. LEGAL PROCEEDINGS**





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





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





None.




23


**PART
      II**




**Item
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**




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





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





2006
                (OTC Bulletin Board)
            
            High
                Bid
            
            Low
                BidFirst
                quarter
            
            $
            1.30
            
            $
            0.65Second
                quarter
            
            
            1.60
            
            
            0.71Third
                quarter
            
            
            1.65
            
            
            1.00Fourth
                quarter
            
            
            1.53
            
            
            0.902007
                (OTC Bulletin Board)
            
            
            High
                Bid
            
            
            Low
                BidFirst
                quarter
            
            $
            2.30
            
            $
            1.17Second
                quarter
            
            
            2.14
            
            
            1.30Third
                quarter
            
            
            2.03
            
            
            1.37Fourth
                quarter
            
            
            1.64
            
            
            0.60





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





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





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




24


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





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





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




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




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




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




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


25


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




**Recent
      Sales of Unregistered Securities**





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





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





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





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





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





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





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





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




26


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





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





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





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





**General**





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





We
      currently employ 87 people at two plants totaling approximately 90,000 square
      feet in Conroe, Texas, north of Houston. Our executive offices are located
      at
      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:





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


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


·
            Measurement
                while drilling (MWD) products;


·
            Directional
                drilling products;·
            Completion
                tools;


·
            Exploration
                products for research and
                development;


·
            Natural
                gas measurement equipment, including fittings and
                valves;


·
            Power
                frames for centrifugal pumps and mud motors;
                and


·
            Sub-sea
                control equipment.





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


27





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





*Valve
      Product Technology – Hemiwedge Valve Corporation*





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


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





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





**Reorganization/Debt
      Forgiveness**





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





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





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





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


28





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.


29




*Concentration
      of credit risk*





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





*Inventory*





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





**Results
      of Continuing Operations**





*Basis
      of Presentation*





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





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




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




**Comparison
      of the Years ended December 31, 2007 and 2006**





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





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


30


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





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





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





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





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




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


31




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





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





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





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





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





**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.





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





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





**Liquidity
      and Capital Resources**





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





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





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





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


32




**Bank
      Credit Facility**





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





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




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





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




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





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





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





**Convertible
      Promissory Notes**




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


33




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




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




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




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




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




**Liquidity
      and Capital Requirements**





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





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





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


34




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





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





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





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





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





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





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




35


**Off-Balance
      Sheet Arrangements**





None.




36


**Item
      7. FINANCIAL STATEMENTS**




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors


Shumate
      Industries, Inc.


Conroe,
      Texas




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





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




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




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




MALONE
      & BAILEY, PC


www.malone-bailey.com


Houston,
      Texas





June
      2,
      2008


37





**SHUMATE
      INDUSTRIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**




December
                31,
            
            December
                31,2007
            
            2006**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            83,591
            
            $
            1,547,326Accounts
                receivable, net of allowance for doubtful accounts of $40,000 and
                $40,000
            
            
            502,383
            
            
            554,134Inventory
            
            
            1,259,166
            
            
            893,650Prepaid
                expense and other current assets
            
            
            497,245
            
            
            198,753Total
                current assets
            
            
            2,342,385
            
            
            3,193,863Fixed
                assets, net of accumulated depreciation of $2,502,132 and
                $1,922,242
            
            
            2,376,061
            
            
            2,303,372Patents,
                net of accumulated amortization of $58,078 and $29,038
            
            
            340,366
            
            
            307,331Deposits
            
            
            84,320
            
            
            104,140Total
                assets
            
            $
            5,143,132
            
            $
            5,908,706**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                liabilities:Accounts
                payable
            
            $
            1,065,656
            
            $
            652,980Accounts
                payable - related party
            
            
            105,000
            
            
            -Accrued
                expenses
            
            
            1,548,504
            
            
            435,234Deferred
                revenue
            
            
            -
            
            
            400,000Current
                portion of notes payable - other
            
            
            8,798
            
            
            75,370Current
                portion of capital lease obligation
            
            
            51,586
            
            
            31,924Current
                portion of equipment notes payable
            
            
            5,578
            
            
            -Current
                portion of convertible notes payable, net of discount of
                $364,290
            
            
            2,800,535
            
            
            -Current
                portion of term note payable - T Swift
            
            
            250,000
            
            
            -Current
                portion of term note payable - Stillwater National Bank
            
            
            389,719
            
            
            480,565Line
                of credit - Stillwater National Bank
            
            
            764,606
            
            
            778,916Total
                current liabilities
            
            
            6,989,982
            
            
            2,854,989Long
                term liabilities:Long
                term portion of capital lease obligation
            
            
            -
            
            
            51,838Long
                term portion of equipment notes payable
            
            
            24,479
            
            
            -Term
                note payable - Stillwater National Bank
            
            
            2,614,279
            
            
            2,883,392Total
                long term liabilities
            
            
            2,638,758
            
            
            2,935,230Total
                liabilities
            
            
            9,628,740
            
            
            5,790,219Commitments
                and contingencies
            
            
            -
            
            
            -Stockholders'
                equity (deficit)Preferred
                stock, $.001 par value, 10,000,000 shares authorized, no shares issued
                or
                outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value, 50,000,000 shares authorized, 20,578,071
                and
                19,322,277 shares issued and outstanding
            
            
            20,578
            
            
            19,322Additional
                paid-in-capital
            
            
            22,581,595
            
            
            20,015,762Deferred
                compensation
            
            
            -
            
            
            (39,600
            )Accumulated
                deficit
            
            
            (27,087,781
            )
            
            (19,876,997
            )Total
                stockholders' equity (deficit)
            
            
            (4,485,608
            )
            
            118,487Total
                liabilities and stockholders' equity (deficit)
            
            $
            5,143,132
            
            $
            5,908,706




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




38





**SHUMATE
      INDUSTRIES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




For
                the Yearsended
                December 31,2007
            
            2006REVENUES
            
            $
            9,033,614
            
            $
            7,719,882COST
                OF REVENUESCost
                of revenues
            
            
            6,605,358
            
            
            5,665,243Depreciation
                expense
            
            
            416,536
            
            
            368,127Total
                cost of revenues
            
            
            7,021,894
            
            
            6,033,370GROSS
                PROFIT
            
            
            2,011,720
            
            
            1,686,512OPERATING
                EXPENSES:Selling,
                general and administrative
            
            
            6,396,410
            
            
            3,427,349Depreciation
                expense
            
            
            191,912
            
            
            82,360Bad
                debt expense (recovery)
            
            
            -
            
            
            (20,000
            )Research
                and development
            
            
            1,741,434
            
            
            750,639Total
                operating expenses
            
            
            8,329,756
            
            
            4,240,348LOSS
                FROM OPERATIONS
            
            
            (6,318,036
            )
            
            (2,553,836
            )OTHER
                INCOME (EXPENSE)Debt
                forgiveness income
            
            
            -
            
            
            2,000,000Interest
                expense
            
            
            (892,748
            )
            
            (755,295
            )NET
                LOSS
            
            $
            (7,210,784
            )
            $
            (1,309,131
            )Basic
                net income (loss) per share
            
            $
            (0.36
            )
            $
            (0.09
            )Diluted
                net income (loss) per share
            
            
            (0.36
            )
            
            (0.09
            )Weighted
                average shares outstanding-Basic
            
            
            20,061,282
            
            
            15,367,674Weighted
                average shares outstanding-Diluted
            
            
            20,061,282
            
            
            15,367,674





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




39





**SHUMATE
      INDUSTRIES, INC.**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**


**For
      the Years Ended December 31, 2007 and 2006**




AdditionalCommon
                Stock
            
            Paid-In
            
            Deferred
            
            AccumulatedShares
            
            Par
            
            Capital
            
            Compensation
            
            Deficit
            
            TotalBalances
                at December 31, 2005
            
            
            12,116,394
            
            $
            12,116
            
            $
            12,278,742
            
            $
            -
            
            $
            (18,567,866
            )
            $
            (6,277,008
            )Common
                stock issued for services
            
            
            85,000
            
            
            85
            
            
            99,415
            
            
            -
            
            
            -
            
            
            99,500Common
                stock issued for cash
            
            
            7,120,883
            
            
            7,121
            
            
            5,590,429
            
            
            -
            
            
            -
            
            
            5,597,550Costs
                of raising capital
            
            
            -
            
            
            -
            
            
            (537,538
            )
            
            -
            
            
            -
            
            
            (537,538
            )Options
                and warrants issued
            
            
            -
            
            
            -
            
            
            337,075
            
            
            -
            
            
            -
            
            
            337,075Related
                party debt forgiveness
            
            
            -
            
            
            -
            
            
            2,247,639
            
            
            -
            
            
            -
            
            
            2,247,639Deferred
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            (39,600
            )
            
            -
            
            
            (39,600
            )Net
                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
            )
            
            118,487Common
                stock issued for cash
            
            
            680,520
            
            
            681
            
            
            769,079
            
            
            
            
            
            
            
            
            769,760Common
                stock issued for services
            
            
            480,050
            
            
            480
            
            
            643,377
            
            
            
            
            
            
            
            
            643,857Costs
                of raising capital
            
            
            
            
            
            
            
            
            (132,333
            )
            
            
            
            
            
            
            
            (132,333
            )Cashless
                exercise of warrants
            
            
            95,224
            
            
            95
            
            
            (95
            )
            
            
            
            
            
            
            
            -Options
                and warrants issued
            
            
            
            
            
            
            
            
            733,310
            
            
            
            
            
            
            
            
            733,310Discount
                on beneficial conversion feature related to convertible notes
                payable
            
            
            
            
            
            
            
            
            552,495
            
            
            
            
            
            
            
            
            552,495Deferred
                compensation
            
            
            
            
            
            
            
            
            
            
            
            39,600
            
            
            
            
            
            39,600Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,210,784
            )
            
            (7,210,784
            )Balances
                at December 31, 2007
            
            
            20,578,071
            
            $
            20,578
            
            $
            22,581,595
            
            $
            -
            
            $
            (27,087,781
            )
            $
            (4,485,608
            )





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




40





**SHUMATE
      INDUSTRIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the Years Ended December 31, 2007 and 2006**




2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (7,210,784
            )
            $
            (1,309,131
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Debt
                forgiveness income
            
            
            -
            
            
            (2,000,000
            )Depreciation
                and amortization expense
            
            
            608,448
            
            
            450,487Bad
                debt expense (recovery)
            
            
            -
            
            
            (20,000
            )Amortization
                of beneficial conversion feature discount
            
            
            187,589
            
            
            -Stock-based
                compensation
            
            
            1,346,332
            
            
            396,975Changes
                in:Accounts
                receivable
            
            
            51,751
            
            
            425,782Inventory
            
            
            (365,516
            )
            
            (611,550
            )Other
                assets
            
            
            (220,133
            )
            
            (107,111
            )Accounts
                payable
            
            
            412,673
            
            
            189,839Accounts
                payable - related party
            
            
            105,000
            
            
            -Accrued
                expenses
            
            
            1,009,111
            
            
            299,077Deferred
                revenue
            
            
            (400,000
            )
            
            400,000Net
                cash used in operating activities
            
            
            (4,475,529
            )
            
            (1,885,632
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of fixed assets
            
            
            (388,773
            )
            
            (916,735
            )Proceeds
                from sale of fixed assets
            
            
            -
            
            
            75,000Purchase
                of patents
            
            
            (62,076
            )
            
            (53,352
            )Net
                cash used in investing activities
            
            
            (450,849
            )
            
            (895,087
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                change in bank credit line
            
            
            (14,310
            )
            
            (58,699
            )Payments
                on notes payable
            
            
            (100,514
            )
            
            (887,486
            )Payments
                on notes payable - related party
            
            
            (359,959
            )
            
            -Proceeds
                from notes payable
            
            
            3,300,000
            
            
            -Proceeds
                from sales of common stock, net of offering cost
            
            
            637,426
            
            
            5,060,012Net
                cash provided by financing activities
            
            
            3,462,643
            
            
            4,113,827NET
                    INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (1,463,735
            )
            
            1,333,108CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            1,547,326
            
            
            214,218CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            83,591
            
            $
            1,547,326Supplemental
                disclosures:Cash
                paid for income taxes
            
            $
            -
            
            $
            -Cash
                paid for interest
            
            
            422,712
            
            
            500,302Non-cash
                investing and financing transactions:Cashless
                exercise of options
            
            
            97,500
            
            
            -Note
                payable for purchase of fixed assets
            
            
            31,823
            
            
            -Accrued
                interest on bridge loan
            
            
            115,441
            
            
            -Discount
                on warrants
            
            
            413,571Discount
                for beneficial conversion feature related to convertible notes
                payable
            
            
            138,924
            
            
            -Amount
                accrued for purchase of fixed assets
            
            
            231,500
            
            
            -Related
                party debt foregiveness income
            
            
            -
            
            
            2,247,639





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




41


**SHUMATE
      INDUSTRIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING
      POLICIES**





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





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





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





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





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





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





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





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





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





**Property
      and Equipment** .
      Property and equipment is valued at cost. Additions are capitalized and
      maintenance and repairs are charged to expense as incurred. Gains and losses
      on
      dispositions of equipment are reflected in operations.


42


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 $58,078 and $29,038 at December 31, 2007 and 2006,
      respectively. Amortization expense of $29,041 and $29,041 was charged to
      operations during 2007 and 2006, respectively.





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





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





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





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





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





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





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





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





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




43





**NOTE
      2 – GOING CONCERN**





As
      shown
      in the accompanying consolidated financial statements, Shumate incurred
      recurring losses from operations of $5,711,806 and $2,553,836 in 2007 and 2006,
      respectively, and has an accumulated deficit of $27,087,780. These conditions
      raise substantial doubt as to Shumate’s ability to continue as a going concern.
      To address these concerns, Shumate has raised proceeds of approximately
      $3,050,000 through a convertible note private offering in 2007. Additionally,
      Shumate has sought recapitalization in debt or equity during 2008, however
      there
      can be no assurance that it will successfully recapitalize. In addition,
      management is trying to continue to increase Shumate’s revenues and improve its
      results of operations to a level of profitability including revenues and cash
      flow from the Hemiwedge Valve Corporation subsidiary. New sales representative
      agreements have been executed during 2008 to assist in the sales and marketing
      efforts to improve our results of operations. As of the date of this report,
      Shumate believes that it will not be able to fund its operations, working
      capital requirements, and debt service requirements through fiscal year 2008
      through cash flows generated by operations. Management may also seek to raise
      additional capital in the future if Shumate’s results of operations do not
      continue to improve or if the need otherwise arises. The financial statements
      do
      not include any adjustments that might be necessary if Shumate is unable to
      continue as a going concern.




**NOTE
      3 – SEGMENT INFORMATION**





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





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




44


**NOTE
      4 – RESEARCH AND DEVELOPMENT CONTRACT**





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





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




**NOTE
      5 – PROPERTY AND EQUIPMENT**





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





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




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





**NOTE
      6 – INTELLECTUAL PROPERTY**





On
      December 5, 2005, Shumate acquired $238,500 the intellectual property rights
      to
      the 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, the property of Soderberg Research Inc., to be paid in the form of
      a
      monthly advance in the amount of $3,000 for each month of the 24 month period
      beginning in January 2006 and (b) three percent of the net sales proceeds
      collected from customers from (i) gross revenue from sales of products to which
      the acquired intellectual property relates, less (ii) sales and/or use taxes,
      import and/or export duties, outbound transportation costs, and amounts allowed
      or credited due to returns, which payments shall begin two years after December
      2005 and continue until March 29, 2013. The $72,000 in monthly advances shall
      be
      credited against the three percent of the net sales proceeds. Amortization
      expense in continuing operations totaled $29,042 and $29,038 in 2007 and 2006,
      respectively.




45




**NOTE
      7 – NOTES PAYABLE – STILLWATER NATIONAL BANK**





2007
            
            2006$1,000,000
                line of credit with Stillwater National Bank secured by a first priority
                security interest in all of Shumate’s existing and future assets. The line
                of credit bears interest at a rate equal to the prime rate plus two
                percent. The advances available under the line of credit are limited
                to a
                borrowing base of the sum of (a) 80% of eligible accounts receivable,
                and
                (b) 50% of eligible inventory. This line of credit is secured by
                a first
                priority security interest in all of Shumate’s existing and future assets.
                The line of credit was amended January 25, 2008.
            
            $
            764,606
            
            $
            778,916$3,633,053
                term note dated March 31, 2006 with Stillwater National Bank. The
                note is
                an amendment and restatement of a promissory note in the original
                amount
                of $5,633,053 delivered to Stillwater in connection with the October
                19,
                2005 reorganization (at which time Stillwater was not considered
                a related
                party), and reflects $2,000,000 of debt forgiveness by Stillwater
                agreed
                to at the time of the October 2005 reorganization. The note requires
                one
                interest only payment on March 31, 2006, and thereafter requires
                Shumate
                to make 24 equal monthly payments in an amount sufficient to fully
                amortize principal and interest on the note over 84 months. The note
                is
                due and payable on April 19, 2008, at which time Shumate will be
                required
                to make a balloon payment of the entire outstanding principal balance
                and
                all accrued interest. The note bears interest at a rate equal to
                the prime
                rate plus two percent, and it is secured by a first priority security
                interest in all of Shumate’s existing and future assets. The term note was
                amended January 25, 2008.
            
            
            3,003,998
            
            
            3,363,957Total
            
            $
            3,768,604
            
            $
            4,142,873




**NOTE
      8 – ACCRUED EXPENSES**





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





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




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





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


46




**NOTE
      9 – NOTES PAYABLE AND CAPITAL LEASE**





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





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





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


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





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




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





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





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


47




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





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





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




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




**NOTE
      10 – INCOME TAXES**





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





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





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




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




**NOTE
      11 – COMMON STOCK**





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





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





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


48





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. As
      of
      the dated of this report, these rights have expired.




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





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





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





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


49




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





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





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





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





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





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





**NOTE
      12 – DISCONTINUED OPERATIONS / 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.





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, 2007 of which 296,429 options have expired unexercised, and (b)
      the
      2005 Stock Incentive Plan reserved 10,000,000 shares, of which 4,783,690 shares
      have been issued to date and 1,796,000 options have been granted through
      December 31, 2007. In addition, there were 48,571 non-plan options outstanding
      as of December 31, 2006.





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


50





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





During
      2006, 87,857 warrants were expired unexercised.





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





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





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





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





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





Summary
      information regarding options and warrants is as follows:


51





Share
                Price
            
            Options
            
            Weighted
              Average
              Exercise Price
            
            Aggregate
              Intrinsic
              Value
            
            Warrants
            
            Weighted
              Average
              Exercise Price
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at December 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
                at December 31, 2006
            
            
            857,857
            
            
            1.55
            
            $
            222,900
            
            
            2,648,385
            
            
            1.51
            
            $
            356,802Year
                ended December 31, 2007:Granted
            
            
            991,000
            
            
            1.57
            
            
            
            
            
            2,023,490
            
            
            1.69Exercised
            
            
            (150,000
            )
            
            0.65
            
            
            
            
            
            (680,520
            )
            
            1.13Forfeited
            
            
            (163,047
            )
            
            3.66
            
            
            
            
            
            (891,045
            )
            
            2.29Outstanding
                at December 31, 2007
            
            
            1,535,810
            
            $
            1.42
            
            $
            5,000
            
            
            3,100,310
            
            $
            1.49
            
            $
            20,320





Options
      outstanding and exercisable as of December 31, 2007:





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




52


Warrants
      outstanding and exercisable as of December 31, 2007:





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





**NOTE
      14 – MAJOR CUSTOMERS**





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





**NOTE
      15 – TERMINATION OF SUNBELT STOCK PURCHASE AGREEMENT**





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




**NOTE
      16 – RELATED PARTY TRANSACTIONS**





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





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





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





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




53


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




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





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





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





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




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





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





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





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





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





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





**NOTE
      17 – COMMITMENTS AND CONTINGENCIES**





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





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




54


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





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





**NOTE
      18 – SUBSEQUENT EVENTS**





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





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





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





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





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





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




55


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





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





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





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





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





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


56


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





None.





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




*Evaluation
      of Disclosure Controls and Procedures*




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




We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of our disclosure controls and procedures pursuant
      to Rule 13a-15 under the Exchange Act as of December 31, 2007. Based on that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures as of December 31, 2007 were
      effective in ensuring that the information required to be disclosed by us in
      reports filed under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the rules and forms of the SEC.




*Management’s
      Report on Internal Control over Financial Reporting*




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




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




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we conducted an evaluation of
      the
      effectiveness of our internal control over financial reporting and, based on
      that evaluation, concluded that, as of December 31, 2007, our internal control
      over financial reporting was effective.




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


57


**Item
      8B. OTHER INFORMATION.**





None.




58


**PART
      III**





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





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




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




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





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





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





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





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




59


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





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





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





**Director
      Independence**





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





**Involvement
      in Certain Legal Proceedings**





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





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





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





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




60


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





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





**Information
      about our Board and its Committees.**





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





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





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





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





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





***Nomination
      and Governance Committee*** .





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





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





61


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





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





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





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





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





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





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





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




62


**Report
      of the Audit Committee**





*Our
      Audit Committee has issued the following report:*





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





Leo
      B.
      Womack, Chairman


Steven
      B.
      Erikson


Frank
      X.
      Marshik





AUDIT
      COMMITTEE





**Communications
      with the Board of Directors**





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








**Item
      10. EXECUTIVE COMPENSATION**





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





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




63


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





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





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





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





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





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





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





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





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





**Outstanding
      Equity Awards**





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





**Employment
      Agreements**





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





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





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




64


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





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





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





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





**Potential
      Payments upon Termination**




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




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




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





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





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




65


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





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





**Compensation
      of Directors**





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





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





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





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





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





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





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





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




66


**Section
      16(a) Beneficial Ownership Reporting Compliance**





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





**Code
      of Ethics**





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





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





The
      following table sets forth information as of May
      14,
      200 8
      as to
      each person or group who is known to us to be the beneficial owner of more
      than
      5% of our outstanding voting securities and as to the security and percentage
      ownership of each of our executive officers and directors and of all of our
      officers and directors as a group. As of May, 2008 we had 20,947,071 shares
      of
      common stock outstanding.





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





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





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


*Less
      than 1%.


(1)
            The
                address is c/o Shumate Industries, Inc., 12060 FM 3083, Conroe, Texas
                77301.(2)
            Mr.
                Flemming’s 1,116,350 shares have been pledged to Stillwater National Bank
                and Trust to secure payment for a loan collateralized by the
                shares.(3)
            Includes
                270,910 shares held by the Marshik Family Trust, of which Mr. Marshik
                is a
                grantor and a trustee, 137,429 shares held by Mr. Marshik’s IRA, 12,000
                shares underlying presently exercisable warrants, 120,000 shares
                underlying presently exercisable options. Mr. Marshik’s address is 8515
                Costa Verde Boulevard, #907, San Diego, CA
                92112.




67





(4)
            Includes
                95,000 shares held by Red Rock Interests, Ltd., of which Mr. Erikson
                is
                President and shareholder, 50,000 shares underlying presently exercisable
                options and 60,000 shares underlying options approved by the Board
                but not
                yet granted. Mr. Erikson’s address is c/o Shumate Industries, Inc. 12060
                FM 3083, Conroe, Texas 77301.(5)
            Includes
                110,792 shares held by a trust of which Mr. Womack is a trustee,
                110,000
                shares underlying presently exercisable options, 5,500 shares underlying
                presently exercisable warrants. Mr. Womack’s address is 710 North Post Oak
                Road, Suite 400, Houston, Texas 77024.(6)
            Includes
                100,000 shares underlying presently exercisable options.(7)
            Includes
                357,000 shares held by the Francis Jungers Trust, of which Mr. Jungers
                is
                a grantor and a trustee, 8,000 shares held by Mr. Jungers’ IRA, 9,000
                shares held by the Julie Jungers Trust, of which Mr. Jungers’ spouse is a
                grantor and a trustee, 135,000 shares underlying presently exercisable
                options.





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





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





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





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





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





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


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





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





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




68


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





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





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





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





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





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





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




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





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





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





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




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




69


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





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





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





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





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





We
      believe that the foregoing transactions were in our best interests. Consistent
      with Section 144 of the Delaware General Corporation Law, it is our current
      policy that all transactions between us and our officers, directors and their
      affiliates will be entered into only if such transactions are approved by a
      majority of the disinterested directors, are approved by vote of the
      stockholders, or are fair to us as a corporation as of the time it is us at
      is
      authorized, approved or ratified by the board. We will conduct an appropriate
      review of all related party transactions on an ongoing basis, and, where
      appropriate, we will utilize our audit committee for the review of potential
      conflicts of interest.





**Item
      13. EXHIBITS.**





(a)  Exhibits





Exhibit
                No.
            
            Description2.1
            
            Agreement
                and Plan of Merger by and among Global Realty Management Group, Inc.,
                GRMG
                Acquisition Corporation, Excalibur Holdings, Inc., and Michael D.
                Farkas,
                incorporated by reference to Amendment No. 1 to Shumate’s Registration
                Statement on Form SB-2 filed on September 5, 2002 (File No.
                333-88974).2.2
            
            Agreement
                and Plan of Merger by and among Shumate Machine Works, Inc., Larry
                C.
                Shumate, Russ Clark, Excalibur Holdings, Inc., and Excalmergeco,
                Inc.,
                incorporated by reference to Amendment No. 1 to Shumate’s Registration
                Statement on Form SB-2 filed on September 5, 2002 (File No.
                333-88974).2.3
            
            Asset
                Purchase Agreement by and among Hemiwedge Valve Corporation, Soderberg
                Research and Development, Inc., Inprop, Inc., and Jeanette Soderberg,
                incorporated by reference to Shumate’s Current Report on Form 8-K filed on
                December 6, 2005.




70




3.1
            
            Certificate
                of Incorporation of Excalibur Industries, Inc. (now known as Shumate
                Industries, Inc.), incorporated by reference to Amendment No. 1 to
                Shumate’s Registration Statement on Form SB-2 filed on September 5, 2002
                (File No. 333-88974).3.2
            
            Certificate
                of Amendment to Certificate of Incorporation of Excalibur Industries,
                Inc.
                (now known as Shumate Industries, Inc.), incorporated by reference
                to
                Shumate’s Current Report on Form 8-K filed on October 26,
                2005.3.3
            
            Bylaws
                of Excalibur Industries, Inc. (now known as Shumate Industries, Inc.),
                incorporated by reference to Amendment No. 1 to Shumate’s Registration
                Statement on Form SB-2 filed on September 5, 2002 (File No.
                333-88974).4.1
            
            Specimen
                Certificate of Shumate Industries, Inc.’s common stock, incorporated by
                reference to Shumate’s Annual Report on Form 10-KSB for the year ended
                December 31, 2005.4.2
            
            Form
                of common stock purchase warrant, incorporated by reference to Amendment
                No. 1 to Shumate’s Registration Statement on Form SB-2 filed on September
                5, 2002 (File No. 333-88974).4.3
            
            Convertible
                promissory note (Stillwater National Bank), incorporated by reference
                to
                Shumate’s Annual Report on Form 10-KSB for the year ended December 31,
                2005.4.4
            
            Amended
                and restated promissory note (Term Note - Stillwater National Bank),
                incorporated by reference to Shumate’s Amendment No. 1 to Current Report
                on Form 8-K, filed on November 7, 2005.4.5
            
            Stock
                Purchase Agreement by and between Shumate Industries, Inc. and A.
                Earl
                Swift, incorporated by reference to Shumate’s Annual Report on Form 10-KSB
                for the year ended December 31, 2005.4.6
            
            Form
                of Securities Purchase Agreement among Shumate Industries, Inc.,
                and
                various purchasers, incorporated by reference to Shumate’s Current Report
                on Form 8-K filed on February 23, 2006.4.7
            
            Form
                of Registration Rights Agreement among Shumate Industries, Inc.,
                and
                various purchasers, incorporated by reference to Shumate’s Current Report
                on Form 8-K filed on February 23, 2006.4.8
            
            Common
                stock purchase warrant (First Montauk Securities Corp.), incorporated
                by
                reference to Shumate’s Current Report on Form 8-K filed on February 23,
                2006.10.1
            
            Restructuring
                Agreement between Shumate Industries, Inc., Shumate Machine Works,
                Inc.,
                Matthew Flemming, Larry Shumate, Russ Clark, and Stillwater National
                Bank
                and Trust Company, incorporated by reference to Shumate’s Amendment No 1.
                to Current Report on Form 8-K, filed on November 7,
                2005.10.2
            
            Promissory
                Note (Line of Credit - Stillwater National Bank), incorporated by
                reference to Shumate’s Annual Report on Form 10-KSB for the year ended
                December 31, 2005.10.3
            
            Security
                Agreement, incorporated by reference to Shumate’s Annual Report on Form
                10-KSB for the year ended December 31, 2005.10.4
            
            Lockbox
                Agreement, incorporated by reference to Shumate’s Annual Report on Form
                10-KSB for the year ended December 31, 2005.10.5
            
            Settlement
                and Release Agreement, incorporated by reference to Shumate’s Current
                Report on Form 8-K filed on October 26, 2005.10.6
            
            Promissory
                Note (Soderberg Research and Development), incorporated by reference
                to
                Shumate’s Current Report on Form 8-K filed on December 6,
                2005.




71





10.7
            
            2001
                Stock Option Plan of Excalibur Holdings, Inc., incorporated by reference
                to Amendment No. 1 to Shumate’s Registration Statement on Form SB-2 filed
                on September 5, 2002 (File No. 333-88974).10.8
            
            2003
                Stock Grant Plan, incorporated by reference to Shumate’s Registration
                Statement on Form S-8, filed on June 26, 2003 (File No.
                333-106521).10.9
            
            2003
                Employee Stock Incentive Plan, incorporated by reference to Shumate’s
                Registration Statement on Form S-8, filed on August 1, 2003 (File
                No.
                333-107548).10.10
            
            2003
                Non-Employee Directors and Consultants Retainer Stock Plan, incorporated
                by reference to Shumate’s Registration Statement on Form S-8, filed on
                August 1, 2003 (File No. 333-107548).10.11
            
            2005
                Stock Incentive Plan, incorporated by reference to Shumate’s Registration
                Statement on Form S-8, filed on May 3, 2005 (File No.
                333-124568).10.12
            
            Improved
                property commercial lease between Paul & Sherry Vick dba P & S
                Properties LLC and Shumate Machine Works, incorporated by reference
                to
                Shumate’s Annual Report on Form 10-KSB for the year ended December 31,
                2005.10.13
            
            Lease
                agreement with option to purchase by and between the Brewer Family
                Charitable Remainder Annuity Trust No. 1 and Shumate Machine Works,
                incorporated by reference to Shumate’s Annual Report on Form 10-KSB for
                the year ended December 31, 2005.10.14
            
            Second
                Amended and Restated Renewal Promissory Note (Line of Credit - Stillwater
                National Bank), incorporated by reference to Shumate’s Annual Report on
                Form 10-KSB for the year ended December 31, 2006.10.15
            
            Amended
                and Restated Loan Agreement dated as of January 25, 2008 between
                Shumate
                Industries, Inc, Shumate Machine Works, Inc., Hemiwedge Valve Corporation,
                Larry Shumate and Stillwater National Bank and Trust Company, incorporated
                by reference to Shumate’s Current Report on Form 8-K filed on January 31,
                2008.10.16
            
            Promissory
                Note dated January 25, 2008, incorporated by reference to Shumate’s
                Current Report on Form 8-K filed on January 31, 2008.10.17
            
            Promissory
                Note dated January 25, 2008, incorporated by reference to Shumate’s
                Current Report on Form 8-K filed on January 31, 2008.10.18
            
            Lockbox
                Agreement dated January 25, 2008, incorporated by reference to Shumate’s
                Current Report on Form 8-K filed on January 31, 2008.10.19
            
            Security
                Agreement dated as of January 25, 2008 between Shumate Machine Works,
                Inc., Hemiwedge Valve Corporation, and Stillwater National Bank and
                Trust
                Company, incorporated by reference to Shumate’s Current Report on Form 8-K
                filed on January 31, 2008.10.20
            
            Security
                Agreement dated as of January 25, 2008 between Larry Shumate and
                Stillwater National Bank and Trust Company, incorporated by reference
                to
                Shumate’s Current Report on Form 8-K filed on January 31,
                200810.21
            
            Employment
                Agreement dated May 10, 2007 between Larry C. Shumate and Shumate
                Industries, Inc., incorporated by reference to Shumate’s Quarterly Report
                on Form 10-QSB for the period ended March 31,
                2007.




72





10.22
            
            Employment
                Agreement dated May 10, 2007 between Matthew C. Flemming and Shumate
                Industries, Inc., incorporated by reference to Shumate’s Quarterly Report
                on Form 10-QSB for the period ended March 31, 2007.10.23
            
            Employment
                Agreement dated May 10, 2007 between Russell T. Clark and Shumate
                Industries, Inc., incorporated by reference to Shumate’s Quarterly Report
                on Form 10-QSB for the period ended March 31, 2007.21.1
            
            Subsidiaries
                of Shumate Industries, Inc., incorporated by reference to Shumate’s Annual
                Report on Form 10-KSB for the year ended December 31,
                2005.23.1
            
            Consent
                of Independent Public Accountants, Malone & Bailey,
                PC.31.1
            
            Certification
                of Larry C. Shumate pursuant to Rule 13a-14(a).31.2
            
            Certification
                of Matthew C. Flemming pursuant to Rule 13a-14(a).32.1
            
            Certification
                of Larry C. Shumate pursuant to 18 U.S.C Section 1350, as adopted
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
            
            Certification
                of Matthew C. Flemming pursuant to 18 U.S.C Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





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





**Appointment
      of Auditors**





Our
      Board
      of Directors selected Malone & Bailey, PC, independent
      accountants, as our auditors for the year ending December 31, 2007. 
Malone & Bailey, PC previously audited our consolidated financial statements
      for the fiscal year ended December 31, 2006 and 2005. Representatives of Malone
      & Bailey, PC are not expected to attend this stockholder’s meeting.





**Audit
      Fees**





Malone
      & Bailey, PC billed us $70,000 in fees for our 2007 annual audit
      and $51,750 in fees for our 2006 annual audit, $67,685 in fees for the review
      of
      our quarterly financial statements in 2007 and $43,320 in fees for
      the review of our quarterly financial statements
      for 2006.





**Audit-Related
      Fees**





We
      did
      not pay any fees to Malone & Bailey, PC for assurance and related
      services that are not reported under Audit Fees above in 2007 or 2006.





**Tax
      Fees**





We
      did
      not pay any fees to Malone & Bailey, PC for tax compliance, tax
      advice or tax planning in 2007 or 2006.





**All
      Other Fees**





For
      2007,
      Malone & Bailey, PC, billed us $47,124 for work in connection with the
      evaluation of a potential acquisition and $10,890 for support related to SEC
      matters. In 2006, Malone & Bailey, PC, billed us $19,450 for work in
      connection with our registration statements on Form SB-2.





73


**Pre-Approval
      Policies and Procedures**





We
      have
      implemented pre-approval policies and procedures related to the provision of
      audit and non-audit services.  Under these procedures, our audit committee
      pre-approves all services to be provided by Malone & Bailey, PC and the
      estimated fees related to these services.





All
      audit, audit related, and tax services were pre-approved by the audit committee,
      which concluded that the provision of such services by Malone & Bailey, PC
      was compatible with the maintenance of that firm’s independence in the conduct
      of its auditing functions. Our pre-approval policies and procedures provide
      for
      the audit committee’s pre-approval of specifically described audit,
      audit-related, and tax services on an annual basis, but individual engagements
      anticipated to exceed pre-established thresholds must be separately approved.
      The policies and procedures also require specific approval by the audit
      committee if total fees for audit-related and tax services would exceed total
      fees for audit services in any fiscal year. The policies and procedures
      authorize the audit committee to delegate to one or more of its members
      pre-approval authority with respect to permitted services.




74


**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. ShumateLarry
                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,
            
            June
                5, 2008Larry
                C. Shumate
            
            Chief
                Executive Officer/s/
                Matthew C. Flemming
            
            Executive
                Vice President, Chief
            
            June
                5, 2008Matthew
                C. Flemming
            
            Financial
                Officer, Treasurer,Secretary,
                and Director/s/
                Russell T. Clark
            
            Vice
                President, Chief Operating OfficerRussell
                T. Clark
            
            and
                Director
            
            June
                5, 2008/s/
                Leo B. Womack
            
            Director
            
            June
                5, 2008Leo
                B. Womack/s/
                Kenton Chickering III
            
            Director
            
            June
                5, 2008Kenton
                Chickering III


75