Unassociated Document

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

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

For the transition period from ___________ to _____________

Commission File Number 000-30291

HEMIWEDGE INDUSTRIES, INC.

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

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

1011 Beach Airport Road Conroe, Texas 77301 (Address of principal executive offices, including zip code)

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

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

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

___________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: ¨ Yes No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy ir information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

Large accelerated filter ¨		Accelerated filter ¨

Non-accelerated filter ¨	(Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x

As of April 7, 2009, 24,004,086 shares of our common stock were issued and outstanding.

Documents Incorporated by Reference: None.

PART I

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

Item 1. DESCRIPTION OF BUSINESS

Overview

Hemiwedge Industries, Inc. is a Texas based energy field services company. Hemiwedge is a holding company that, through its subsidiary operates a valve product line. Hemiwedge seeks to leverage its existing infrastructure, expertise, and customer channels to grow its business and introduce new product line extensions of the Hemiwedge® technology to the energy, pipeline, process, mining and power markets.

We currently employ 28 people. Our executive offices are located at 1011 Beach Airport Road, Conroe, Texas 77301. Our telephone number is (936) 539-5770 and our Internet address is www.hemiwedge.com.

Valve Product Technology - Hemiwedge Valve Corporation

We formed Hemiwedge Valve Corporation (“HVC”) 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 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.

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.

Fiscal 2008 and Fiscal 2009 Developments

Sale of Shumate Machine Works’ Assets—Discontinued Operations

On October 8, 2008, we, and our wholly owned subsidiary Shumate Machine Works, Inc. (“Machine Works”) consummated the sale of substantially all of Machine Works’ assets to American International Industries, Inc. (“Purchaser”). The sale was effected pursuant to an asset purchase agreement (the “Purchase Agreement”) pursuant to which Machine Works transferred substantially all of its assets and certain enumerated liabilities to Purchaser. The aggregate purchase price was $6,703,749 consisting of assumption by Purchaser of (i) $5 million of promissory notes due Stillwater National Bank and Trust Company and (ii) $1,703,749 of certain other liabilities, including without limitation, accounts payable of Machine Works. In January 2009 we also issued 1,401,170 shares of our common stock to Purchaser as a purchase price adjustment of $420,351.

License of Certain Hemiwedge Assets

On October 15, 2008, we, and our wholly owned subsidiary Hemiwedge Valve Corporation (“HVC”), entered into a Transfer Agreement with Tejas Research & Engineering, L.P. (“Tejas”) pursuant to which we and HVC transferred certain assets and granted certain license rights related to our Hemiwedge Valve Technology to Tejas in exchange for $3.5 million in cash at closing and a 5 year common stock purchase warrant to purchase 2,443,269 shares of our common stock at a purchase price of $0.25 per share. The transfer of assets was consummated pursuant to the Hemiwedge Intellectual Property Agreement between HVC and Tejas, under which Tejas received (i) a worldwide, perpetual, fully paid up, irrevocable and sublicensable license for the intellectual property related to HVC’s hemispherical wedge valves for the markets, or Fields of Use, of Sub-Sea and Offshore, Drilling and Workover, above 5,000 PSI, Surface Safety valves and all Downhole applications, all together known as the “Combined Fields of Use;” (ii) assignment of two pending U.S. patent applications related to specialty downhole valves and (iii) the use of the Hemiwedge registered trademark in their Combined Fields of Use subject to our oversight.

HVC still retains all rights to the original Hemiwedge Cartridge valve product targeted for the API 6D and ANSI valves in the oil & gas production, pipeline, refining and power markets.

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:

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

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

On September 30, 2008, the amounts due under this facility were consolidated under a Loan and Consolidation Agreement, as discussed below. All amounts due under the term note and the revolving note for this facility were assumed on October 8, 2008, by the purchaser of substantially all of the assets held by our subsidiary Shumate Machine Works, Inc.

In March 2008, we borrowed a total of $25,000 from a third party under a promissory note. This note is due on demand and bears interest at 12% per annum. The principal plus interest in the amount of $1,500 was paid in full by us in October 2008.

In March 2008, we borrowed $196,118 from several directors of the Company. The loan principal was due on demand and had an interest rate of 12% per annum. The principal plus interest in the amount of $1,088 was paid in full by us in May 2008.

On May 23, 2008, we entered into a Loan Agreement with Shumate Machine Works, Inc., Hemiwedge Valve Corporation (collectively, the “Borrowers”), Larry Shumate, Matthew C. Flemming and Russ Clark (collectively, the “Guarantors”) and Stillwater National Bank and Trust Company pursuant to which Stillwater agreed to lend us $625,000 for working capital. The promissory note bears interest at a rate equal to the prime rate plus two percent and has a maturity date of August 31, 2008. The interest rate as of September 30, 2008, was 7%. In addition, the loan is secured by a security agreement of even date therewith and a limited guaranty agreement executed by each of the Guarantors. Under the security agreement, the Borrowers granted Stillwater a security interest in all accounts and accounts receivable, all capital assets, general intangibles, inventory and all of the stock of Shumate Machine Works and Hemiwedge Valve Corporation held by us. Each Guarantor guaranteed payment and performance up to 50% of the outstanding indebtedness at the time payment becomes due and payable.

On June 26, 2008, we entered into an Amended and Restated Loan Agreement with Stillwater National Bank with respect to the May 23, 2008, loan agreement to increase the size of the loan to $1,140,000 and to extend the maturity date to September 26, 2008. The Borrowers executed an Amended and Restated Note on June 26, 2008, in the amount of $1,140,000 in connection with such amended loan agreement. This has been accounted for as a modification of debt. On September 30, 2008, the amounts due under this facility were consolidated under a Loan and Consolidation Agreement, as discussed below. All amounts due under the term for this facility were assumed on October 8, 2008, by the purchaser of substantially all of the assets held by our subsidiary Shumate Machine Works, Inc.

On September 30, 2008, we entered into a Loan and Consolidation Agreement with Stillwater National Bank and Trust Company. This Loan and Consolidation Agreement consolidated all amounts owed to Stillwater (i) under the January 2008 Amended Loan Agreement; (ii) under the June 2008 Amended and Restated Loan Agreement and (iii) pursuant to overdrafts by us in certain demand deposit accounts (the “Overdraft”). The Overdraft and interest owed on the January 2008 term note were consolidated into two promissory notes totaling $1,500,000. There are no requirements to maintain liquidity and minimum debt coverage ratios (or other financial covenants) under the Loan and Consolidation Agreement. On October 17, 2008, we paid $749,000 in principal and $2,330 in accrued interest, leaving a principal balance due of $751,000. In addition, a reserved cash account was established to fund the principal and interest on the remaining loan for the initial year. The original reserve was $92,775.

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 2009 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.

We guaranteed payment and performance of the lease pursuant to a Guaranty Agreement. In addition, we issued 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 connection with merging with the Excalibur operations. In October 2005, we changed our name from “Excalibur Industries, Inc.” to “Shumate Industries, Inc.” In February 2009, we changed our name from “Shumate Industries, Inc.” to “Hemiwedge Industries, Inc.” to emphasize and focus on our valve product technology after the recent sale of assets related to our contract machining business discussed in the paragraph below.

Sale of Shumate Machine Works’ Assets—Discontinued Operations

On October 8, 2008, we, and our wholly owned subsidiary Shumate Machine Works, Inc. (“Machine Works”) consummated the sale of substantially all of Machine Works’ assets to American International Industries, Inc. (“Purchaser”). The sale was effected pursuant to an asset purchase agreement (the “Purchase Agreement”) pursuant to which Machine Works transferred substantially all of its assets and certain enumerated liabilities to Purchaser. The aggregate purchase price was $6,703,749 consisting of assumption by Purchaser of (i) $5 million of promissory notes due Stillwater National Bank and Trust Company and (ii) $1,703,749 of certain other liabilities, including without limitation, accounts payable of Machine Works. We also issued 1,401,170 shares of our common stock to Purchaser as a purchase price adjustment of $420,351.

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

·	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.

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.

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 one wholly-owned operating subsidiary. Each of the following former subsidiaries of the Company has been dissolved: Excalibur Steel, Excalibur Services, Excalibur Aerospace, Excalibur Holdings and Shumate Machine Works.

Our Markets

We believe that the industrial valve market is large and growing. According to a 2008 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.

The McIlvaine Company report was not 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. 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. In 2007 we developed test installs in specific applications and developed a users list. In 2008 we received several product certifications and approvals including API 6D monogram and continue to introduce the product into new applications appropriate for the technology.

Developing strategic alliances with other companies to leverage our valve technology into market segments where we have little or no market infrastructure. We intend to license and partner our Hemiwedge® technology in market verticals where we have little or no market infrastructure to maximize the technology’s value. For example, the Tejas transaction we licensed Hemiwedge® technology for markets HVC does not target and will allow, via corporate partners, the potential to accelerate the technology’s adoption. Also, in early 2009 we signed an agreement with Enertech, the nuclear division within Curtis Wright Flow Control (NYSE: CW).

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.

Sales and Marketing; Customers

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.

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

Our business is fragmented and highly competitive industry segments. We estimate 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 2008 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 manufacturers 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, as it gains market share, will compete with a large number of companies with international and national capabilities that will possess greater financial resources.

We believe that we are able to compete by defining and understanding customer needs and by offering a proprietary superior product.

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 the last few years. We have also filed international patent applications for some of the inventions embodied in the pending United States patent applications.

These intellectual property rights are of considerable importance to the Hemiwedge® Cartridge valve product line (including the sub sea high pressure valve licensed to Tejas), 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.

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 28 people in Conroe, Texas. Of the total, approximately 4 are in administration, 5 are in engineering and drafting, and 4 are in sales, marketing and distribution. 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 from a lack of capital.,

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 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, 2008 and 2007 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 2008 and 2007, respectively and, we have negative working capital as of December 31, 2008. 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 term loan, as well as our 2007 bridge financing. As of December 31, 2008, we owed total indebtedness of approximately $751,000 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). These notes were due and payable on July 10, 2008, and are currently in default. Our failure to make full payment on such maturity date constituted a default under these notes. We also are indebted to other lenders for approximately $200,000. 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.

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 a working capital deficit of $4,647,597 as of December 31, 2007 and we had a working capital deficit of $3,648,630 as of December 31, 2008. 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 2009 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.

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.

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

Our subsidiary, Hemiwedge Valve Corporation, is an early stage company that has not had significant historical operations. Its primary business purpose is to develop, manufacture, and market applications of its new valve technology known as the Hemiwedge® Cartridge 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 Hemiwedge. We may not be able to successfully implement our plans for Hemiwedge Valve Corporation and achieve a significant level of operations.

If we do not successfully commercialize the Hemiwedge® 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. 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.

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.

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.

Many of our valve products are sold to oil and gas E&P and 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 2007 and early 2008, we experienced increased activity levels driven by increases in energy commodity prices and increased demand for oil field drilling products. However, in late 2008 and now we see reduction from lower commodity prices and slowing 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.

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.

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, 2009, the average daily trading volume of our common stock was approximately 21,700 shares. As of March 31, 2009, we had approximately 366 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, 2008, we have granted options and warrants to purchase an aggregate of 1,687,000 and 5,893,579 shares respectfully of our common stock to various persons and entities, of which options and warrants to purchase up to 1,330,333 and 5,893,579 shares respectfully of our common stock are currently exercisable. The exercise prices on these options and warrants range from $0.25 per share to $1.25 per share. If issued, the shares underlying options and warrants would increase the number of shares of our common stock currently outstanding and will dilute the holdings and voting rights of our then-existing shareholders.

We have no immediate plans to pay dividends.

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

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

Our officers and directors are collectively the beneficial owners of approximately 18.8% 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.

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.

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.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

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 Hemiwedge Industries guaranteed payment and performance of the lease pursuant to a Guaranty Agreement. In addition, Hemiwedge 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

On June 23, 2008, we received notice from Sunbelt Machine Works Corporation of its intention to seek arbitration in Houston, Harris County Texas relating 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 failed to make the first 3 installment payments of $37,500 to Sunbelt on each of October 25, 2007, February 20, 2008, and June 20, 2008, as required under the Stock Purchase Agreement. Sunbelt had threatened litigation regarding this matter in April 2008, and we were unable to come to terms on a settlement. Sunbelt is seeking an award of $150,000 and reasonable attorney’s fees, expenses and costs incurred to enforce their contractual rights. . We have recorded $178,995 in accrued expenses in our financial statements to reflect this contingency.

On July 14, 2008, we entered into a letter agreement with Sunbelt pursuant to which Sunbelt agreed to withdraw the notice of arbitration until November 1, 2008, in exchange for an immediate payment of $1,000 and installment payments of $500 on the 1st and 15th of each month until November 1, 2008. On October 8, 2008, we entered into a letter agreement with Sunbelt under which Hemiwedge agreed to pay Sunbelt $75,000 in full satisfaction of this matter; provided, however, that payment must be received by Sunbelt within 90 days of the date of the letter for such settlement to be effective. Due to cash constraints, we were unable to make the payment within the required 90 days. As of the date of this report, Sunbelt has not informed us of any indication to re-institute arbitration proceedings.

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

None.

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 “HWEG.OB” since February 19, 2009. Before that date our common stock traded on the OTC Bulletin Board under the symbol “SHMT.OB” 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, 2007 as reported by the OTC Bulletin Board.

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.

2008 (OTC Bulletin Board)	High Bid		Low Bid
First quarter	$	0.60	$	0.21
Second quarter		0.60		0.18
Third quarter		0.35		0.11
Fourth quarter		0.22		0.06

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

As of April 7, 2009 there were 366 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.

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, 2008:

	(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)		1,687,000	$	0.45		1,937,840
Equity compensation plans not approved by security holders (3)(4)(5)(6)		120,000	$	1.50		—
Total		1,807,000	$	1.43		1,937,840

(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, 2008, we have issued 8,062,140 shares under the plan, and there are options to purchase 1,687,000 shares outstanding under this plan.

(2)

2001 Stock Option Plan. On April 8, 2002, we assumed the 2001 Excalibur Holdings, Inc. Stock Option Plan, which was approved by the securities holders of Excalibur Holdings prior to our assumption of the plan. We are authorized to issue options to purchase up to 285,714 shares under this plan. As of December 31, 2008, there were zero options to purchase 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 120,000 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.

(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

On August 6, 2008, we issued 76,338 shares of our common stock to a single accredited investor in consideration of accrued and unpaid interest of $32,235 due under a convertible promissory note. We relied on the exemption from registration provided by Section 462) of the Securities Act of 1933, as amended, for the issuance of these shares.

On December 11, 2008, we issued 40,812 shares of our common stock to a single accredited investor in consideration of accrued and unpaid interest of $11,250 due under a convertible promissory note. We relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, for the issuance of these shares

Item 6. SELECTED FINANCIAL DATA

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 7. 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

We currently employ 28 people at one plant totaling approximately 60,000 square feet in Conroe, Texas, north of Houston. Our executive offices are located at 1011 Beach Airport Road, Conroe, Texas 77301. Our telephone number is (936) 539-5770 and our Internet address is www.hemiwedgeinc.com.

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.

Sale of Shumate Machine Works’ Assets—Discontinued Operations

License of Certain Hemiwedge Assets

On October 15, 2008, we, and our wholly owned subsidiary Hemiwedge Valve Corporation (“HVC”), entered into a Transfer Agreement with Tejas Research & Engineering, L.P. (“Tejas”) pursuant to which we and HVC transferred certain assets and granted certain license rights related to our Hemiwedge Valve Technology to Tejas in exchange for $3.5 million in cash at closing and a 5 year common stock purchase warrant to purchase 2,443,269 shares of our common stock at a purchase price of $0.25 per share. The transfer of assets was consummated pursuant to the Hemiwedge Intellectual Property Agreement between HVC and Tejas, under which Tejas received (i) a worldwide, perpetual, fully paid up, irrevocable and sub-licensable license for the intellectual property related to HVC’s hemispherical wedge valves for the markets, or Fields of Use, of Sub-Sea and Offshore, Drilling and Workover, above 5,000 PSI, Surface Safety valves and all Downhole applications, all together known as the “Combined Fields of Use;” (ii) assignment of two pending U.S. patent applications related to specialty downhole valves and (iii) the use of the Hemiwedge registered trademark in their Combined Fields of Use subject to our oversight.

HVC still retains all rights to the original Hemiwedge Cartridge valve product targeted for the API 6D and ANSI valves in the oil & gas production, pipeline, refining and power markets.

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.

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

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

Critical Accounting Policies

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

Revenue Recognition

Revenues of 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 collectability 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 collectability. Account balances, when determined to be uncollectible, are charged against the allowance.

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.

Discontinued Operations

On August 29, 2008, we entered into an Asset Purchase Agreement with American International Industries, Inc. pursuant to which we agreed to sell the assets of Shumate Machine Works, subject to certain closing conditions. This transaction closed on October 8, 2008.

The depreciable assets of Shumate Machine Works were depreciated through the date of shareholder approval and then the cost and accumulated depreciation was moved to a long term asset account identified as "Assets held for sale."

Prior year financial statements have been restated to present the operations of Shumate Machine Works as discontinued operations.

The assets and liabilities of the discontinued operations are presented separately under the captions "Current assets from discontinued operations," “Assets held for sale,” "Non-Current assets from discontinued operations," "Current liabilities from discontinued operations," and “Long-term liabilities from discontinued operations” respectively, in the accompanying Balance Sheets at December 31, 2007. The results of operations are presented under the caption “Income (loss) from discontinued operations” in the accompanying Consolidated Statement of Operations for the years ended December 31, 2008 and 2007.

Results of Continuing Operations

Basis of Presentation

The results of operations set forth below for the years ended December 31, 2008 and 2007 are those of the continuing operations of Hemiwedge Industries and the operations of Hemiwedge Valve Corporation on a consolidated basis.

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

	Year Ended
	December 31
	2008			2007
Net sales		100.0	%		100.0	%
Cost of sales		(65.0	)		(51.2	)
Gross profit (loss)		35.0			48.8

Selling, general and administrative		(131.0	)		(497.4	)
Depreciation		(5.5	)		(17.4	)
Bad debt recovery (expense)		(6.5	)		-
Research and development		(7.9	)		(157.6	)
Operating loss		(115.9	)%		(623.6	)%

Comparison of the Years ended December 31, 2008 and 2007

Net sales. Net sales for Hemiwedge Valve Corporation increased by $1,725,144 or an increase of 156% to $2,829,996 for the year ended December 31, 2008, from $1,104,852 for the year ended December 31, 2007. The revenues recorded for the year ended December 31, 2007, reflect $1,084,629 in income for amounts earned for services completed under the development agreement with a former corporate partner. The revenues recorded for the year ended December 31, 2008, include $2,613,985 from the transfer of certain assets and granting of certain license rights related to our Hemiwedge® Valve Technology to Tejas along with Hemiwedge® Cartridge valve sales. Management currently believes that sales of the Hemiwedge® Cartridge valve will increase significantly going forward resulting from new distribution channels, independent representation agreements signed during 2008 and test ‘beta’ installations of the product concluding with larger customer purchases. Additionally, the company has received several product approvals during 2008 including API and ISO certification for the Hemiwedge® Cartridge valve which is required in many applications. We believe the industrial valve market in the United States and worldwide will continue to grow in 2009 based on peer company announcements and publicly available industry forecasts.

Cost of Sales. Cost of sales for Hemiwedge Valve Corporation increased by $1,275,211 or 226%, to $1,840,427, for the year ended December 31, 2008, from $565,216 for the year ended December 31, 2007. As a percentage of net sales, cost of sales increased to 65.0% of net sales for the year ended December 31, 2008, versus 51.2% of sales for the year ended December 31, 2007. Cost of sales includes direct labor and related payroll tax and benefits as well as various allocated overhead items such as facility lease, utilities, and indirect labor costs with related payroll tax and their employee benefits expenses. The increase includes an inventory adjustment of $228,833 for scrap and recording an additional inventory allowance based on the lower of cost or market method. The increase in the cost of sales as a percentage of sales resulted from a decrease in efficiencies from lower volumes and higher fixed costs relative to volumes and the inventory adjustment. We generated a gross profit of $989,569, with a gross profit margin of approximately 35.0%, for the year ended December 31, 2008, as compared to a 48.8% gross profit margin in the same period 2007. We are focused on increasing revenues and seeking to improve gross margins by generating more sales and generating better costs of goods sold from economies received from higher volumes. We believe that continued growth in the industrial valve market driven by activity levels in the process, mining and power markets along with global infrastructure investment trends and anticipated future higher volumes of sales of the Hemiwedge® Cartridge valve will continue to lead to better cost economies, pricing, volumes and gross margins for our products.

Selling, general, and administrative. Selling, general and administrative expenses decreased by $1,786,953 to $3,708,636 for the year ended December 31, 2008, from $5,495,589 for the year ended December 31, 2007. This decrease resulted primarily from the elimination of indemnification, acquisition and investor relations expenses incurred in 2007 as further discussed below. As a percentage of net sales, selling, general and administrative expenses were 131.0% for the year ended December 31, 2008, as compared to 497.4% for the comparable period in 2007. For the year ended December 31, 2007, the Board 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. Additionally, we recorded an expense of $333,575 in the year ended December 31, 2007 for acquisition related costs associated with the failed acquisition of Sunbelt Machine Works, Inc. Our firm also expensed approximately $374,000 in the year ended December 31, 2007, from the cost of our shares issued in connection with the hiring of our investment relations firm. These expenses were partially offset by the amortization of the beneficial conversion feature discount in the year ended December 31, 2008. We also incurred approximately $144,720 in non-cash stock and option awards associated with FASB 123R for the year ended December 31, 2008, compared to 662,872 for the year ended December 31, 2007.

Depreciation. Depreciation expense increased by $11,810 to $228,551 for the year ended December 31, 2008, from $216,741 for the year ended December 31, 2007.

Bad debt expense. During the year ended December 31, 2008, we recorded a bad debt allowance of $183,429. A receivable was formally charged off in September against the allowance thus no additional expense was recorded.

Research and development. Research and development expense decreased by $1,517,178 to $224,256 for the year ended December 31, 2008, from $1,741,434 for the year ended December 31, 2007. The reduction in research and development expenses resulted from the conclusion of some of activities associated with the development of our sub sea and down hole Hemiwedge® valve products. However, we currently expect to incur research and development expenses as we continue the development of Hemiwedge® valve technology projects as well as the anticipated additional implementation of more product sizes, forms and applications of the Hemiwedge® Cartridge valve line. 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.

Operating loss. We incurred an operating loss of $3,282,135 for the year ended December 31, 2008, a decrease of $3,607,164 as compared to an operating loss of $6,889,299 for the year ended December 31, 2007.

Hemiwedge Valve Corporation recorded an operating loss of $1,464,042 for the year ended December 31, 2008, as compared to an operating loss of $3,525,693 for the same period in 2007. The decreased operating loss is primarily due to the decrease in research and development of $1,517,178.

Also included in our operating loss were general corporate overhead expenses of $1,818,093 for the year ended December 31, 2008, resulting from the costs of operating a publicly reporting company including $324,627 for accounting, legal and professional fees, Sarbanes-Oxley consulting costs, filing costs, and $225,840 for investor relations and shareholder meeting costs.

We have not reduced our fixed costs significantly enough as compared to the revenues we generated in the period to generate an operating profit. In the event that we successfully commercialize our Hemiwedge® products with revenues exceeding costs we anticipate that increased revenues from the sales of our Hemiwedge® products will greatly improve our results of operations.

Interest expense. Interest expense increased by $474,160 to $819,064 for the year ended December 31, 2008, from $344,904 for the year ended December 31, 2007. This includes the amortization of the beneficial conversion feature discount related to the 2007 convertible loans for $364,290 in amortization expense.

Provision for income taxes. We generated a net loss of $806,594 for the year ended December 31, 2008 compared to a net loss of $7,210,784 for the year ended December 31, 2007. 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 $3,648,630 at December 31, 2008. We had unrestricted and restricted cash of $388,958 and $79,842 respectively, as of December 31, 2008, compared to having cash of $83,591 at December 31, 2007.

We used $2,223,086 of net cash in operating activities for the year ended December 31, 2008, compared to using $4,475,529 in the year ended December 31, 2007. Cash used in operating activities is primarily due to an operating loss of $806,594 and an increase in inventory of $190,091 and $135,729 in accounts receivable. This was offset by non-cash charges of $228,551 for amortization and depreciation and $754,406 for issuances of stock, stock options and warrants.

Net cash flows provided by investing activities was $254,683 for the year ended December 31, 2008, compared to net cash flows used by investing activities of $450,849 in the year ended December 31, 2007. Cash of $319,617 was used provided by the sale leaseback transaction.

Net cash flows provided by financing activities were $2,353,612 for the year ended December 31, 2008, compared to net cash provided by financing activities of $3,462,643 in the year ended December 31, 2007. Cash provided by financing activities is primarily due to proceeds from notes payable of $2,740,000, offset by payments on notes payable of $949,385.

Bank Credit Facility

A primary source of our financing has been our senior 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 expired on April 19, 2008.

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

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

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

The loan documents for the Stillwater line of credit and term loan require us to keep all other credit facilities in good standing. Our failure to pay the convertible promissory notes discussed below on July 10, 2008, constitutes a default. Accordingly, Stillwater had the right to declare all indebtedness under the loan agreement due and payable. As of September 30, 2008, Stillwater had not accelerated the $3,850,278 outstanding under the January 2008 loan agreement. Should Stillwater decide to declare a default and request acceleration of the related debt, it could result in Stillwater foreclosing on our assets. On September 30, 2008, the amounts due under this facility were consolidated under a Loan and Consolidation Agreement, as discussed below. All amounts due under the term note and the revolving note for this facility were assumed on October 8, 2008, by the purchaser of substantially all of the assets held by our subsidiary Shumate Machine Works, Inc.

On May 23, 2008, Hemiwedge entered into a Loan Agreement with Shumate Machine Works, Inc., Hemiwedge Valve Corporation (collectively, the “Borrowers”), Larry Shumate, Matthew C. Flemming and Russ Clark (collectively, the “Guarantors”) and Stillwater National Bank and Trust Company pursuant to which Stillwater agreed to lend us $625,000 for working capital. The promissory note bears interest at a rate equal to the prime rate plus two percent and has a maturity date of August 31, 2008. In addition, the loan is secured by a security agreement of even date therewith and a limited guaranty agreement executed by each of the Guarantors. Under the security agreement, the Borrowers granted Stillwater a security interest in all accounts and accounts receivable, all FFE, general intangibles, inventory and all of the stock of Shumate Machine Works and Hemiwedge Valve Corporation held by us. Each Guarantor guaranteed payment and performance up to 50% of the outstanding indebtedness, at the time payment becomes due and payable.

On June 26, 2008, Hemiwedge entered into an Amended and Restated Loan Agreement with Stillwater National Bank with respect to the May 23, 2008, loan agreement to increase the size of the loan to $1,140,000 and to extend the maturity date to September 26, 2008. The Borrowers executed an Amended and Restated Note on June 26, 2008, in the amount of $1,140,000 in connection with such amended loan agreement. The loan agreement for this loan provides that failure to pay when due any substantial liability shall constitute an event of default thereunder. Our failure to pay the convertible promissory notes discussed below on July 10, 2008, constitutes a default. Accordingly, Stillwater has the right to declare all indebtedness under the loan agreement due and payable. As of September 30, 2008, Stillwater has not accelerated the $1,140,000 outstanding under the June 2008 loan agreement. On September 30, 2008, the amounts due under this facility were consolidated under a Loan and Consolidation Agreement, as discussed below. All amounts due under the term for this facility were assumed on October 8, 2008, by the purchaser of substantially all of the assets held by our subsidiary Shumate Machine Works, Inc.

On September 30, 2008, Hemiwedge entered into a Loan and Consolidation Agreement with Stillwater National Bank and Trust Company. This Loan and Consolidation Agreement consolidated all amounts owed to Stillwater (i) under the January 2008 Amended Loan Agreement; (ii) under the June 2008 Amended and Restated Loan Agreement and (iii) pursuant to overdrafts by Hemiwedge in certain demand deposit accounts (the “Overdraft”). The Overdraft and interest owed on the January 2008 term note were consolidated into two promissory notes totaling $1,500,000. There are no requirements to maintain liquidity and minimum debt coverage ratios (or other financial covenants) under the Loan and Consolidation Agreement. On October 17, 2008, we paid $749,000 in principal and $2,330 in accrued interest, leaving a principal balance due of $751,000. In addition, a reserved cash account was established to fund the principal and interest on the remaining loan for the initial year. The original reserve was $92,775.

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 while the notes are outstanding, 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 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.

Hemiwedge 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, Hemiwedge 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 as of December 31, 2008, is $552,495.

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, Hemiwedge agreed to register the remaining underlying shares, if any, by January 6, 2008. We accrued approximately $26,200 at December 31, 2008, 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 was incurred. The net proceeds of this offering after the payment of commissions, fees and other expenses of the offering were approximately $2,825,000.

These notes were due and payable on July 10, 2008, and are currently in default. Our failure to make full payment on such maturity date constituted a default under these notes. These notes continue to bear interest until payment. As of December 31, 2008, the total amount due under these notes, including accrued interest was $3,496,229. The company’s intention is to restructure these notes.

Sale-Leaseback

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 operations of Hemiwedge Valve are conducted at this location. The terms of the Original Lease included an option to purchase the underlying property. Shumate Machine Works purchased the property for $1,726,949 pursuant to a warranty deed.

Concurrently with the purchase of the property, Shumate Machine Works entered into a sale and simultaneous lease transaction with Trader Properties LLC. Shumate Machine Works sold the property to Trader Properties for an aggregate purchase price of $2,180,000 pursuant to a general warranty deed with vendor’s lien. As such, Shumate Machine Works received net cash of $319,617 and the gain realized on the sale of the property was $304,031. The gain was deferred and is being amortized over the life of the lease as a reduction to rent expense.

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.

We guaranteed payment and performance of the lease pursuant to a Guaranty Agreement with Trader Properties. In addition, we issued Trader Properties a warrant to purchase 100,000 shares of its common stock at an exercise price of $0.25 per share, with a five year term in connection with the lease.

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 demand and pricing for manufacturing of our customer’s oil and gas drilling products and components, which allowed us to generate gross profits since the third quarter of 2005 at Shumate Machine Works. Since late 2006, we have commercialized the first valve product line known as the Hemiwedge® Cartridge valve and developed other corporate strategic relationships which have subsidized a portion of our technology development expenses. Even with the increased demand for oilfield manufacturing and the commercialization of part of our valve technology, we are still operating on a net loss basis, and we will need to continue to service our debt obligations from our continuing operations.

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. We have sought recapitalization with debt and equity during 2008, however, there can be no assurance that it will successfully recapitalize. In addition, management is trying to continue to increase Hemiwedge’s revenues and improve its results of operations to a level of profitability including increasing revenues and cash flow from its Hemiwedge Valve Corporation subsidiary. New sales representative agreements have been executed at Hemiwedge Valve Corporation during 2008 to assist in the sales and marketing efforts to improve our results of operations.

The closing of our sale of Shumate Machine Works’ assets on October 8, 2008, allowed us to substantially reduce our outstanding debt as $5 million of promissory notes due to our senior lender, Stillwater National Bank and Trust Company, were assumed by the purchaser at closing.

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. In addition, on October 15, 2008, we transferred certain assets and granted certain license rights related to our Hemiwedge Valve Technology in exchange for, among other things, a $3.5 million cash payment. While this debt reduction and cash influx improved our working capital profile, 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 other capital financings. We intend to seek additional debt or equity financing, in the form of a bank line, private placement or a public offering, a strategic alliance, or a joint venture. Such additional financing, alliances, or joint venture opportunities might not be available to us, when and if needed, on acceptable terms or at all. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms under such circumstances, our operating results and prospects could be adversely affected. In addition, any debt financings or significant capital expenditures require the written consent of our lender, Stillwater National Bank.

We may continue to incur operating losses if the industrial valve market deteriorates or softens. Additionally, if we restructure our convertible loans, they may include future negative covenants. 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.

Off-Balance Sheet Arrangements

None.

Item 8. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Hemiwedge Industries, Inc.

Conroe, Texas

We have audited the accompanying consolidated balance sheets of Hemiwedge Industries, Inc., as of December 31, 2008 and 2007 and the related statements of operations, changes in stockholders’ deficits and cash flows for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of Hemiwedge Industries, Inc.’s management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hemiwedge Industries, Inc. as of December 31, 2008 and 2007 and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, the accompanying financial statements have been prepared assuming that Hemiwedge Industries, Inc.will continue as a going concern. Hemiwedge Industries, Inc. 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ MALONE & BAILEY, PC

www.malone-bailey.com

Houston, Texas

April 15, 2009

HEMIWEDGE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	388,958		$	83,591
Restricted cash for note payable		79,842		$	-
Accounts receivable, net of allowance for doubtful accounts of $0 and $40,000		157,948			502,383
Inventory, net of allowance of $281,233 and $0		1,135,381			1,259,166
Prepaid expense and other current assets		219,243			472,345
Current assets from discontinued operations		-			24,900

Total current assets		1,981,372			2,342,385

Fixed assets, net of accumulated depreciation of $502,750 and $303,239		348,650			537,847
Assets held for sale		-			1,838,214
Patents, net of accumulated amortization of $87,118 and $58,078		344,938			340,366
Deposits		17,740			25,000
Non-current assets from discontinued operations		-			59,320

Total assets	$	2,692,700		$	5,143,132

LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable	$	364,230		$	485,498
Accounts payable - related party		18,368			55,000
Accrued expenses		1,457,744			929,833
Deferred Gain on Sale/Leaseback		30,408			-
Current portion of notes payable - other		206,244			258,798
Current portion of capital lease obligation		-			51,586
Current portion of equipment notes payable		-			5,578
Current portion of convertible notes payable, net of discount of $0 and $364,290		3,496,229			2,800,535
Current portion of term note payable - Stillwater National Bank		56,779			-
Line of credit from discontinued operations		-			764,606
Current portion of notes payable from discontinued operations		-			389,719
Current liabilities from discontinued operations		-			1,248,829

Total current liabilities		5,630,002			6,989,982

Long term liabilities:
Deferred Gain on Sale/Leaseback		255,885			-
Term note payable - Stillwater National Bank		694,221			-
Long-term liabilities from discontinued operations		-			2,638,758

Total long term liabilities		950,106			2,638,758

Total liabilities		6,580,108			9,628,740

Commitments and contingencies		-			-

Stockholders' (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,
22,054,691 and 20,578,071 shares issued and outstanding		22,054			20,578
Additional paid-in-capital		23,984,913			22,581,595
Accumulated deficit		(27,894,375	)		(27,087,781	)

Total stockholders' (deficit)		(3,887,408	)		(4,485,608	)

Total liabilities and stockholders' (deficit)	$	2,692,700		$	5,143,132

See accompanying notes to consolidated financial statements

HEMIWEDGE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the years ended
	December 31,
	2008			2007

REVENUES	$	2,829,996		$	1,104,852

COST OF REVENUES
Cost of revenues		1,767,259			540,387
Depreciation expense		73,168			24,829

Total cost of revenues		1,840,427			565,216

GROSS PROFIT (LOSS)		989,569			539,636

OPERATING EXPENSES:
Selling, general and administrative		3,708,636			5,495,589
Depreciation expense		155,383			191,912
Bad debt expense (recovery)		183,429			-
Research and development		224,256			1,741,434

Total operating expenses		4,271,704			7,428,935

LOSS FROM OPERATIONS		(3,282,135	)		(6,889,299	)

OTHER INCOME (EXPENSE)
Interest expense		(819,064	)		(344,904	)

LOSS BEFORE DISCONTINUED OPERATIONS		(4,101,199	)		(7,234,203	)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(including gain on disposal of $3,558,508 in 2008)		3,294,605			23,419

NET LOSS	$	(806,594	)	$	(7,210,784	)

Basic and diluted net income (loss) per share from continuing operations	$	(0.19	)	$	(0.36	)
Basic and diluted net income (loss) per share from discontinued operations		0.15			-
Basic and diluted net income (loss) per share		(0.04	)		(0.36	)

Weighted average shares outstanding-Basic		21,357,689			20,061,282
Weighted average shares outstanding-Diluted		21,357,689			20,061,282

See accompanying notes to consolidated financial statements

HEMIWEDGE INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)

For the years ended December 31, 2008 and 2007

					Additional
	Common Stock				Paid-In			Accumulated
	Shares		Par		Capital			Deficit			Total

Balances at December 31, 2006		19,322,277		19,322		20,015,762		$	(19,876,997	)		118,487

Common stock issued for cash		680,520		681		769,079						769,760
Common stock issued for services		480,050		480		643,377						643,857
Costs of raising capital						(132,333	)					(132,333	)
Cashless exercise of warrants		95,224		95		(95	)					-
Options and warrants issued						733,310						733,310
Discount on beneficial conversion feature related to convertible notes payable						552,495						552,495
Deferred compensation												39,600

Net 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	)

Common stock issued for services		1,359,470		1,359		429,922						431,281
Common stock issued for interest		117,150		117		43,368						43,485
Vesting of restricted shares						14,000						14,000
Options and warrants expense						280,238						280,238
Warrant issued for cash						635,790						635,790

Net loss									(806,594	)		(806,594	)

Balances at December 31, 2008		21,903,879	$	22,054	$	23,984,913		$	(27,894,375	)	$	(3,887,408	)

See accompanying notes to consolidated financial statements

HEMIWEDGE INDUSTRIES, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended Dectember 31, 2008 and 2007

	2008			2007

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(542,691	)	$	(7,234,203	)
Net income (loss) from discontinued operations		(263,903	)		23,419
Net loss from continuing operations		(806,594	)		(7,210,784	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		228,551			216,740
Bad debt expense		183,429			-
Amortization of beneficial conversion feature discount		364,292			187,589
Stock-based compensation		754,406			1,346,332
Non-cash gain on sale of assets		(3,558,508	)		-
Changes in:
Accounts receivable		(135,729	)		1,361
Inventory		(190,901	)		(568,432	)
Other assets		84,672			(216,183	)
Accounts payable		72,383			260,830
Accounts payable - related party		(46,632	)		55,000
Accrued expenses		462,321			928,535
Deferred revenue		(18,730	)		(400,000	)
Net cash used in continuing operations		(2,607,040	)		(5,399,012	)
Net cash provided in discontinued operations		383,954			923,483
Net cash used in operating activities		(2,223,086	)		(4,475,529	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds received in purchase and sale of facilities		319,617			-
Purchase of fixed assets		(10,314	)		(162,268	)
Purchase of patents		(33,612	)		(62,076	)
Net cash provided by (used in) continuing operations		275,691			(224,344	)
Net cash provided by (used in) discontinued operations		(21,008	)		(226,505	)
Net cash provided by (used in) investing activities		254,683			(450,849	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable		(949,385	)		(98,747	)
Payments on notes payable - related party		(196,118	)		-
Proceeds from notes payable - related party		196,118			-
Proceeds from notes payable		2,740,000			3,300,000
Proceeds from sales of warrants		635,790			—
Proceeds from sales of common stock, net of offering cost		-			637,426
Net cash provided by continuing operations		2,426,405			3,838,679
Net cash provided by (used in) discontinued operations		(72,793	)		(376,036	)
Net cash provided by financing activities		2,353,612			3,462,643

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		385,209			(1,463,735	)

CASH AND CASH EQUIVALENTS, beginning of period		83,591			1,547,326

CASH AND CASH EQUIVALENTS, end of period	$	468,800		$	83,591

Supplemental disclosures:
Cash paid for income taxes	$	-		$	-
Cash paid for interest		158,124			422,712

Non-cash investing and financing transactions:
Purchase and sale leaseback of facilities		1,719,978			-

See accompanying notes to consolidated financial statements

	October 8, 2008			December 31, 2007

Accounts receivable		294,888			480,164
Inventories		760,373			314,686
Property and equipment, net		1,566,894			1,838,214
Other assets		11,603			11,469

Total assets		2,633,758			2,644,533


Accounts payable		1,100,489			580,158
Accrued liabilities		386,726			501,111
Notes payables		4,167,256			3,829,460

Total liabilities		5,654,471			4,910,729

Net liabilities of discontined operations		(3,020,713	)		(2,266,196	)

Aggregate purchase price:

Assumption of Stillwater National Bank debt	$	5,000,000
Assumption of certain liabilities		1,703,749

		6,703,749
Less:
Accounts receivable		294,888
Inventory		760,373
Property and equipment, net		1,620,231
Other assets		49,398
Negative working capital adjustment		420,351

		3,145,241

Gain on sale		3,558,508

	2008		2007

Contractual Research and Development Revenue		-		1,084,629

Contractual Research and Development Expense		-		437,022

Payments Received		-		495,219

Description	Life	2008			2007

Shop equipment	5-12 years	$	373,991		$	363,677
Other equipment and furniture	3 years		233,499			233,499
Leasehold improvements	5 years		243,910			243,910

			851,400			841,086
Less: accumulated depreciation			(502,750	)		(303,239	)

Property and equipment, net		$	348,650		$	537,847

	2008		2007

Payroll taxes and estimated penalties	$	17,525	$	21,050
Property tax		-		39,354
Accrued salaries and commissions		-		32,745
Investor relation payable		90,500		-
Failed Acquisition Contingency		253,995		178,995
Officer Indemnification		560,000		580,000
Payable to AMIN		450,128		-
Other		85,596		77,689

	$	1,457,744	$	929,833

Carrying amount of notes as of December 31, 2007	$	2,800,535
Add: amortization of discounts		364,290
Add: accrued interest		331,404

Carrying amount of notes as of December 31, 2008	$	3,496,229

Sales Price	$	2,180,000

Less:
Settle amount owed on the purchase of the Asset		- 1,719,978
Sales commission paid on the sale of the Asset		- 100,280
Loan Origination Fees		- 17,800
Title Insurance		- 10,829
Prorated County Taxes		- 9,247
Other Closing Costs		- 2,249

Net Cash Received	$	319,617

Sales Price	$	3,500,000

Less:
Fair market value of warrants issued		- 635,790
Finder's Fee		- 215,000
Legal Fees associated with the transaction		- 35,225

Net revenue on the Sale of license	$	2,613,985

	2008			2007
Deferred tax asset	$	9,615,000		$	9,445,000
Valuation allowance		(9,615,000	)		(9,445,000	)

Net deferred tax asset	$	-		$	-