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


**WASHINGTON,
      D.C. 20549**




**AMENDMENT
      NO. 1 TO**




**FORM
      10-KSB**




(Mark
      One)


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




For
      the
      fiscal year ended December 31, 2005




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES
                EXCHANGE ACT OF 1934




For
      the
      transition period from ___________ to _____________




Commission
      File Number 000-30291




**SHUMATE
      INDUSTRIES, INC.**


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




**Delaware**
            
            **03-0453686**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)**12060
                FM 3083**
              **Conroe,
                Texas 77301**
              ****(Address
                of principal executive offices, including zip
                code)




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


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


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







Check
      whether the issuer (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90 days.  Yes x Noo




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




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




The
      issuer’s revenues for the most recent fiscal year were $4,964,544.




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant was approximately $6,770,379 as of March 15,
      2006. Shares of common stock held by each officer and director and by each
      person or group who owns 10% or more of the outstanding common stock amounting
      to 8,729,348 shares have been excluded in that such persons or groups may be
      deemed to be affiliates. This determination of affiliate status is not
      necessarily a conclusive determination for other purposes.




As
      of
      March 15, 2006, 15,449,727 shares of our common stock were issued and
      outstanding.




Documents
      Incorporated by Reference: Proxy statement for the issuer’s 2006 annual
      meeting.




Transitional
      Small Business Disclosure Format: No.







**PART
      I**




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




**Item
      1. DESCRIPTION OF BUSINESS**




**Overview**





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





We
      currently employ 54 people at two plants totaling approximately 85,000 square
      feet in Conroe, Texas, just north of Houston. Our executive offices are located
      at 12060 FM 3083, Conroe, Texas 77301. Our telephone number is (936) 539-9533
      and our Internet address is www.shumateinc.com .





*Contract
      Machining and Manufacturing – Shumate
      Machine
      Works*





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





The
      diverse line of products we manufacture includes the following:





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


service
              applications


·
            Blowout
                preventers and their spare service parts


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


·
            Directional
                drilling products


·
            Exploration
                products for research and
                development


·
            Natural
                gas measurement equipment, including fittings and
                valves


·
            Control
                and check valves, and


·
            Subsea
                control equipment.





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





Our
      customers include Baker Hughes, BJ Services Company, Canrig Drilling Technology,
      a Nabors Industries company, Elmar, a Varco International company, FMC
      Technologies, Halliburton Energy Services, National Oil Well, Oceaneering
      Intervention Engineering, Oil States Industrial Hydrotech, R&M Energy
      Systems, Shell Development, Smith International, Texas Oil Tools, a Varco
      company, and Weatherford International.




2


*Valve
      Product Technology –Hemiwedge
      Valve Corporation*





We
      recently formed Hemiwedge Valve Corporation as a wholly-owned subsidiary to
      develop and commercialize a new patented technology addressing what we believe
      to be a significant opportunity in the global valve market. The Hemiwedge® valve
      is a quarter-turn hemispherical wedge valve, engineered to provide what we
      believe are substantial technological improvements compared with what is
      available in the marketplace today, such as traditional butterfly, ball, and
      gate valve designs.





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





We
      believe that the Hemiwedge® 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 with the bonnets removal,
      including the seals. A new pre-certified replacement cartridge can be installed
      without removing the valve body from its line of service. We believe this
      represents a substantial decrease in maintenance and service downtime reduction
      from a few days to a few hours, depending on the application. We also believe
      this is a significant cost-reduction benefit to users, especially in high-end
      pipeline or severe service applications, where replacement parts are frequently
      needed and supply disruption from shutting down a line during service may result
      in significant costs and loss of revenues.











3


*Reduced
      failure frequency rates from superior design*





We
      believe many times when valves “break,” it is usually due to leaks caused by
      leaking seals within a valve. Most ball valves, by example (see “Figure 2”),
      have more turbulent flow patterns where the fluid within the valve comes into
      direct contact with the seals during modulation, actuation and service. Our
      Hemiwedge 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.




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





*Reduced
      torque providing easier actuation*





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





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





We
      anticipate concluding the engineering, design, and development of the Hemiwedge®
valve, building an initial inventory and launching the product line in the
      second half of 2006. Since the valve is still in the engineering and design
      stage, we have not yet determined in field experience how long the valve will
      last under normal operating conditions and operating pressures or how much
      less
      torque the valve requires than those valves currently available in the
      market.




4


**Fiscal
      2005 and First Quarter 2006 Developments**





In
      2005,
      we continued to experience increased revenues in our Shumate Machine Works
      division. Increases in commodity prices, particularly in the energy sector,
      and
      in activity level in the energy field services industry resulted in increased
      demand for our products from our existing customers. In particular, we received
      increased orders for drilling tools, liner hangers, top-drive units and blow-out
      preventers in 2005. As a result, we increased revenues by approximately $1.5
      million, or 45%. In addition, we were able to continue the successful
      implementation of our cost-cutting program, which, combined with our increase
      in
      revenue, resulted in a reduction of our operating loss by approximately $50,000.
      Finally, as a result of the discharge of the liabilities associated with our
      reorganization and the bankruptcy of our Excalibur Holdings subsidiary, dormant
      since late 2003, we recorded $6,264,452 in debt forgiveness income in 2005,
      which in turn resulted in our realizing a net profit of $1.98 million in
      2005.





While
      we
      have improved our results from operations in 2005, we continue to have
      substantial indebtedness outstanding. As of December 31, 2005, we had
      outstanding indebtedness to Stillwater National Bank of approximately $9
      million, including a $2.5 million convertible note.




In
      December 2005, we closed the sale of 416,667 shares of our common stock to
      A.
      Earl Swift, our former director and a significant stockholder of our company,
      in
      a private offering pursuant to exemption from registration under Section 4(2)
      of
      the Securities Act of 1933, as amended. We used the net proceeds from the
      offering to finance our acquisition of the intellectual property rights to
      the
      Hemiwedge® valve technology, working capital, and general corporate purposes.
      The purchase price per share of common stock was $0.60. We have since nominated
      Mr. Swift to fill a vacancy on our board of directors and to become the chairman
      of the board of directors.





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





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 activity in previously dormant
      drilling facilities. We believe that such an increase in activity would result
      in increased demand for our energy related field service products in the coming
      fiscal year. In addition, we anticipate that our commencement of the Hemiwedge®
valve product line will enhance our profitability.





**Business
      Development**





*Organization*





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




5


*Acquisition
      of Hemiwedge Assets*





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





*Reorganization*





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





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


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


·
            the
                issuance of a convertible note to
                Stillwater;


·
            the
                issuance of a note, by our senior lender, 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 effectuated 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.





6


**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.





**Convertible
      Note** .
      Stillwater has accepted, and we have issued, a convertible note 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 accrued 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.





**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 of 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 noteholders 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.




7


*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.





**Our
      Markets**





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





*Contract
      Machining and Manufacturing – Shumate
      Machine
      Works*





The
      dollar size of the United States (U.S.) oil & gas field services market can
      be measured by the U.S. drilling and completion activity spending and the total
      U.S. well service and work-over spending. In their *March
      2006*  *Drilling
      and Production Outlook* report
      Spears and Associates, a leading energy market research firm, stated that U.S.
      drilling and completion spending was $79.9 billion for 2005, up 43% from the
      year 2004, and that U.S. well service and work-over spending was $14.9 billion
      in 2005, up 8% from 2004.





*Valve
      Product Technology – Hemiwedge
      Valve
      Corporation*





We
      believe that the industrial valve market is large and growing. According to
      a
      recent report from Mcilvaine Company, the dollar value of industrial valve
      shipments in 2005 was projected at approximately $7.9 billion in the United States, up
      3%
      from 2004, and $41.2 billion worldwide, up 4% from 2004.





Neither
      the Spears and Associates report nor the Mcilvaine Company report was prepared
      for us nor have either consented to the use of this information in our report;
      rather, these reports are widely and publicly available.





**Our
      Strategy**





Strategies
      to achieve our growth objectives include the following:





*Expand
      and grow our contract machining and manufacturing business.* As
      a
      result of higher commodity prices, activity levels and pricing for our
      customers, as measured by our revenues, increased 45% in 2005, and our sales
      and
      marketing initiatives focus on capturing more revenue per customer.
      Additionally, we solicit historical existing customers for new product line
      manufacturing opportunities and extensions of their current business. During
      2005, we invested approximately $393,000 in additional CNC machinery at our
      Shumate Machine Works plant to expand capacity for growth.




8


*Launch
      and grow our proprietary new Hemiwedge® valve product line targeting energy flow
      control.* The
      anticipated launch of this new technology in the second half of 2006 should
      provide a secondary revenue stream for us and generate further a critical mass
      and efficiencies from shared resources. We anticipate focusing on development,
      supply chain buildup, inventory buildup, and beta testing during the first
      half
      of 2006.




*Leverage
      our valve technology in other market segments outside of our focus through
      strategic alliances.* We
      intend to license our Hemiwedge® technology in market verticals where we have
      little or no expertise to maximize the technology’s value. Our Hemiwedge® valve
      has been tested at very high pressures and demonstrated “bubble-tight” sealing
      capability and substantially reduced torque for sub-sea applications, providing
      a proof of concept needed to pursue discussions with larger energy companies
      with a presence in those markets. Additionally, we are in early stage
      discussions for the use of the technology in certain down-hole applications,
      where, after a prototype is built and successfully tested, licensing discussions
      may take place. Any proposed licensing deal for our technology would be
      complementary to our intended product line and targeted focus.




*Leverage
      our manufacturing infrastructure, market presence, and personnel to launch
      other
      technology-oriented products.* We have
      significant 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 that
      we may develop, for this customer base and through these distribution channels.





*Growth
      through acquisitions.* We
      believe that acquisition opportunities exist for niche-oriented businesses
      and
      product lines within the energy field services industry, including divisions
      and
      subsidiaries within larger energy field service companies that remain from
      past
      mergers, acquisitions, and consolidations. As a growth strategy, we seek such
      divestiture candidates that would be complementary to our existing business
      lines.





**Sales
      and Marketing; Customers**





In
      our
      contract machining and manufacturing division, we have developed and maintained
      long-term relationships with our customers. We use a variety of methods to
      identify target customers, including the utilization of databases, direct mail,
      and participation in manufacturers’ trade shows. The energy field service target
      market usually consists of larger, well capitalized companies as well as smaller
      firms. These efforts supplement our traditional sales and marketing efforts
      of
      customer referrals and territory canvassing. In 2005, we expended approximately
      $73,500 on sales and marketing, which included the salaries, commissions, and
      expenses of our sales department.




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





For
      our
      valve division, we intend to target the high end of the pipeline, transmission
      stations, oil & gas, power, and mining markets, where there is a demand for
      flow control or process control valves. These target markets seek rapid
      maintenance benefits that our cartridge load system and flow control properties
      are designed to provide. Although we believe that our valve product line
      provides significantly improved functionality for high-end flow control
      applications, we intend to price our valves competitively relative to other
      high-end valve manufacturers to establish market share. In addition to
      leveraging our existing customer base and distribution channels to market and
      distribute the valve product line, we have identified a
      network
      of established independent representative companies to market
      and distribute
      the valves on
      a
      success fee basis. We
      intend
      to complement
      this effort with inside sales support, catalogs, web site , and
      internal professional s that can
      travel to sales locations to
      consummate sales .




9


We
      have a
      customer base of more than 30 customers. Two of these customers represented
      about seventy percent of our revenues for 2005. We continually focus on
      developing more volume from secondary and tertiary customers and with new
      customers to reduce customer concentration risk. We believe that long-term
      relationships with many of our customers will contribute to our success. While
      we intend to leverage our existing customer relationships to market the valve
      product, we also will seek additional new customers for the valve product line,
      which we anticipate would result in reduced revenue and account receivables
      concentrations.





**Raw
      Materials**





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





**Competition**





Both
      the
      machining and manufacturing business and anticipated valve product business
      are
      engaged in fragmented and highly competitive industry segments. We estimate
      that
      there are more than 800 machine shops in the greater Houston area alone, and
      that there are more than 4,000 valve product manufacturers and distributors
      within the United States alone. We estimate that our share of the market, based
      on 2005 revenues, is less than one percent (1%). Competition is based primarily
      on quality, service, price, performance timeliness and geographic proximity.
      We
      compete with a large number of other machining and manufacturing operators
      on a
      national, regional and local basis, most of which have greater financial
      resources than we do, and several of which are public companies. We also compete
      with overseas competitors whose labor costs may be significantly lower than
      our
      costs. We anticipate the valve product, when launched, will compete with a
      large
      number of companies with international and national capabilities that will
      possess greater financial resources then we have.





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





**Intellectual
      Property**





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





These
      intellectual property rights are of considerable importance to the proposed
      Hemiwedge® valve product line, and we consider them, in the aggregate, to be
      material to our valve product division. It is possible that these intellectual
      property rights may later be invalidated by a court of competent jurisdiction,
      and it is also possible that our products or proposed products may be found
      to
      infringe upon the intellectual property rights of others.




10


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 are 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 54 people in Conroe, Texas. Of the total, approximately 6
      are
      in administration, 4 are in engineering, 4 are in sales, marketing and
      distribution, and 40 are in machining, manufacturing and production. None of
      our
      employees are represented by a labor union, and we have not entered into a
      collective bargaining agreement with any union. We have not experienced any
      work
      stoppages and consider the relations with our employees to be good.




11


**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 following risk factors and the other information in
      this
      annual report before investing in our common stock. Our business and results
      of
      operations could be seriously harmed by any of the following risks. The trading
      price of our common stock could decline due to any of these risks.





**The
      majority of our revenues are generated from a small number of customers, and
      our
      results of operations cash flows will be adversely affected if any of our major
      customers either fail to pay on a timely basis or cease to purchase our
      products.** In 2005,
      two of our customers accounted for approximately 71% of our sales. At December
      31, 2005, two customers accounted for approximately 73% of our trade accounts
      receivable balance. These customers do not have any ongoing commitment to
      purchase our products and services. We generally do not require collateral
      from
      our customers, although we do perform ongoing credit evaluations of our
      customers and maintain allowances for potential credit losses, which when
      realized, have been within the range of our expectations. If one or more of
      our
      other major customers stops purchasing our products, our results of operations
      will be adversely affected. If one of our major customers fails to pay its
      account on a timely basis, our cash flows will be adversely affected.
      Furthermore, if one of our major customer defaults in its obligation to pay
      and
      we are unable to collect on that account, our operating results will be
      materially adversely affected.





**Our
      business might fail, even after our recent restructuring.** Although
      we recently completed a restructuring
      of our company, and although we have increased revenues in each of the last
      two
      years, we have
      still incurred operating losses in each of the last three fiscal years. Our
      ability to become profitable will depend upon several factors, including whether
      we can continue to increase our revenues in Shumate Machine Works and whether
      we
      can successfully launch our new Hemiwedge® valve products. 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 do not develop as expected, we may not be able to generate enough
      revenues to generate profits from operations or to generate positive cash
      flow.





**Our
      Hemiwedge Valve Corporation subsidiary is a development stage company with
      no
      significant operating history.** Hemiwedge
      Valve Corporation is a development stage company that has not had significant
      operations. Our plans and businesses for Hemiwedge Valve Corporation are
“proposed” and “intended” but we may not be able to successfully implement them.
      The primary business purpose of this subsidiary is to develop and market a
      new
      valve product line, the Hemiwedge® valve. As of the date of this report, the
      Hemiwedge® valve is still in the engineering,
      design, and development stage. In
      addition, this subsidiary has not earned revenues and has incurred losses since
      its formation. As a development stage company, the prospects for Hemiwedge
      Valve
      Corporation are subject to all of the risks, uncertainties, expenses, delays,
      problems, and difficulties typically encountered in the establishment of a
      new
      business. We expect that unanticipated expenses, problems, and technical
      difficulties may occur which would result in material delays in the development
      of the Hemiwedge® products. We
      may
      not achieve a significant level of operations for this subsidiary and, even
      if
      we do, we may not be able to conduct such operations on a profitable
      basis.





**If
      we do not successfully commercialize the Hemiwedge® valve products, we may never
      achieve profitability in this subsidiary.** We
      have
      incurred substantial expenses to acquire and fund development of our Hemiwedge®
valve products. We have never had operating revenues in this subsidiary and
      have
      not yet commercially introduced any Hemiwedge® valve product. Many of our
      research and development programs for these products are at an early stage.
      Early stage product lines are subject to inherent risks of failure. These risks
      include the possibilities that the Hemiwedge® valve may not last as long or
      reduce torque as anticipated. Even if the Hemiwedge® valve operates as
      anticipated, it still might not be developed into a commercially successful
      product. If we are unable to develop the Hemiwedge® products as anticipated, the
      Hemiwedge Valve Corporation subsidiary may never achieve profitability.




12


**Our
      ability to achieve any significant revenue in Hemiwedge Valve Corporation may
      depend on our ability to establish effective sales and marketing capabilities.** Our
      efforts to date in Hemiwedge Valve Corporation have focused on the development
      and initial testing of our Hemiwedge® valve product. As we continue our
      engineering, design, and development of these products and prepare for
      commercialization of the product line, we may need to build a sales and
      marketing infrastructure. If we fail to establish a sufficient marketing and
      sales force or to make alternative arrangements to have our products marketed
      and sold by others on attractive terms, it will impair our ability to
      commercialize our valve product line and to enter new or existing markets.
      Our
      inability to effectively enter these markets would materially and adversely
      affect our ability to generate significant revenues in the valve
      division.





**We
      have substantial indebtedness outstanding, and our operations are significantly
      leveraged.** In order
      to finance our operations, we have incurred substantial indebtedness, including
      our debt with Stillwater, which consists of a line of credit, a term loan,
      and a
      convertible note. As of December 31, 2005, we had approximately $9,070,668
      of
      notes payable, which includes a $100,000 seller note to the former owners of
      the
      Hemiwedge® intellectual property. We are currently in compliance with our debt
      covenants under the loan agreements with Stillwater National Bank; however,
      we
      would not be in compliance with the balance sheet liquidity ratio and income
      statement debt coverage ratio covenants - which become effective on March 31,
      2006 - if those requirements were in effect today. Our cash flows from
      operations are currently sufficient to service our debt obligations, but may
      not
      be in the future.





**We
      will likely need to finance our operations and a full-scale launch of the
      Hemiwedge® products through additional bank borrowings under our existing line
      of credit or other capital financings, and if we are unable to obtain additional
      capital, we may not be able to adequately fund our Hemiwedge Valve Corporation
      subsidiary or continue as a going concern.** We
      had a
      working capital deficit of $494,720 as of December 31, 2005. Since that time,
      we
      have completed a private placement of our common stock which resulted in net
      proceeds to us of approximately $1,810,000, thus providing us with working
      capital for the immediate future. As of the date of this annual report, we
      believe that we will be able to fund our operations, working capital
      requirements, and debt service requirements in Shumate Machine over the fiscal
      year 2006 through existing working capital and cash flows generated from
      operations. In addition, we believe that we will also be able to fund the beta
      development of the Hemiwedge® technology and the initial launch of the
      Hemiwedge® valve products through existing working capital and cash flows
      generated from operations. However, we do not believe that our existing working
      capital and cash flows generated from operations to conduct a full-scale launch
      of the Hemiwedge® valve product line, including an inventory buildup, or an
      expansion of the product line. In order to conduct a full-scale launch, we
      would
      need to obtain additional financing.





Shumate
      currently has a $1,000,000 secured revolving line of credit facility, subject
      to
      qualifying accounts receivable and inventory, with Stillwater National Bank.
      The
      outstanding balance on this line of credit was approximately $837,615 at
      December 31, 2005, which, at the time, was the maximum allowed due to the amount
      of the qualifying accounts receivable and inventory, also referred to as our
      borrowing base. The outstanding balance on the line of credit and the borrowing
      base fluctuate based on our available working capital, our qualifying accounts
      receivable and inventory, and at various points in time we may have the ability
      to borrow additional funds on this line of credit.





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




13


**Our
      independent auditors’ report raises substantial doubt about our ability to
      continue as a going concern.** Our
      independent auditors have prepared their report on our 2005 financial statements
      assuming that we will continue as a going concern. Their report has an
      explanatory paragraph which states that our recurring losses from operations
      and
      our working capital deficiency raise substantial doubt about our ability to
      continue as a going concern.





**Our
      Stillwater line of credit and Stillwater term loan contain numerous restrictive
      covenants which limit our management’s discretion to operate our
      business.** ****** These
      covenants place significant restrictions on, among other things, our ability
      to
      incur additional indebtedness, to create liens or other encumbrances, to make
      certain payments and investments, and to sell or otherwise dispose of assets
      and
      merge or consolidate with other entities. The Stillwater line of credit and
      the
      Stillwater term loan also require us to meet certain financial ratios and tests
      and require us to obtain consent from Stillwater National Bank in order to
      change our senior management. We are currently in compliance with all of our
      debt covenants under the loan agreements with Stillwater National Bank; however,
      we would not be in compliance with the balance sheet liquidity ratio and income
      statement debt coverage ratio covenants - which become effective on March 31,
      2006 - if those requirements were in effect today. Any failures to comply with
      the obligations contained in the Stillwater loan agreements could result in
      an
      event of default under either the Stillwater line of credit or the Stillwater
      term loan, which could result in acceleration of the related debt and the
      acceleration of debt under other instruments evidencing indebtedness that may
      contain cross-acceleration or cross-default provisions.





**The
      rate of interest on a significant portion of our indebtedness varies with the
      market rate of interest.** The
      interest on the Stillwater line of credit and term loan is payable monthly
      at
      Stillwater’s prime rate plus two percent. The base rates on the Stillwater line
      of credit and the Stillwater term loan will fluctuate over time, and if the
      base
      rates significantly increase, our interest expense will increase, which will
      have a direct adverse affect on our profitability. As an example, based on
      the
      amounts outstanding under the Stillwater line of credit and term loan at
      December 31, 2005, a one percent increase in Stillwater’s prime rate would
      increase our annual debt service by more than $89,000.





**We
      may not be able to successfully accelerate internal sales growth which would
      result in lower revenues and earnings than we currently
      anticipate.** 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
      which
      we offer, developing long-term partnering relationships with customers, adding
      new customers, improving our operating margins by increasing operating
      efficiencies and centralizing appropriate administrative functions, or otherwise
      increase revenues internally. Our ability to increase our net sales will be
      affected by many factors which are beyond our control, and there can be no
      assurance that our strategies will be successful or that we will be able to
      generate cash flow adequate for our operations and to support internal growth.





**We
      may not be able to develop our own new product lines.** We are
      currently seeking opportunities to develop or acquire energy field services
      products via acquisition or license. 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 companies larger and
      more
      financially capable of developing product lines in this market than we are.
      However, even if we do acquire or design our own products, it is possible that
      we may not have the working capital or financial capacity to enter into this
      market, and we may be unable to successfully sell any products due to inadequate
      working capital, lack of capacity, or both.





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





14




**We
      face significant competition in our markets.** The
      energy field services industry, including both the machining and manufacturing
      industry and the commercial valve industry, is highly competitive. Competition
      in the sale of our products is primarily based on engineering, product design,
      process capability, quality, cost, delivery and responsiveness. Many of our
      competitors are companies, or divisions or subsidiaries of companies, which
      are
      larger and have greater financial resources than we do. We have competition
      from
      foreign manufacturers that have substantially cheaper labor costs than we do.
      Our company may not be able to successfully compete with the products of these
      other companies.





**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® products. Our success will depend in part on our
      ability to obtain additional United States and foreign patent protection for
      our
      Hemiwedge® products, preserve our trade secrets, and operate without infringing
      the proprietary rights of third parties. We place considerable importance on
      obtaining patent protection for significant new technologies, products and
      processes. Legal standards relating to the validity of patents covering valve
      inventions and the scope of claims made under such patents are still developing.
      Future enforcement of patents and proprietary rights in many other countries
      may
      be problematic or unpredictable. Moreover, 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. Our
      domestic patent position is also 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. 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 to 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 United States 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 also 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. In addition,
      others may independently discover trade secrets and proprietary 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.




15


**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, resulting in lower margins. Changing metal prices could
      adversely affect our operating margin and net income.





**The
      oil and gas industry is cyclical, which results in fluctuations in our results
      of operations.** ****** Most of
      our products are sold to oil and gas field services companies that experience
      significant fluctuations in demand based on economic conditions, energy prices,
      domestic and international drilling rig counts, consumer demand, and other
      factors beyond our control. In 2004 and 2005, we experienced increased activity
      levels driven by increases in energy commodity prices and increased demand
      for
      oil field drilling products. However, the increase in demand could be temporary
      as commodity prices fluctuate daily and reduced economics for energy field
      service customers would result in lower activity levels for our company. These
      changes can happen very quickly and without forecast or notice giving adverse
      impact on our business.





**We
      may need to recruit additional personnel for Hemiwedge Valve Corporation.** Our
      success in developing Hemiwedge Valve Corporation may depend on our ability
      to
      attract and retain other qualified management, project development, and sales
      and marketing personnel. We compete for such persons with other companies,
      some
      of which have substantially greater capital resources and facilities than we.
      Further, demand for such personnel in during periods of increased demand for
      energy products is very strong. We may not be successful in recruiting or
      retaining personnel of the requisite caliber or in adequate numbers to enable
      us
      to conduct the Hemiwedge business as proposed.





**Our
      operations are subject to a number of federal, state and local regulations
      relating to the protection of the environment and to workplace health and
      safety.** Our
      operations are subject to extensive federal, state and local laws and
      regulations governing waste disposal, air and water emissions, the handling
      of
      hazardous substances, environment 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 Environmental Protection Agency
      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.





**There
      is a limited active trading market for our shares.**  Our
      common stock is traded on the OTC Bulletin board under the symbol “SHMT.OB.”
There has been limited trading activity in our stock recently, 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. A consistently active trading market for our
      stock may not develop at any time in the future. Stockholders may experience
      difficulty selling their shares if they choose to do so because of the illiquid
      market and limited public float for our stock. It is possible that even
      a
      limited public market for our common stock will not be sustained after the
      date
      of this report or at a time at which a stockholder desires to sell shares.





Announcements
      by us or our competitors of innovations or new technologies in the energy field
      services industry, developments concerning proprietary rights and
      period-to-period fluctuations in revenues and financial results will have a
      significant impact on our business and the market price of the common stock.
      In
      addition, stock markets in general, and the market for shares of energy-based
      stocks in particular, have experienced extreme price and volume fluctuations
      in
      recent years that have frequently been unrelated to the operating performance
      of
      the affected companies. These broad market fluctuations may adversely affect
      the
      market price of our common stock.





16


**Our
      common stock is considered to be a “penny stock” and, as such, the market for
      our common stock may be further limited by certain SEC rules applicable to
      penny
      stocks.** As
      long
      as the price of our common stock remains below $5.00 per share or we have net
      tangible assets of $2,000,000 or less, our common shares are likely to be
      subject to certain “penny stock” rules promulgated by the SEC. Those rules
      impose certain sales practice requirements on brokers who sell penny stock
      to
      persons other than established customers and accredited investors (generally
      institutions with assets in excess of $5,000,000 or individuals with net worth
      in excess of $1,000,000). For transactions covered by the penny stock rules,
      the
      broker must make a special suitability determination for the purchaser and
      receive the purchaser’s written consent to the transaction prior to the sale.
      Furthermore, the penny stock rules generally require, among other things, that
      brokers engaged in secondary trading of penny stocks provide customers with
      written disclosure documents, monthly statements of the market value of penny
      stocks, disclosure of the bid and asked prices and disclosure of the
      compensation to the brokerage firm and disclosure of the sales person working
      for the brokerage firm. These rules and regulations adversely affect the ability
      of brokers to sell our common shares and limit the liquidity of our
      securities.





**There
      are options and warrants to purchase shares of our common stock currently
      outstanding.** We have
      granted options and warrants to purchase an aggregate of 505,569 shares of
      our
      common stock to various persons and entities, of which options and warrants
      to
      purchase up to 253,807 shares of our common stock are currently exercisable.
      The
      exercise prices on these options and warrants range from $0.63 per share to
      $10.50 per share. If issued, the shares underlying options and warrants would
      increase the number of shares of our common stock currently outstanding and
      will
      dilute the holdings and voting rights of our then-existing
      stockholders.





**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 Stillwater line of credit
      and
      our Stillwater term loan prohibit us from declaring or paying dividends or
      purchasing or redeeming any of our capital stock without Stillwater National
      Bank’s prior approval. 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
      31.9% of the outstanding shares of our common stock. As long as our officers
      and
      directors collectively own a significant percentage of our common stock, our
      other stockholders 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.





**Our
      certificate of incorporation authorizes our board of directors to designate
      and
      issue preferred stock with rights, preferences and privileges that may be
      adverse to the rights of the holders of our common stock.** Our
      board
      of directors has the authority to issue up to an additional 10,000,000 shares
      of
      preferred stock and to determine the price, rights, preferences and privileges
      of those shares without any further vote or action by our stockholders. To
      date,
      we have not issued any shares of preferred stock. Any preferred stock issued
      by
      our board of directors may contain rights and preferences adverse to the voting
      power and other rights of the holders of common stock.




17


**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.


18


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




We
      lease
      approximately 85,000 square feet of manufacturing facilities in Conroe,
      Texas.  In March 2003, we entered into a five-year lease for the rental of
      the facilities of approximately 25,000 square feet for our Shumate Machine
      subsidiary at a rate of approximately $19,600 per month. In June 2004, we
      expanded our building by 5,000 square feet to its present size of 25,000 square
      feet to accommodate our growth.  Since June 2004, our lease rate is
      approximately $22,600 per month, expiring June 2009.





In
      December 2005, Shumate Machine Works entered into a lease agreement, with an
      option to purchase, for the lease of a manufacturing facility of approximately
      60,000 square feet located in Conroe, Texas to be used by Hemiwedge Valve
      Corporation. The lease agreement is a three-year lease at a rate of
      approximately $14,000 per month. The new lease agreement grants to Shumate
      Machine an option to purchase the premises covered under the lease for a
      purchase price of $1,825,000, against which amount Shumate Machine shall be
      entitled to a credit against the purchase price in an amount equal to the amount
      necessary to amortize the purchase price at seven percent (7%) over a period
      of
      240 months. The purchase option expires on September 1, 2009. Concurrently
      therewith, the lessor of the property granted to Shumate Machine a right of
      first refusal with respect to the premises. In addition, Shumate Machine entered
      into a sublease agreement for the sublease of a portion of the premises. The
      sublease agreement is a three-month sublease, with automatic extensions for
      the
      following 33 months, at a rate of approximately $4,000 per month. ****





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





**Item
      3. LEGAL PROCEEDINGS**





None.
      All
      actions pending against our former wholly-owned subsidiary, Excalibur Holdings,
      Inc., were discharged by the United States Bankruptcy Court, Southern District
      of Texas on November 30, 2005, pursuant to Chapter 7 of the U.S. Bankruptcy
      Code.





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





On
      October 19, 2005, we held a special meeting of stockholders to approve the
      following:





1.
            The
                terms of the recapitalization plan, including the issuance of new
                shares
                of our common stock in the restructuring
                transactions.


2.
            An
                amendment to our certificate of incorporation to effectuate a 1-for-7
                reverse stock split of our outstanding common stock.


3.
            An
                amendment to our certificate of incorporation to change our name
                to
                Shumate Industries, Inc.


4.
            The
                adoption of our 2005 Stock Incentive Plan and the grant of certain
                restricted stock awards to our officers and
                directors. 5.
            The election of
              directors.




The
      details of each proposal are set forth in our definitive
      proxy statement for the special meeting of stockholders, which has been filed
      with the Securities and Exchange Commission.





The
      total
      number of outstanding shares of common stock entitled to vote at the meeting
      was 17,032,732
      shares ,
      and
      there were present at the meeting, in person or by proxy, 11,740,601 shares
      of
      our common stock, which constituted a quorum for the meeting. 11,572,461 votes
      were cast in favor of each of the first four (4) proposals, and 68,140 votes
      were cast against each of the first four (4) proposals. Holders of
      no ** shares
      indicated that they abstained from voting on these matters and holders of no
      shares represented at the meeting for other purposes indicated no response
      on
      these items.




19


With
      respect to the election of our directors, votes were cast for each of the
      nominees as follows:





**Name**
            ****
            **No.
                of Votes Cast For**
            ****
            **No.
                of Votes Withheld**Larry
                C. Shumate
            
            11,572,461
            
            68,140Russell
                T. Clark
            
            11,572,461
            
            68,140Matthew
                C. Flemming
            
            11,572,461
            
            68,140Francis
                X. Marshik
            
            11,572,461
            
            68,140




20


**PART
      II**




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




Our
      common stock has traded on the OTC Bulletin Board under the symbol “SHMT.OB”
since October 20, 2005. Before that date, our common stock traded on the OTC
      Bulletin Board under the symbol “EXCB.OB” since June 10, 2002. Before that date,
      our common stock traded on the OTC Bulletin Board under the symbol “GRMA.OB,”
and before that, it traded on the OTC Bulletin Board under the symbol “GRMG.OB.”
The following table shows the high and low bid prices for our common stock
      for
      each quarter since January 1, 2004 as reported by the OTC Bulletin Board. All
      share prices have been adjusted to provide for the one for seven reverse split
      which was effected on October 19, 2005 (i.e. they have been increased seven
      times to compare them to current prices).





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





**2004
                (OTC Bulletin Board)**
            ****
            **High
                Bid**
            
            **Low
                Bid**First
                quarter
            
            $
            0.53
            
            $
            0.18Second
                quarter
            
            
            0.42
            
            
            0.14Third
                quarter
            
            
            0.28
            
            
            0.18Fourth
                quarter
            
            
            1.33
            
            
            0.21**2005
                (OTC Bulletin Board)**
            ****
            ****
            **High
                Bid**
            
            
            **Low
                Bid**First
                quarter
            
            $
            0.49
            
            $
            0.21Second
                quarter
            
            
            0.53
            
            
            0.21Third
                quarter
            
            
            0.53
            
            
            0.42Fourth
                quarter
            
            
            0.90
            
            
            0.40





As
      of
      March 15, 2006, there were 377 record holders of our common stock.





We
      have
      not paid any cash dividends since our inception and do not contemplate paying
      dividends in the foreseeable future. In addition, the terms of our Stillwater
      lines of credit and our Stillwater term loans prohibit us from declaring or
      paying dividends or purchasing or redeeming any of our capital stock without
      Stillwater National Bank’s prior approval. It is anticipated 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, thus
      lowering 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.





Our
      revenues and operating results may fluctuate significantly from quarter to
      quarter, which can lead to significant volatility in the price and volume of
      our
      stock. In addition, stock markets have experienced extreme price and volume
      volatility in recent years. This volatility has had a substantial effect on
      the
      market prices of securities of many smaller public companies for reasons
      unrelated or disproportionate to the operating performance of the specific
      companies. These broad market fluctuations may adversely affect the market
      price
      of our common stock.




21


**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,
      2005:





**(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)
            
            
            5,286
            
            $
            4.20
            
            
            28,594,928Equity
                compensation plans not approved by security holders
                (3)(4)(5)(6)
            
            
            250,283
            
            $
            8.05
            
            
            1,625,079Total
            
            
            255,569
            
            $
            7.91
            
            
            30,625,793





**(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 33,000,000 shares, and to date, we have issued 4,685,500 shares
                under
                the 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,
                2005,
                there were options to purchase 5,286 shares outstanding under this
                plan.




**(3)**
            **Individual
                Option and Warrant Grants.**From 2001 through 2003, we have granted options and warrants on an
                individual basis. Of the options we have granted on an individual
                basis,
                there are currently options to purchase in the aggregate up to 48,571
                shares of our common stock at a weighted average price of $9.45 per
                share.
                Of the warrants we have granted on an individual basis, there are
                currently warrants to purchase in the aggregate up to 201,712 shares
                of
                our common stock at a weighted average price of $7.70 per share


22


**(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.
                It is
                anticipated that providing such persons with a direct stake in our
                welfare
                will assure a closer identification of their interests with those
                of us,
                thereby stimulating their efforts on our behalf and strengthening
                their
                desire to remain with us. We are permitted to issue up to 428,157
                shares
                of common stock under this plan, and to date, we have issued 232,063
                shares.




**(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. The purpose of this plan is to provide the employees
                with
                equity-based compensation incentives who make significant and
                extraordinary contributions to our long-term growth and performance,
                and
                to attract and retain these employees. We are permitted to issue
                up to
                1,071,429 shares of common stock under this plan, and to date, we
                have
                issued no shares or options to purchase shares under 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 are 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 are permitted
                to issue
                up to 357,143 shares of common stock under this plan, and to date,
                we have
                issued no shares under this plan.




**Recent
      Sales of Unregistered Securities**





**Recapitalization** .
      On
      October 19, 2005, we completed a restructuring
      of our company. The restructuring was effected through an out-of-court
      restructuring, or “recapitalization plan.” In connection with the restructuring,
      we issued the following securities without registering the securities under
      the
      Securities Act of 1933, as amended:





*Convertible
      Note* .
      We
      issued to Stillwater National Bank a convertible note 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. 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 accrued
      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. The
      issuance the note was exempt under both Sections 3(a)(9) and 4(2) of the
      Securities Act.





*CFO
      Shares* .
      Our
      Chief Financial Officer, Matthew C. Flemming, purchased an aggregate of 250,000
      shares of our common stock for a total purchase price of $250,000. The
      issuance of shares to Mr. Flemming was exempt under Section 4(2) of the
      Securities Act.




23


*Conversion
      of Prior Bank Debt* .
      Stillwater exchanged $2,368,000 of our outstanding indebtedness to Stillwater
      for 2,368,000 of shares of our common stock. 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. The
      issuance of shares to Stillwater was exempt under both Sections 3(a)(9) and
      4(2)
      of the Securities Act.





*Unsecured
      Note Exchange Offer* .
      Our
      unsecured noteholders 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 shares of our common stock. The
      issuance of shares to our unsecured creditors was exempt under both Sections
      3(a)(9) and 4(2) of the Securities Act.





**Strategic
      Alliance** .
      On
      November 29, 2005, we issued 171,432 shares of our common stock to UTEK
      Corporation pursuant to a strategic alliance agreement. The term of the
      strategic alliance agreement is one year, and the shares vest 1/12 th per
      month over the term of the agreement. In the event that the strategic alliance
      agreement is terminated by us before the one year term is completed, any
      unvested shares will not vest. The issuance of these shares was exempt under
      Section 4(2) of the Securities Act of 1933, as amended.





**Consultant
      Shares** .
      On
      November 29, 2005, we issued an aggregate of 100,000 shares of our common stock
      to two private consultants for consulting services. The issuance of these shares
      was exempt under Section 4(2) of the Securities Act of 1933, as
      amended.





**December
      Private Placement** .
      On
      December 5, 2005, A. Earl Swift, Shumate’s former director and a significant
      stockholder of Shumate, purchased 416,667 shares of our common stock in a
      private placement at a purchase price of $0.60 per share, for gross proceeds
      of
      $250,000. The issuance of these shares was exempt under Section 4(2) of the
      Securities Act of 1933, as amended. We have since nominated Mr. Swift to fill
      a
      vacancy on our board of directors and to become the chairman of the board of
      directors.





**February
      Private Placement** .
      On
      February 22, 2006, we sold 3,333,333 shares of our common stock to institutional
      and accredited retail investors in a private offering pursuant to exemption
      from
      registration under Section 4(2) of the Securities Act of 1933, as amended.
      We
      intend to use the net proceeds from the financing to launch the new Hemiwedge®
valve technology, working capital, and general corporate purposes. First Montauk
      Securities Corporation, an NASD member firm, acted as placement agent in
      connection with the sale of 2,500,000 shares of common stock and we placed
      the
      remaining 833,333 shares of common stock. The purchase price per share of common
      stock was $0.60. First Montauk received $165,000 in commissions and 250,000
      warrants to purchase shares of common stock at an exercise price of $0.63 per
      share. We also paid legal fees of $10,000 to counsel for First Montauk. The
      net
      proceeds of this offering to us after the payment of commissions, fees, and
      other expenses of the offering were approximately $1,810,000.





Pursuant
      to the terms of a registration rights agreement between the investors and us,
      we
      are obligated to file a registration statement on Form SB-2 (or if Form SB-2
      is
      not available another appropriate form) registering the resale of shares of
      our
      common stock. We are required to file the registration statement within 30
      days
      of the filing of this report, but no later than April 30, 2006. If the
      registration statement is not timely filed or if the registration is suspended
      other than as permitted in the registration rights agreement, we will be
      obligated to pay each investor a fee equal to 1.0% of such investor’s purchase
      price of the common stock for each 30 day period (pro rated for partial
      periods), that such registration conditions are not satisfied.





In
      addition, subject to certain conditions, we have granted the investors a right
      of first refusal, for a period of one (1) year from the effective date of the
      registration statement required to be filed in connection with this transaction,
      to participate in any subsequent financing that we conduct.




24


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





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





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





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





**General**





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





We
      currently employ 54 people at two plants totaling approximately 85,000 square
      feet in Conroe, Texas, north of Houston. Our executive offices are located
      at
      12060 FM 3083, Conroe, Texas 77301. Our telephone number is (936) 539-9533
      and
      our Internet address is www.shumateinc.com .





*Contract
      Machining and Manufacturing –Shumate
      Machine
      Works*





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





The
      diverse line of products we manufacture includes the following:





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


service
      applications


·
            Blowout
                preventers and their spare service parts


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


·
            Directional
                drilling products


·
            Exploration
                products for research and
                development


·
            Natural
                gas measurement equipment, including fittings and
                valves


·
            Control
                and check valves, and


·
            Subsea
                control equipment.




25


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





*Valve
      Product Technology – Hemiwedge
      Valve
      Corporation*





We
      recently formed Hemiwedge Valve Corporation as a wholly-owned subsidiary to
      develop and commercialize a new patented technology addressing what we believe
      to be a significant opportunity in the global valve market. The Hemiwedge® valve
      is a quarter-turn hemispherical wedge valve, engineered to provide what we
      believe are substantial technological improvements compared with what is
      available in the marketplace today, such as traditional butterfly, ball, and
      gate valve designs.





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





We
      anticipate concluding the engineering, design, and development of the Hemiwedge®
valve, building an initial inventory and launching the product line in the
      second half of 2006. Since the valve is still in the engineering and design
      stage, we have not yet determined in field experience how long the valve will
      last under operating pressures or how much less torque the valve requires than
      those valves currently available in the market.





**Reorganization**





On
      October 19, 2005, we completed a restructuring
      of our company, Shumate
      Industries, Inc. (formerly known as Excalibur Industries, Inc.) .
      The
      restructuring resulted in a significant reduction of our outstanding debt and
      provides 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 consists of the
      following :





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


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


·
            the
                issuance of a convertible note to
                Stillwater;


·
            the
                issuance of a note by our Chief Financial Officer to Stillwater 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
                vesting of restricted stock awards granted 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 effectuated 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. A
      complete description of the restructuring plan is set forth under the heading
      “Business Development - Reorganization” in the Description of Business and in
      our definitive proxy statement for the October 19, 2005 special meeting of
      stockholders, which has been filed with the Securities and Exchange Commission.





26




As
      a
      result of the reorganization, 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.





**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*





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





*Accounts
      Receivable*




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




*Concentration
      of credit risk*





At
      December 31, 2005, two customers accounted for 71% of our total accounts
      receivable. Because management believes that all such amounts are collectible
      due to the nature of the customers and our collection experience with the
      payers, we have not recorded an allowance for doubtful accounts for these
      receivables.





*Inventory*





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





27


**Fiscal
      2004 and 2005 - Discontinued Operations**





On
      December 31, 2003, three of our operating subsidiaries, Excalibur Steel,
      Excalibur Services, and Excalibur Aerospace, collectively referred to as the
      Tulsa-based companies, 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.





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





28


**Results
      of Continuing Operations**





*Basis
      of Presentation*





The
      results of operations set forth below for the years ended December 31, 2005
      and
      2004 are those of the continuing operations of Shumate Industries, which include
      Shumate Machine Works and Hemiwedge Valve Corporation on a consolidated
      basis





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





****
            ****
            **Year
                      Ended**
                    **December
                      31,**
                    **2005**
            ****
            **Year
                      Ended**
                    **December
                      31,**
                    **2004**Net
                sales
            
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            99.1
            
            
            143.3Gross
                income (loss)
            
            
            0.9
            
            
            (43.3
            )Selling,
                general and administrative
            
            
            49.8
            
            
            45.8Depreciation
            
            
            0.6
            
            
            0.7Bad
                debt expense
            
            
            1.2
            
            
            —Research
                and development
            
            
            10.1
            
            
            —Operating
                income (loss)
            
            
            (60.8
            )%
            
            (89.8
            )%





**Comparison
      of the Years ended December 31, 2005 and 2004**





**Net
      sales.** ** Net
      sales for operations of Shumate Machine Works increased to $4,964,544, or an
      increase of 45.3%, for the year ended December 31, 2005, from $3,416,712 for
      the
      year ended December 31, 2004. Continued increases in commodity prices,
      particularly in the energy sector, and in activity level in the energy field
      services industry resulted in further increased demand for our products from
      our
      existing customers. In particular, we received increased orders for drilling
      tools and blow-out preventers in 2005. As a result of this increased demand,
      the
      pricing for Shumate products and components improved in 2005. Our customers
      have
      indicated to us that this activity levels in the energy field services industry
      will continue to increase in 2006.





**Cost
      of Sales.** Cost of
      sales for continued operations increased to $4,919,658, or 0.48%, for the year
      ended December 31, 2005, from $4,896,211 for the year ended December 31, 2004.
      As a percentage of net sales, cost of sales decreased to 99.1% of net sales
      for
      the year ended December 31, 2005 versus 143.3% of sales for the year ended
      December 31, 2004. The decrease in cost of sales as a percentage of net sales
      resulted primarily from better control of our direct labor costs and better
      pricing of our products. As
      a
      result, we generated a gross profit of $44,886 with a gross profit margin of
      0.9%. In addition, our gross margins steadily improved over the third and fourth
      quarters of 2005, and, based on customer indications, we anticipate that this
      trend of will continue though at least the first quarter of 2006. We are
      continuing to implement better cost-controls with production wages on jobs
      and
      create greater efficiencies in production. We are also continuing to seek to
      increase revenues by generating more sales with higher pricing for Shumate
      products and components. We believe that continued increasing market improvement
      in the oil and gas field services markets resulting from higher commodity prices
      will continue to lead to better pricing and gross margins.





**Selling,
      general and administrative.** Selling,
      general and administrative expenses increased to $2,473,868, or an increase
      of
      58.2%, for the year ended December 31, 2005, from $1,563,450 for the year ended
      December 31, 2004. As a percentage of net sales, selling, general and
      administrative expenses were 49.8% for the year ended December 31, 2005, as
      compared to 45.8% for the comparable period in 2004. The increase in selling,
      general and administrative expenses primarily results from our incurring approximately $475,000 in stock compensation expense in 2005. The
      remainder of the increase is mainly attributable to an increase in
      administrative wages and our recording an accrual for potential penalties and
      interest with the Internal Revenue Service.





29




**Depreciation.** Depreciation expense decreased to $326,550 for the year ended December 31,
      2005,
      from $413,426 for the year ended December 31, 2004. During the fourth quarter
      of
      2004, we increased our estimate of useful lives of certain shop equipment from
      seven to twelve years to reflect technological improvements, which resulted
      in
      decreased depreciation expense for 2005.





**Bad
      debt expense** .
      During
      the year ended December 31, 2005, we charged off accounts receivable in the
      amount of $58,088 to bad debt expense.





**Research
      and development.** During
      the year ended December 31, 2005, we incurred $503,263 in research and
      development expenses relating to our new valve product technology. We anticipate
      that we will continue to incur significant research and development expenses
      for
      this new technology in 2006 as we continue the beta development of the
      technology for the field and implement the initial launch of the product. We
      expect that these expenses will include consulting fees, engineering fees,
      design fees and costs, development fees and costs, patent and other intellectual
      property filings, legal fees, prototyping costs, costs of new materials, and
      other research and development costs.





**Operating
      loss.** We
      incurred an operating loss of $3,017,593 for the year ended December 31, 2005,
      compared to an operating loss of $3,068,080 for the year ended December 31,
      2004. We had lower operating losses in the year 2005 as compared to 2004
      primarily because we generated more revenues due to increased demand for
      drilling products and components manufactured by Shumate. This increase in
      revenue was offset by an increase in research and development costs, stock
      compensation expense, increased administrative wages, and interest and penalty
      accruals. While we narrowed our operating loss in 2005, we have not reduced
      our
      fixed costs significantly enough to bring them below the revenues we generated
      in the period.





**Debt
      forgiveness income** .
      As a
      result of the bankruptcy proceedings of three of Shumate’s wholly owned
      subsidiaries, Shumate recorded $5,218,883 in debt forgiveness income from
      discontinued operations in 2004. In 2005, Shumate recorded $1,837,295 in debt
      forgiveness income from discontinued operations as a result of the bankruptcy
      proceedings of Excalibur Holdings. Additionally in 2005, Shumate recorded
      $4,427,157 in debt forgiveness income from continuing operations as a result
      of
      debt forgiveness by Stillwater National Bank and other third party lenders
      during the restructuring in October 2005.





**Restructuring
      cost** .
      On
      April 28, 2005, Excalibur Holdings, our bankrupt subsidiary and holder of 100%
      of the common stock of Shumate Machine Works received notice from Stillwater
      National Bank that Stillwater intended 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 finalized on
      October 19, 2005, Stillwater transferred 100% of the capital stock of Shumate
      Machine Works to us for $100,000. This cost was charged to restructuring cost
      in
      the 4 th quarter
      of 2005.





**Interest
      expense.** Interest
      expense increased to $1,168,375 for the twelve months ended December 31, 2005,
      from $966,788 for the twelve months ended December 31, 2004. Our
      interest expense increase resulted primarily from increased borrowings from
      our
      senior lender partially offset by pay offs of leases. Our interest expense
      results primarily from a line of credit and term loans from our primary lender,
      notes issued to sellers as part of the purchase price in our acquisitions,
      capital leases, and notes issued to officers and directors for working capital
      loans. For 2006, we anticipate that our material interest expense will result
      solely from our credit facilities with our senior lender.





**Provision
      for income taxes.** While we
      have generated net income in 2005 and 2004, we have made no provision for income
      taxes due to our tax loss carry-forward from previous years. Accordingly, we
      have made no provision for income taxes.




30


**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. Our working capital deficit at December
      31,
      2005 was $494,720 and at December 31, 2004 it was $13,805,288. We had cash
      of
      $214,218 as of December 31, 2005, while we had cash of $177,822 and a bank
      overdraft of $332,512, as of December 31, 2004. This difference results
      primarily from the restructuring of our debt obligations with Stillwater
      National Bank, the issuance of equity in exchange for notes payable and accrued
      interest to third party and related party lenders, and debt forgiveness related
      to the bankruptcy of Excalibur Holdings and third party notes
      payable.




We
      used
      $3,111,549 of net cash from operating activities for the year ended December
      31,
      2005 compared to using $3,007,316  in
      the
      year ended December 31, 2004. Net income of $1,978,484 resulted primarily from
      a
      non-cash recognition of $4,427,157 of debt forgiveness income related to
      continuing operations. We further used cash in operating activities by
      increasing our accounts receivable by $350,938, our inventory by $103,569,
      and
      our other current assets by $54,936, while we decreased our accrued expenses
      by
      $199,729 and our accounts payable by $813,341. This cash used in operating
      activities was offset by a non-cash depreciation expense of $326,550, bad debt
      expense of $58,088, and non-cash expense for common stock issued for services
      of
      $474,999.





Net
      cash
      flows used in investing activities was $576,697 for the year ended December
      31,
      2005, compared to $288,407 in the year ended December 31, 2004. Of the cash
      used
      in investing activities for the year ended December 31, 2005, $393,680 was
      used
      for the purchase of fixed assets while $183,017 was used for the purchase of
      and
      investment in patents.





Net
      cash
      flows provided by financing activities were $3,724,642 for the year ended
      December 31, 2005, compared to net cash provided by financing activities of
      $3,463,269 in the year ended December 31, 2004. The increase in net cash
      provided by financing activities is primarily due to increased net borrowings of
      $3,276,905 from Stillwater National Bank and third party lenders and $500,000
      in
      cash proceeds from sales of common stock. These
      increases were offset by a $52,263 in payments made on notes
      payable.





**Bank
      Credit Facility**





The
      primary source of our financing has been our credit facility with Stillwater
      National Bank. As set forth above under the heading “Reorganization” and as more
      fully described in our definitive proxy statement for the special meeting of
      stockholders, which has been filed with the Securities and Exchange Commission,
      we have restructured our credit facility with Stillwater National Bank.





As
      of
      December 31, 2005, we were obligated to Stillwater in the amount of
      approximately $9 million, which includes the following loans:





*Term
      Note* .
      We have
      outstanding with Stillwater a term note in the principal amount of approximately
      $5,600,000. The term note requires interest only payments for the six months
      following October, 2005, 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 term note is due and payable
      in
      April 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.





*Line
      of Credit* .
      We also
      have a revolving line of credit with Stillwater in an amount of up to $1,000,000
      for one year. As of December 31, 2005, the balance on the line of credit was
      $837,615. 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.





*Convertible
      Note* .
      We have
      issued a convertible note in the principal amount of $2,500,000 to Stillwater. 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 accrues the date of issuance until the earlier of conversion or 24 months,
      at which time the accrued interest will be capitalized into principal. Beginning
      at the end of the ninth quarter, we will be 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.




31




**December
      Private Offering**





In
      December 2005, we closed the sale of 416,667 shares of our common stock to
      A.
      Earl Swift, our former director and a significant stockholder of our company,
      in
      a private offering pursuant to exemption from registration under Section 4(2)
      of
      the Securities Act of 1933, as amended. We used the net proceeds from the
      offering to finance our acquisition of the intellectual property rights to
      the
      Hemiwedge® valve technology, working capital, and general corporate purposes.
      The purchase price per share of common stock was $0.60.





**February
      Private Offering**





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





Pursuant
      to the terms of a registration rights agreement between the investors and us,
      we
      are obligated to file a registration statement on Form SB-2 (or if Form SB-2
      is
      not available another appropriate form) registering the resale of shares of
      our
      common stock. We are required to file the registration statement within 30
      days
      of the filing of this report, but no later than April 30, 2006. If the
      registration statement is not timely filed or if the registration is suspended
      other than as permitted in the registration rights agreement, we will be
      obligated to pay each investor a fee equal to 1.0% of such investor’s purchase
      price of the common stock for each 30 day period (pro rated for partial
      periods), that such registration conditions are not satisfied.





In
      addition, subject to certain conditions, we have granted the investors a right
      of first refusal, for a period of one (1) year from the effective date of the
      registration statement required to be filed in connection with this transaction,
      to participate in any subsequent financing that we conduct.





**Insider
      and Affiliate Loans**




Six
      unsecured notes payable to officers and directors totaling $1,095,799 and
      related accrued interest in the amount of $225,120 were converted to 1,320,918
      shares of common stock on November 1, 2005. There are no outstanding insider
      and
      affiliate loans as of December 31, 2005.





**Capital
      Requirements**





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





We
      had a
      working capital deficit of $494,720 as of December 31, 2005. Since that time,
      we
      have completed a private placement of our common stock which resulted in net
      proceeds to us of approximately $1,810,000, thus providing us with working
      capital for the immediate future.





32




In
      addition, we have a $1,000,000 secured revolving line of credit facility,
      subject to qualifying accounts receivable and inventory, with Stillwater
      National Bank. The outstanding balance on this line of credit was approximately
      $837,615 at December 31, 2005, which, at the time, was the maximum allowed
      due
      to the amount of the qualifying accounts receivable and inventory, also referred
      to as our borrowing base. The outstanding balance on the line of credit and
      the
      borrowing base fluctuate based on our available working capital, our qualifying
      accounts receivable and inventory, and at various points in time we may have
      the
      ability to borrow additional funds on this line of credit.





As
      of the
      date of this report, we believe that we will be able to fund our operations,
      working capital requirements, and debt service requirements in Shumate Machine
      over the fiscal year 2006 through existing working capital and cash flows
      generated from operations. In addition, we believe that we will also be able
      to
      fund the beta development of the Hemiwedge® technology and the initial launch of
      the Hemiwedge® valve products through existing working capital and cash flows
      generated from operations. However, we do not believe that our existing working
      capital and cash flows generated from operations to conduct a full-scale launch
      of the Hemiwedge® valve product line, including an inventory buildup, or an
      expansion of the product line. In order to conduct a full-scale launch, we
      would
      need to obtain additional financing. In addition, we have initiated a formal
      search program for other technology-oriented products targeted in complementary
      markets segments, including oil & gas field services, pipeline and
      transportation, process and fluid management controls, refining, and maintenance
      services for these areas. The acquisition of such products may also require
      us
      to obtain additional financing.





In
      the
      event we seek to conduct a full-scale launch of the Hemiwedge® products and
      expand the product line, or in the event we seek to acquire another
      technology-oriented or other new product line, or in the event that our cash
      flows from operations are insufficient to fund our operations, working capital
      requirements, and debt service requirements, we would need to finance our
      operations through additional bank borrowings under our Stillwater line of
      credit or other capital financings. Our collateral may not be sufficient to
      borrow additional amounts under the Stillwater line of credit at such time,
      and,
      in such circumstances, we would need to seek additional debt or equity
      financing, in the form of a private placement or a public offering, a strategic
      alliance, or a joint venture. Such additional financing, alliances, or joint
      venture opportunities might not be available to us, when and if needed, on
      acceptable terms or at all. If we are unable to obtain additional financing
      in
      sufficient amounts or on acceptable terms under such circumstances, our
      operating results and prospects could be adversely affected. In addition, any
      debt financings or significant capital expenditures require the written consent
      of our lender, Stillwater National Bank.




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





In
      addition to the recent recapitalization and equity financings, we anticipate
      reduced overhead costs from further reductions in our holding company expenses.
      Further, 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 reorganization, debt restructuring, equity financing,
      operating expense reductions, and our intent to capitalize on anticipated
      increase in demand are the steps that we have been taking to try to return
      to
      profitability.  However, it is possible that none of these steps will be
      completed and that we may never return to profitability.





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





**Off-Balance
      Sheet Arrangements**





None.




33


**Item
      7. FINANCIAL STATEMENTS**




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors


Shumate
      Industries, Inc.


(formerly
      Excalibur Industries, Inc.)


Conroe,
      Texas




We
      have
      audited the accompanying consolidated balance sheet of Shumate Industries,
      Inc.
      (“Shumate”) as of December 31, 2005 and the related consolidated statements of
      income, changes in stockholders’ deficit and cash flows for the each of the two
      years then ended. These consolidated financial statements are the responsibility
      of Shumate’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Shumate as of December
      31,
      2005 and the results of its operations and cash flows for the two years then
      ended in conformity with accounting principles generally accepted in the United
      States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      Shumate will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, Shumate suffered recurring losses from
      operations and has a working capital deficiency, which raises substantial doubt
      about its ability to continue as a going concern. Management’s plans regarding
      those matters are also described in Note 2. The consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




MALONE
      & BAILEY, PC


www.malone-bailey.com


Houston,
      Texas





February
      15, 2006




F-1


**SHUMATE
                INDUSTRIES, INC.****(FORMERLY
                EXCALIBUR INDUSTRIES, INC.)****CONSOLIDATED
                BALANCE SHEET****December
                31, 2005**




**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            214,218Accounts
                receivable, net of allowance for doubtful accounts of
                $60,000
            
            
            959,916Inventory
            
            
            237,173Prepaid
                expense and other current assets
            
            
            87,920Total
                current assets
            
            
            1,499,227Fixed
                assets, net of accumulated depreciation of $1,455,868
            
            
            1,853,013Patents
            
            
            283,017Deposits
            
            
            30,340Total
                assets
            
            $
            3,665,597**LIABILITIES
                AND STOCKHOLDERS' DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            463,141Accrued
                expenses
            
            
            408,796Current
                portion of note payable - other
            
            
            48,504Current
                portion of term note payable - Stillwater National Bank
            
            
            235,891Line
                of credit - Stillwater National Bank
            
            
            837,615Total
                current liabilities
            
            
            1,993,947Long
                term liabilities:Note
                payable - other
            
            
            51,496Term
                note payable - Stillwater National Bank
            
            
            5,397,162Convertible
                note payable - Stillwater National Bank
            
            
            2,500,000Total
                long term liabilities
            
            
            7,948,658Total
                liabilities
            
            
            9,942,605Commitments
                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,12,116,394
                shares issued and outstanding
            
            
            12,116Additional
                paid-in-capital
            
            
            12,278,742Accumulated
                deficit
            
            
            (18,567,866
            )Total
                stockholders' deficit
            
            
            (6,277,008
            )Total
                liabilities and stockholders' deficit
            
            $
            3,665,597See
                accompanying summary of accounting policiesand
                notes to consolidated financial
                statements.





F-2


**SHUMATE
                INDUSTRIES, INC.****(FORMERLY
                EXCALIBUR INDUSTRIES, INC.)****CONSOLIDATED
                STATEMENTS OF INCOME****For
                the Years Ended December 31, 2005 and 2004****2005**
            ****
            ******2004**REVENUES
            
            $
            4,964,544
            
            $
            3,416,712COST
                OF SALESCost
                of sales
            
            
            4,620,368
            
            
            4,507,916Depreciation
                expense
            
            
            299,290
            
            
            388,295Total
                cost of sales
            
            
            4,919,658
            
            
            4,896,211GROSS
                INCOME (LOSS)
            
            
            44,886
            
            
            (1,479,499
            )OPERATING
                EXPENSES:Selling,
                general and administrative
            
            
            2,473,868
            
            
            1,563,450Depreciation
                expense
            
            
            27,260
            
            
            25,131Bad
                debt expense
            
            
            58,088
            
            
            —Research
                and development
            
            
            503,263
            
            
            —Total
                operating expenses
            
            
            3,062,479
            
            
            1,588,581LOSS
                FROM OPERATIONS
            
            
            (3,017,593
            )
            
            (3,068,080
            )OTHER
                INCOME (EXPENSE)Debt
                forgiveness income
            
            
            4,427,157
            
            
            —Interest
                expense
            
            
            (1,168,375
            )
            
            (966,788
            )Restructuring
                cost
            
            
            (100,000
            )
            
            —NET
                INCOME (LOSS) FROM CONTINUING OPERATIONS
            
            
            141,189
            
            
            (4,034,868
            )DISCONTINUED
                OPERATIONSDebt
                forgiveness income
            
            
            1,837,295
            
            
            5,218,883NET
                INCOME
            
            $
            1,978,484
            
            $
            1,184,015Basic
                net income per share
            
            $
            0.33
            
            $
            0.49Diluted
                net income per share
            
            
            0.31
            
            
            0.49Basic
                net income (loss) per share resulting from continuing
                operations
            
            $
            0.02
            
            $
            (1.66
            )Diluted
                net income (loss) per share resulting from continuing
                operations
            
            
            0.02
            
            
            (1.66
            )Basic
                net income per share resulting from discontinued
                operations
            
            
            0.31
            
            $
            2.15Diluted
                net income per share resulting from discontinued
                operations
            
            
            0.30
            
            
            2.15Weighted
                average shares outstanding
            
            $
            5,956,531
            
            
            2,432,817




See
                accompanying summary of accounting policiesand
                notes to consolidated financial
                statements.


F-3





**SHUMATE
                INDUSTRIES, INC.****(FORMERLY
                EXCALIBUR INDUSTRIES, INC.****CONSOLIDATED
                STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT****For
                the Years Ended December 31, 2005 and 2004******
            **Additional**
            ****
            ****
            ****
            ****
            ********
            ****
            **Common
                Stock**
            ****
            **Paid-In**
            ****
            **Accumulated**
            ****
            ****
            ********
            ****
            **Shares**
            ****
            **Par**
            ****
            **Capital**
            ****
            **Deficit**
            ****
            **Total**Balances
                at December 31, 2003
            
            
            2,419,200
            
            $
            2,419
            
            $
            8,551,745
            
            $
            (21,730,365
            )
            $
            (13,176,201
            )Common
                stock issued for accounts payable
            
            
            14,285
            
            
            14
            
            
            3,107
            
            
            —
            
            
            3,121Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            1,184,015
            
            
            1,184,015Balances
                at December 31, 2004
            
            
            2,433,485
            
            
            2,433
            
            
            8,554,852
            
            
            (20,546,350
            )
            
            (11,989,065
            )Common
                stock issued for services
            
            
            4,956,932
            
            
            4,957
            
            
            470,042
            
            
            —
            
            
            474,999Common
                stock issued for debt
            
            
            4,059,310
            
            
            4,059
            
            
            2,754,515
            
            
            —
            
            
            2,758,574Common
                stock issued for cash
            
            
            666,667
            
            
            667
            
            
            499,333
            
            
            —
            
            
            500,000Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            1,978,484
            
            
            1,978,484Balances
                at December 31, 2005
            
            
            12,116,394
            
            $
            12,116
            
            $
            12,278,742
            
            $
            (18,567,866
            )
            $
            (6,277,008
            )




F-4


**SHUMATE
                INDUSTRIES, INC.****(FORMERLY
                EXCALIBUR INDUSTRIES, INC.)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****For
                the Years Ended December 31, 2005 and 2004****2005**
            ****
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            1,978,484
            
            $
            1,184,015Adjustments
                to reconcile net income to netcash
                used in operating activities:Debt
                forgiveness income-continuing operations
            
            
            (4,427,157
            )
            
            —Debt
                forgiveness income—discontinued operations
            
            
            (1,837,295
            )
            
            (5,218,883
            )Depreciation
                expense
            
            
            326,550
            
            
            413,426Bad
                debt expense
            
            
            58,088
            
            
            —Common
                stock issued for services
            
            
            474,999
            
            
            —Changes
                in:Accounts
                receivable
            
            
            (350,938
            )
            
            (160,800
            )Inventory
            
            
            (103,569
            )
            
            (85,395
            )Other
                assets
            
            
            (54,936
            )
            
            (27,058
            )Accounts
                payable
            
            
            (813,341
            )
            
            (67,655
            )Accrued
                expenses
            
            
            (199,729
            )
            
            955,034Pre-petition
                liabilities of bankrupt subsidiary
            
            
            1,837,295
            
            
            —Net
                cash used in operating activities
            
            
            (3,111,549
            )
            
            (3,007,316
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of fixed assets
            
            
            (393,680
            )
            
            (288,407
            )Purchase
                of patents
            
            
            (183,017
            )
            
            —Net
                cash used in operating activities
            
            
            (576,697
            )
            
            (288,407
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                change from bank overdraft
            
            
            —
            
            
            (96,872
            )Proceeds
                from notes payable
            
            
            3,276,905
            
            
            3,685,071Payments
                on note payable
            
            
            (52,263
            )
            
            (124,930
            )Proceeds
                from sales of common stock
            
            
            500,000
            
            
            —Net
                cash provided by financing activities
            
            
            3,724,642
            
            
            3,463,269NET
                INCREASE IN CASH AND CASHEQUIVALENTS
            
            
            36,396
            
            
            167,546CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            177,822
            
            
            10,276CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            214,218
            
            $
            177,822Supplemental
                disclosures:Cash
                paid for income taxes
            
            $
            —
            
            $
            —Cash
                paid for interest
            
            
            139,769
            
            
            10,628Non-cash
                transactions:Stock
                issued for accounts payable and debt
            
            $
            2,758,574
            
            $
            3,121Prior
                year deposit applied to equipment purchase
            
            
            —
            
            
            55,000Balance
                due to vendor for equipment purchase
            
            
            —
            
            
            171,120Purchase
                of patents with note payable
            
            
            100,000
            
            
            —See
                accompanying summary of accounting policiesand
                notes to consolidated financial
                statements


F-5


**SHUMATE
      INDUSTRIES, INC.**


**(FORMERLY
      EXCALIBUR INDUSTRIES, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





**Description
      of Business** .
      Excalibur Industries, Inc. (“Excalibur”) is a Texas based energy field services
      company. During 2005, Excalibur changed its name to Shumate Industries, Inc.
      (“Shumate”). See Note 3 for details. Shumate operates through two
      wholly-owned subsidiaries, Shumate Machine Works, Inc. (“Shumate Machine”), a
      contract machining and manufacturing company, and Hemiwedge Valve Corporation
      (“Hemiwedge”), a development stage company formed to launch a proprietary valve
      product line.





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





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





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





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





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





**Allowance
      for Doubtful Accounts** .
      Bad
      debt expense is recognized based on management’s estimate of likely losses per
      year, based on past experience and an estimate of current year uncollectible
      amounts. The allowance was $60,000 as of December 31, 2005.





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





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





**Patents.** Patents
      are initially measured based on their fair values. Patents are being amortized
      on a straight-line basis over a period of 8 to 10 years and are stated net
      of
      accumulated amortization of $283,017 and $0 at December 31, 2005, and 2004,
      respectively. Because the patents were acquired in late 2005, no amortization
      expense was charged to operations during 2005.





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





F-6




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





**Stock-Based
      Compensation** . **** Shumate
      accounts for stock-based compensation under the intrinsic value method. Under
      this method, Shumate recognizes no compensation expense for stock options
      granted when the number of underlying shares is known and exercise price of
      the
      option is greater than or equal to the fair market value of the stock on the
      date of grant. In the years ended December 31, 2005 and 2004, no options were
      granted.





The
      following table illustrates the effect on net income and net income per share
      if
      Shumate had applied the fair value provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      stock-based employee compensation.


**2005**
              
              **2004**Net
                  income as reported
              
              $
              1,978,484
              
              $
              1,184,015Add:
                  stock based compensation determined under intrinsic value based
                  method
              
              
              —
              
              
              —Less:
                  stock based compensation determined under
              
              
              —
              
              
              —fair
                  value - based method
              
              
              —
              
              
              (7,959
              )Pro
                  forma income
              
              $
              1,978,484
              
              $
              1,176,056


Basic
                  net income per common share:As
                  reported
              
              $
              .33
              
              $
              .49Pro
                  forma
              
              $
              .33
              
              
              .48Diluted
                  net income per common share:As
                  reported
              
              $
              .31
              
              
              N/APro
                  forma
              
              $
              .31
              
              
              N/A




**Basic
      and Diluted Net Income per Share** .
      The
      basic net income per common share is computed by dividing the net income by
      the
      weighted average number of common shares outstanding. Diluted net income per
      common share is computed by dividing the net income adjusted on an “as if
      converted” basis, by the weighted average number of common shares outstanding
      plus potential dilutive securities. For the year ended December
      31, 200 4,
      there
      was no diluted income per share due to the absence of common stock equivalents.
      Diluted earnings per common share for the year 2005 was determined on the
      assumption that the convertible note payable was converted upon issuance on
      October 19, 2005. The 2005 information is as follows:




Net
                  income
              
              $
              1,978,484Add:
                  adjustment for interest on the convertible note payable47,500Net
                  income, includes assumed conversions
              
              $
              2,025,984Weighted
                  average number of shares outstanding
              
              
              5,956,531Add:
                  shares assumed to be issued under the convertible note
                  payable
              
              
              500,000Weighted
                  average number of shares adjusted for dilutive shares
              
              
              6,456,531





F-7





**Stock
      Split** . All
      references to common stock and per share data have been retroactively restated
      to account for the 1 for 7 reverse stock split. See Note 3 for
      details.





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





**Recently
      Issued Accounting Pronouncements.** In
      December 2004, the FASB issued SFAS No.123R, “Accounting for Stock-Based
      Compensation.” SFAS No.123R establishes standards for the accounting for
      transactions in which an entity exchanges its equity instruments for goods
      or
      services. This Statement focuses primarily on accounting for transactions in
      which an entity obtains employee services in share-based payment transactions.
      SFAS No.123R requires that the fair value of such equity instruments be
      recognized as expense in the historical financial statements as services are
      performed. Prior to SFAS No.123R, only certain pro forma disclosures of fair
      value were required. SFAS No.123R shall be effective for small business issuers
      as of the beginning of the first interim or annual reporting period that begins
      after December 15, 2005.





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





**NOTE
      2 - GOING CONCERN**





As
      shown
      in the accompanying consolidated financial statements, Shumate incurred
      recurring losses from operations of $3,017,593 and $3,068,080 in 2005 and 2004,
      respectively, has an accumulated deficit of $18,567,866, and a working capital deficit
      of $494,720 as of December 31, 2005. These conditions raise substantial doubt
      as
      to Shumate’s ability to continue as a going concern. To address these concerns,
      since the year end of fiscal 2005, Shumate has raised $2,000,000 through a
      private offering. See Note 16 for details. In addition, management is trying
      to
      continue to increase Shumate’s revenues and improve its results of operations to
      a level of profitability. Management may also seek to raise additional capital
      in the future if Shumate’s results of operations do not continue to improve or
      if the need otherwise arises. The financial statements do not include any
      adjustments that might be necessary if Shumate is unable to continue as a going
      concern.





**NOTE
      3 - REORGANIZATION**





On
      October 19, 2005, Shumate completed a restructuring
      with Stillwater National Bank (“Stillwater”). The restructuring resulted in a
      significant reduction in outstanding debt and provided Shumate with a
      strengthened balance sheet and reduced debt-servicing requirements. The
      restructuring was effected through an out-of-court restructuring, or
“recapitalization plan,” which consisted of the following:





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


·
            the
                extension of Shumate’s current line of credit with
                Stillwater;


·
            the
                issuance of a convertible note to
                Stillwater;


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


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


·
            Shumate’s
                acquisition of the capital stock of Shumate
                Machine;


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


·
            the
                exchange of Shumate’s outstanding unsecured notes, including principal and
                accrued interest, for shares of Shumate’s common stock;
                and


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




F-8


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





The
      recapitalization plan consisted of the following transactions (the
“restructuring transactions”):





**Amended
      and Restated Term Note** .
      Stillwater 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 Shumate 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, Shumate will be required to make a balloon payment
      of the entire outstanding principal balance and all accrued interest. The note
      bears interest at a rate equal to the prime rate plus two percent, and it is
      secured by a first priority security interest in all of Shumate’s existing and
      future assets. The proceeds of this note were applied as follows: $303,000
      to
      purchase machines from Shumate’s President and Chief Executive Officer, and from
      a former director; $100,000 to purchase the capital stock of Shumate Machine;
      and the remainder was applied to Shumate’s existing indebtedness to
      Stillwater.





**Revised
      Line of Credit** .
      Stillwater has extended Shumate’s 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 Shumate’s 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 Shumate’s existing
      and future assets.





**Convertible
      Note** .
      Shumate
      issued a convertible note in the principal amount of $2,500,000 to Stillwater.
      The principal and accrued interest on the convertible note is convertible,
      at
      Stillwater’s option, into shares of Shumate’s 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 Shumate’s common stock. Interest on the
      convertible note accrues from the date of closing until the earlier of
      conversion or 24 months, at which time the accrued interest will be capitalized
      into principal. Beginning at the end of the ninth quarter, Shumate is 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 Shumate’s assets.
      Shumate has agreed to include the shares of common stock underlying the
      convertible note on any eligible registration statement that it may file with
      the Securities and Exchange Commission under the Securities Act of 1933 in
      the
      next five years. Shumate analyzed
      this instrument for derivative accounting consideration under SFAS 133 and
      EITF
      00-19. Shumate determined the convertible notes were conventional and met the
      criteria for classification in stockholders equity under SFAS 133 and EITF
      00-19. Therefore, derivative accounting is not applicable for this convertible
      note payable. Shumate also analyzed this instrument for Beneficial Conversion
      Feature under EITF 98-5 and EITF 00-27. Because the conversion prices exceed
      the
      market trading price of Shumate’s common stock when the loans were issued, a
      Beneficial Conversion Feature was not created.





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





**Releases** .
      Stillwater has released Shumate and its Chief Financial Officer from their
      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** .
      Shumate’s unsecured note holders have exchanged all of their outstanding
      unsecured notes, with interest rates ranging from 6% to 12% and all currently
      due and owing, aggregated $1,719,787, for approximately 1,691,310 newly issued
      shares of Shumate’s common stock (on a post reverse-split basis), representing
      approximately 14.61% of the outstanding shares of Shumate’s common stock after
      giving effect to the restructuring.




F-9




**Restricted
      Stock Awards** .
      Shumate’s 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 its executive officers and non-employee directors,
      representing approximately 34.12% of the outstanding shares of Shumate’s common
      stock after giving effect to the restructuring. These shares vested on the
      closing of the restructuring, as did restricted stock awards of 335,500 shares
      previously issued to non-management employees and consultants.





As
      part
      of the restructuring, Stillwater loaned $350,000 to Shumate’s Chief Financial
      Officer to purchase an aggregate of 250,000 newly issued shares (post reverse
      stock split) of Shumate’s common stock, representing approximately 2.16% of its
      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 the Chief Financial Officer to Stillwater of approximately
      $10,000,000 under a personal guarantee of Shumate’s indebtedness to Stillwater.
      Stillwater has released the Chief Financial Officer from the remainder of his
      personal guarantee.




**NOTE
      4 - PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following at December 31, 2005:




**Description**
              
              **Life**
              
              **Amount**Shop
                  equipment
              
              
              5
                  - 12 years
              
              $
              3,206,467Other
                  equipment and furniture
              
              
              3
                  years
              
              
              79,773Leasehold
                  improvements
              
              
              5
                  years
              
              
              22,6413,308,881Less:
                  accumulated depreciation
              
              
              
              
              
              (1,455,868
              )Property
                  and equipment, net
              
              
              
              
              $
              1,853,013




Depreciation
      expense in continuing operations totaled $326,550 and $413,426 in 2005 and
      2004,
      respectively.





**NOTE
      5 - INTELLECTUAL PROPERTY**





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





At
      December 31, 2005, Shumate also has patent costs of $44,517 unrelated to the
      intellectual property rights described above.





F-10


**NOTE
      6 - NOTES PAYABLE - STILLWATER NATIONAL BANK**




$1,000,000
                  line of credit with Stillwater National Bank securedby
                  a first priority security interest in all of Shumate’s existing and future
                  assets.The
                  line of credit bears interest at a rate equal to the prime rate
                  plus two
                  percent.The
                  advances available under the line of credit are limited to a borrowing
                  base of the sum of (a) 80% of eligible accounts receivable, and
                  (b) 50% of
                  eligible inventory. This line of credit is secured by a first priority
                  security interest in all of Shumate’s existing and future
                  assets.
              
              $
              837,615$5,633,053
                  term note dated October 19, 2005 with Stillwater National Bank.The
                  note requires interest only payments for the six months, and thereafter
                  requires Shumate to make 24 equal monthly payments in an amount
                  sufficient
                  to fully amortize principal and interest on the note over 120 months.
                  The
                  note is due and payable in 30 months, at which time, Shumate will
                  be
                  required to make a balloon payment of the entire outstanding principal
                  balance and all accrued interest. The note bears interest at a
                  rate equal
                  to the prime rate plus two percent, and it is secured by a first
                  priority
                  security interest in all of Shumate’s existing and future
                  assets.
              
              
              5,633,053$2,500,000
                  convertible note dated October 19, 2005 with Stillwater National
                  Bank.The
                  principal and accrued interest on the convertible note is convertible,
                  at
                  Stillwater’s option, into shares of Shumate’s 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 Shumate’s common
                  stock. Interest on the convertible note accrues from October 19,
                  2005
                  until the earlier of conversion or 24 months, at which time the
                  accrued
                  interest will be capitalized into principal. Beginning at the end
                  of the
                  ninth quarter, Shumate is 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 Shumate’s assets. Shumate has agreed to
                  include the shares of common stock underlying the convertible note
                  on any
                  eligible registration statement that it may file with the Securities
                  and
                  Exchange Commission under the Securities Act of 1933 in the next
                  five
                  years.
              
              
              2,500,000Total
              
              $
              8,970,668




F-11


**NOTE
      7 - ACCRUED EXPENSES**





Accrued
      expenses as of December 31, 2005 included the following:





Accrued
                interest on notes payable
            
            $
            45,252Payroll
                taxes and estimated penalties
            
            
            244,616Unpaid
                salaries
            
            
            15,770Rebates
            
            
            42,013Insurance
            
            
            61,145Total
                accrued liabilities
            
            $
            408,796





**NOTE
      8 - NOTES PAYABLE**





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





Four
      unsecured notes payable to third parties totaling $315,000 and related accrued
      interest in the amount of $60,625 were converted to 370,392 shares of common
      stock on October 19, 2005. Shumate recognized a total of $202,207 debt
      forgiveness income in these transactions.





**NOTE
      9 - RELATED PARTY NOTES PAYABLE**





Six
      unsecured notes payable to officers and directors totaling $1,095,799 and
      related accrued interest in the amount of $225,120 were converted to 1,320,918
      shares of common stock on October 19, 2005.





**NOTE
      10 - INCOME TAXES**





Shumate
      uses the liability method, where deferred tax assets and liabilities are
      determined based on the expected future tax consequences of temporary
      differences between the carrying amounts of assets and liabilities for financial
      and income tax reporting purposes. Shumate has incurred significant net losses
      in past years and, therefore, has no tax liability. The net deferred tax asset
      generated by the loss carry-forward has been fully reserved. The cumulative
      net
      operating loss carry-forward is approximately $7,000,000 at December 31, 2005,
      and will expire in the years 2021 through 2025.





Internal
      Revenue Section 382 restricts the ability to use these carryforwards whenever
      an
      ownership change as defined occurs. Shumate incurred such an ownership change
      on
      October 19, 2005. As the result of the ownership change, Shumate’s use of net
      operating losses through the date of change is restricted. Losses subsequent
      to
      the date of change are not restricted.





**NOTE
      11 - COMMON STOCK**





On
      April
      29, 2005, Shumate adopted its 2005 Stock Incentive Plan (the “Plan”). Shumate is
      permitted to issue up to 33,000,000 shares of common stock under the Plan in
      the
      form of stock options, restricted stock awards, and stock awards to employees,
      non-employee directors, and outside consultants.





On
      May
      11, 2005, Shumate granted restricted stock awards for 4,285,500 post-split
      shares of common stock under the Plan, including restricted stock awards of
      3,950,000 post-split shares to its officers and directors. These shares were
      recorded at their par value at $30,000 based on the appraisal performed by
      an
      independent third party consultant. Under the terms of the restricted stock
      awards, the shares would not vest until Shumate closed a plan of reorganization
      between Shumate, its subsidiaries, certain affiliated parties, and Stillwater,
      with respect to the restructuring of various notes issued to Stillwater. This
      restructuring was completed on October 19, 2005.





F-12





In
      October 2005, Shumate issued 370,392 shares of common stock to several third
      parties for release of $315,000 in unsecured notes payable and related accrued
      interest of $60,625.





In
      October 2005, Shumate issued 1,320,918 shares of common stock to several related
      parties for release of $1,095,799 in unsecured notes payable and related accrued
      interest of $225,120.





In
      October 2005, Shumate issued 2,368,000 shares of common stock to Stillwater
      in
      exchange for release of $2,368,000 of outstanding indebtedness to
      Stillwater.





In
      October 2005, in conjunction with the debt restructuring, Shumate issued 250,000
      shares of common stock to its Chief Financial Officer for cash totaling
      $250,000.





In
      December 2005, Shumate issued 416,667 shares of common stock for cash totaling
      $250,000.





During
      the fourth quarter of 2005, Shumate issued 671,432 shares of common stock to
      consultants for their services. These shares were recorded at their value of
      $444,999.





**NOTE
      12 - DISCONTINUED OPERATIONS / DEBT FORGIVENESS INCOME**





In
      September 2003, three of Shumate’s wholly owned subsidiaries, Excalibur Steel,
      Inc., Excalibur Aerospace, Inc., which did business as AeroWeld, Inc., and
      Excalibur Services, Inc. (the “Tulsa-based Operations”) ceased operations. On
      December 31, 2003, 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 court discharged Excalibur Steel and Excalibur
      Aerospace of all of its debts and liabilities, and on August 3, 2004, the court
      discharged Excalibur Services of all of its debts and liabilities. In 2003,
      Shumate reclassified $5,218,883 as net liabilities of discontinued operations,
      and these liabilities were discharged in the three bankruptcy proceedings in
      2004. As a result, Shumate recorded $5,218,883 in debt forgiveness income in
      2004.





On
      March
      9, 2005, Excalibur Holdings, Inc. (“Excalibur Holdings”), a wholly-owned
      subsidiary of Shumate and the parent corporation of Shumate Machine, filed
      a
      voluntary petition for protection under Chapter 7 of the U.S. Bankruptcy Code
      in
      the United States Bankruptcy Court, Southern District of Texas. As a result
      of
      this bankruptcy filing, 100% of the capital stock of Shumate Machine became
      the
      sole asset of the bankruptcy estate. The capital stock of Shumate Machine was
      pledged to secure the obligations of Excalibur Holdings to its senior lender,
      Stillwater. On October 19, 2005, Stillwater transferred the capital stock of
      Shumate Machine to Shumate as part of the reorganization of Shumate. See Note
      3
      for details. In November 2005, the court discharged Excalibur Holdings of all
      of
      its debts and liabilities. As shown in the accompanying consolidated financial
      statements, Shumate recorded $1,837,295 in 2005 for debt forgiveness income
      resulting from the discharge of the debts and liabilities of Excalibur Holdings
      in the bankruptcy proceedings.





As
      a
      result of the reorganization of Shumate discussed in Note 3, Shumate recognized
      $4,222,743 in debt forgiveness income from Stillwater transactions and $204,414
      in debt forgiveness income related to third party notes payable in
      2005.





**NOTE
      13 - STOCK OPTIONS AND WARRANTS**





Shumate
      currently has 5 stock option plans: (a) the 2001 Stock Option Plan reserved
      285,714 shares, and 300,571 options have been granted through December 31,
      2005
      (“date”) of which 294,929 options have expired unexercised, (b) the 2003 Stock
      Grant Plan reserved 428,571 shares, of which 232,063 shares have been issued
      to
      date, (c) the 2003 Employee Stock Incentive Plan reserved 1,071,429 shares,
      of
      which none have been issued to date, (d) the 2003 Non-Employee Directors and
      Consultants Retainer Stock Plan reserved 357,143 shares, of which none have
      been
      issued to date, and (e) the 2005 Stock Incentive Plan reserved 33,000,000 shares
      of which 4,685,500 have been issued to date.




F-13


During
      2005 and 2004, no options or warrants were granted.





Summary
      information regarding options and warrants is as follows:




**Options**
              
              **WeightedaverageSharePrice**
              
              **Warrants**
              
              **Weighted
                  averageShare
                  Price**Outstanding
                  atDecember
                  31, 2003
              
              
              55,571
              
              $
              8.82
              
              
              201,712
              
              $
              7.94Year
                  ended December 31, 2004:Forfeited
              
              
              (1,357
              )
              
              4.20
              
              
              —
              
              
              —Outstanding
                  atDecember
                  31, 2004
              
              
              54,214
              
              
              8.89
              
              
              201,712
              
              
              7.94Year
                  ended December 31, 2005:Forfeited
              
              
              (357
              )
              
              4.20
              
              
              —
              
              
              —Outstanding
                  atDecember
                  31, 2005
              
              
              53,857
              
              $
              8.95
              
              
              201,712
              
              $
              7.94





Options
      outstanding and exercisable as of December 31, 2005:




**--Outstanding
                  -
                  -****Exercise
                  Price**
              
              **Numberof
                  Shares**
              
              ****
                **Remaininglife**
              
              **Exercisable
                    Numberof
                    Shares**$
                  4.20
              
              
              5,286
              
              
              2
                  years
              
              
              3,5247.00
              
              
              14,286
              
              
              1
                  year
              
              
              14,28610.50
              
              
              34,285
              
              
              1
                  year
              
              
              34,28553,857
              
              
              
              
              
              52,095





Warrants
      outstanding and exercisable as of December 31, 2005:


**--Outstanding
                  - -**
              ****
              
              ******Exercise
                  Price**
              ****
              ****
                **Number****of
                  Shares**
              
              **Remaining**
                    **life**
              
              **Exercisable****Number**
                  **of
                    Shares**$6.30
                  - $ 7.00
              
              
              130,848
              
              
              1
                  year
              
              
              130,848$8.40
                  - $10.50
              
              
              70,864
              
              
              1
                  year
              
              
              70,864201,712
              
              
              
              
              
              201,712




**NOTE
      14 - MAJOR CUSTOMERS**





Two
      customers accounted for 71% of total revenues in 2005 and 51% of total revenues
      in 2004.





F-14


**NOTE
      15 - COMMITMENTS**





Shumate’s
      executive offices are in Conroe, Texas. The lease expires June 30, 2009 and
      is
      payable at $22,600 per month. Future minimum lease payments under the lease
      as
      of December 31, 2005 are $271,200 in 2006, $271,200 in 2007, $271,200 in 2008
      and $135,600 in 2009.





In
      December 2005, Shumate Machine entered into an operating lease with a third
      party landlord. This lease expires November 30, 2008 and is payable at $14,149
      per month. The lease grants to Shumate Machine an option to purchase the
      premises for a purchase price of $1,825,000, against which Shumate Machine
      shall
      be entitled to a credit against the purchase price in an amount equal to the
      amount necessary to amortize the purchase price at seven percent over a period
      of 240 months. The landlord also granted to Shumate Machine a right of first
      refusal with respect to the premises. In addition, Shumate Machine entered
      into
      a sublease agreement to sublease of a portion of the premises. The sublease
      is a
      three-month sublease, with automatic extensions for the following 33 months,
      at
      a rate of approximately $4,000 per month. Future net minimum lease payments
      under the lease as of December 31, 2005 are $169,788 in 2006, $169,788 in 2007
      and $155,639 in 2008. Future net minimum lease receivables under the sublease
      as
      of December 31, 2005 are $48,000 in 2006, $48,000 in 2007 and $44,000 in
      2008.





Rent
      expense was $271,680 and $300,244 in 2005 and 2004, respectively.





**NOTE
      16 - SUBSEQUENT EVENTS**





On
      February 22, 2006, Shumate sold 3,333,333 shares of its common stock to several
      investors in a private offering. 2,500,000 shares of common stock were placed
      by
      a placement agent and Shumate placed the remaining 833,333 shares of common
      stock. The purchase price per share of common stock was $0.60. The placement
      agent received $165,000 in commissions and 250,000 warrants to purchase shares
      of common stock at an exercise price of $0.63 per share. Shumate also paid
      legal
      fees of $10,000 to the placement agent’s attorney. The net proceeds of this
      offering to Shumate after the payment of commissions, fees, and other expenses
      of the offering were approximately $1,810,000.





Shumate
      is obligated to file a registration statement registering the resale of shares
      of Shumate’s common stock. Shumate is required to file the registration
      statement within 30 days of filing its Form 10-KSB for the year ended December
      31, 2005, but no later than April 30, 2006. If the registration statement is
      not
      timely filed or if the registration is suspended other than as permitted in
      the
      registration rights agreement, Shumate will be obligated to pay each investor
      a
      fee equal to 1.0% of such investor’s purchase price of the common stock for each
      30 day period (pro rated for partial periods), that such registration conditions
      are not satisfied.





Subject
      to certain conditions, Shumate has granted the investors a right of first
      refusal, for a period of one (1) year from the effective date of the
      registration statement required to be filed in connection with this transaction,
      to participate in any subsequent financing that Shumate conducts.




F-15


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





See
      our
      Current Report on Form 8-K filed on February 4, 2004 with respect to changes
      in
      accountants.





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




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports is recorded,
      processed, summarized, and reported within the time periods specified in the
      Securities and Exchange Commission’s rules and forms, and that such information
      is accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure based on the definition of “disclosure controls
      and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure
      controls and procedures, our management recognized that any controls and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures.





At
      the
      end of the period covered by this Annual Report on Form 10-KSB, we carried
      out
      an evaluation, under the supervision and with the participation of our
      management, including our Chief Executive Officer and Chief Financial Officer,
      of the effectiveness of the design and operation of our disclosure controls
      and
      procedures. Based on the foregoing, our Chief Executive Officer and our Chief
      Financial Officer concluded that our disclosure controls and procedures were
      not
      effective to ensure that all material information required to be disclosed
      in
      this Annual Report on Form 10-KSB has been made known to them in a timely
      fashion. **** In
      connection with the completion of its audit of, and the issuance of its report
      on, our financial statements for the year ended December 31, 2005, Malone &
Bailey, PC identified deficiencies that existed in the design or operation
      of
      our internal control over financial reporting that it considers to be “material
      weaknesses.” The Public Company Accounting Oversight Board has defined a
      material weakness as a “significant deficiency or combination of significant
      deficiencies that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.”





The
      deficiencies in our internal control related to inventory valuation, expense
      recognition, related party transactions, and disclosure control deficiencies
      related to transactions involving discontinued operations and diluted earnings
      per share. The adjustment to inventory valuation increased our inventory to
      account for additional allocated overhead items and resulted in a reduction
      to
      cost of sales in the amount of $65,772. Adjustments to expense recognition
      items
      involved the following: reallocation of accrued employee group insurance expense
      from December 2005 to January 2006, resulting in a credit to expense in the
      amount of $27,749; reduction of our allowance for bad debts from $100,000 to
      $60,000 resulting in a credit to bad debt expense of $40,000; and a correction
      in depreciation calculations resulting in a charge to depreciation expense
      in
      the amount of $57,518. Adjustments regarding related party transactions relate
      to the reimbursement of the purchase price of equipment acquired by related
      parties for Shumate in 2003 and 2004. Because the equipment has been in use
      by
      Shumate since that time, the cost basis of the equipment was reduced by imputed
      depreciation of $125,137, and a related charge to compensation was recorded.
      Other adjustments were re-allocations of interest expense, debt forgiveness,
      and
      paid in capital related to our reorganization, resulting in a net credit to
      interest expense in the amount of $31,464. Disclosure control deficiencies
      relating to transactions involving discontinued operations and diluted earnings
      per share have been appropriately corrected in this Annual Report on Form
      10-KSB.





These
      deficiencies have been disclosed to our Board of Directors. Additional effort
      is
      needed to fully remedy these deficiencies and we are continuing our efforts
      to
      improve and strengthen our control processes and procedures. We are in the
      process of improving our internal control over financial reporting in an effort
      to remediate these deficiencies by improving supervision and increasing training
      of our accounting staff with respect to generally accepted accounting
      principles, providing additional training to our management regarding use of
      estimates in accordance with generally accepted accounting principles,
      increasing the use of contract accounting assistance, adding additional
      accounting personnel to assist in inventory and job costing valuations, and
      increasing the frequency of internal financial statement review.





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





16




**PART
      III**





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





The
      information under the caption “Election of Directors” and “Management -
      Executive Officers and Directors” in the proxy statement for our 2006 annual
      meeting is incorporated herein by reference.





The
      information under the caption “Section 16(a) Beneficial Ownership Reporting
      Compliance” in the proxy statement for our 2006 annual meeting is incorporated
      herein by reference.





**Item
      10. EXECUTIVE COMPENSATION**





The
      information under the caption “Executive Compensation” in the proxy statement
      for our 2006 annual meeting is incorporated herein by reference.





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





The
      information under the captions “Common Stock Ownership of Certain Beneficial
      Owners and Management” in the proxy statement for our 2006 annual meeting is
      incorporated herein by reference.





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





The
      information under the caption “Related Party Transactions” in the proxy
      statement for our 2006 annual meeting is incorporated herein by
      reference.





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




(a)  Exhibits





**Exhibit
                No.**
            ****
            **Description**2.1
            
            Agreement
                and Plan of Merger by and among Global Realty Management Group, Inc.,
                GRMG
                Acquisition Corporation, Excalibur Holdings, Inc., and Michael D.
                Farkas,
                incorporated by reference to Amendment No. 1 to Shumate’s Registration
                Statement on Form SB-2 filed on September 5, 2002 (File No.
                333-88974).2.2
            
            Agreement
                and Plan of Merger by and among Shumate Machine Works, Inc., Larry
                C.
                Shumate, Russ Clark, Excalibur Holdings, Inc., and Excalmergeco,
                Inc.,
                incorporated by reference to Amendment No. 1 to Shumate’s Registration
                Statement on Form SB-2 filed on September 5, 2002 (File No.
                333-88974).2.3
            
            Asset
                Purchase Agreement by and among Hemiwedge Valve Corporation, Soderberg
                Research and Development, Inc., Inprop, Inc., and Jeanette Soderberg,
                incorporated by reference to Shumate’s Current Report on Form 8-K filed on
                December 6, 2005.3.1
            
            Certificate
                of Incorporation of Excalibur Industries, Inc. (now known as Shumate
                Industries, Inc.), incorporated by reference to Amendment No. 1 to
                Shumate’s Registration Statement on Form SB-2 filed on September 5, 2002
                (File No. 333-88974).




17




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




18




10.7
            
            2001
                Stock Option Plan of Excalibur Holdings, Inc., incorporated by reference
                to Amendment No. 1 to Shumate’s Registration Statement on Form SB-2 filed
                on September 5, 2002 (File No. 333-88974).10.8
            
            2003
                Stock Grant Plan, incorporated by reference to Shumate’s Registration
                Statement on Form S-8, filed on June 26, 2003 (File No.
                333-106521).10.9
            
            2003
                Employee Stock Incentive Plan, incorporated by reference to Shumate’s
                Registration Statement on Form S-8, filed on August 1, 2003 (File
                No.
                333-107548).10.10
            
            2003
                Non-Employee Directors and Consultants Retainer Stock Plan, incorporated
                by reference to Shumate’s Registration Statement on Form S-8, filed on
                August 1, 2003 (File No. 333-107548).10.11
            
            2005
                Stock Incentive Plan, incorporated by reference to Shumate’s Registration
                Statement on Form S-8, filed on May 3, 2005 (File No.
                333-124568).10.12
            
            Improved
                property commercial lease between Paul & Sherry Vick dba P & S
                Properties LLC and Shumate Machine Works, incorporated by reference
                to
                Shumate’s Annual Report on Form 10-KSB for the year ended December 31,
                2005.10.13
            
            Lease
                agreement with option to purchase by and between the Brewer Family
                Charitable Remainder Annuity Trust No. 1 and Shumate Machine Works,
                incorporated by reference to Shumate’s Annual Report on Form 10-KSB for
                the year ended December 31, 2005.16.1
            
            Letter
                on change in certifying accountant, incorporated by reference to
                Shumate’s
                Current Report on Form 8-K filed on February 4, 2004.21.1
            
            Subsidiaries
                of Shumate Industries, Inc., incorporated by reference to Shumate’s Annual
                Report on Form 10-KSB for the year ended December 31,
                2005.23.1
            
            Consent
                of Independent Public Accountants, Malone & Bailey, PC, incorporated
                by reference to Shumate’s Annual Report on Form 10-KSB for the year ended
                December 31, 2005.31.1
            
            Certificationof
                Larry C. Shumate pursuant to Rule 13a-14(a),
                filed herewith.31.2
            
            Certificationof
                Matthew C. Flemming pursuant to Rule 13a-14(a),
                filed herewith.32.1
            
            Certification
                of Larry C. Shumate pursuant to 18 U.S.C Section 1350, as adopted
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002,
                filed herewith.32.2
            
            Certification
                of Matthew C. Flemming pursuant to 18 U.S.C Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                filed herewith.


___________________





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





The
      information under the caption “Accountant Fees and Services” in the proxy
      statement for our 2006 annual meeting is incorporated herein by
      reference.




19


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant caused this amended report to be signed on its behalf by the
      undersigned, thereunto duly authorized.


**SHUMATE
              INDUSTRIES, INC.**By:
            /s/ Larry
              C.
              ShumateLarry
              C. Shumate, Chairman, President and Chief Executive
              Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      amended report has been signed below by the following persons on behalf of
      the
      registrant and in the capacities indicated.





Signatures
              
              Title
              
              Date/s/
                  Larry C. Shumate
              
              Chairman
                  of the Board, President,
              
              June
                  28, 2006Larry
                  C. Shumate
              
              Chief
                  Executive Officer/s/
                  Matthew C. Flemming
              
              Executive
                  Vice President, Chief
              
              June
                  28, 2006Matthew
                  C. Flemming
              
              Financial
                  Officer, Treasurer,Secretary,
                  and Director/s/
                  Russell T. Clark
              
              Vice
                  President, Chief Operating OfficerRussell
                  T. Clark
              
              and
                  Director
              
              June
                  28, 2006/s/
                  Frank X. Marshik
              
              Director
              
              June
                  28, 2006


20