**U.
        S. SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
  **FORM
        10-KSB**
  (Mark
        One)
  x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the fiscal year ended December 31, 2005o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
  For
        the
        transition period from ___________ to _____________
  Commission
        File Number 000-30291
  **SHUMATE
        INDUSTRIES, INC.**
 (Name
        of
        small business issuer as specified in its charter)
  **Delaware**
              **03-0453686**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer
                Identification
                  No.)**12060
                  FM 3083**
                **Conroe,
                  Texas 77301**
                ****(Address
                  of principal executive offices, including zip
                  code)
  Registrant’s
        telephone number, including area code: (936) 539-9533
 Securities
        registered pursuant to Section 12(b) of the Act: **None**
 Securities
        registered pursuant to Section 12(g) of the Act: **Common
        Stock, $.001 par value**
 ___________________
  Check
        whether the issuer (1) filed all reports required to be filed by
        Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months
        (or for such shorter period that the registrant was required to file such
        reports), and (2) has been subject to such filing requirements for the past
        90 days.  Yes X No
  Check
        if
        disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is
        not
        contained in this form, and no disclosure will be contained, to the best
        of
        registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-KSB or any amendment
        to
        this Form 10-KSB. [ ]
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act. [ ]
  The
        issuer’s revenues for the most recent fiscal year were $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.
  **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 WithheldLarry
                  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
                  BidFirst
                  quarter
              
              $
              0.53
              
              $
              0.18Second
                  quarter
              
              
              0.42
              
              
              0.14Third
                  quarter
              
              
              0.28
              
              
              0.18Fourth
                  quarter
              
              
              1.33
              
              
              0.212005
                  (OTC Bulletin Board)
              
              
              High
                  Bid
              
              
              Low
                  BidFirst
                  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.
 
 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.
  26
  **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.
 
 **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.
  27
  **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
              
              Year
                  EndedDecember
                  31,
              
              December
                  31,2005
              
              2004Net
                  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.
  28
 
 **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.
  29
 
 **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.
  30
 
 *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.
  **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.
  31
 
 **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.
 
 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.
  32
 
 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**
  **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.
  
 
 **SHUMATE
                    INDUSTRIES, INC.****(FORMERLY
                    EXCALIBUR INDUSTRIES, INC.)****CONSOLIDATED
                    STATEMENTS OF INCOME****For
                    the Years Ended December 31, 2005 and 2004**2005
                
                2004REVENUES
                
                $
                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
                
                
                2,432,817See
                    accompanying summary of accounting policiesand
                    notes to consolidated financial
                    statements.
  
 
 **SHUMATE
                    INDUSTRIES, INC.****(FORMERLY
                    EXCALIBUR INDUSTRIES, INC.****CONSOLIDATED
                    STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT****For
                    the Years Ended December 31, 2005 and 2004**AdditionalCommon
                    Stock
                
                Paid-In
                
                AccumulatedShares
                
                Par
                
                Capital
                
                Deficit
                
                TotalBalances
                    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
                )
  
 
 **SHUMATE
                    INDUSTRIES, INC.****(FORMERLY
                    EXCALIBUR INDUSTRIES, INC.)****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****For
                    the Years Ended December 31, 2005 and 2004**2005
                
                2004CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                1,978,484
                
                $
                1,184,015Adjustments
                    to reconcile net income to net cash 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
  
  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
 
 Basis
          of Presentation
 
 Reclassifications
 
 Use
          of Estimates in Financial Statement Preparation
 
 Revenue
          Recognition.
 
 Cash
          and Cash Equivalents
 
 Allowance
          for Doubtful Accounts
 
 Inventory
 
 Property
          and Equipment
 
 Patents.
 
 Impairment
          of Long-Lived Assets
  
  Income
          Taxes
 
 Stock-Based
          Compensation.
 
 Accounting for Stock-Based Compensation
 2005
                  
                  2004Net
                      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
                  
                  $
                  1,176,056Basic
                      net income per common shareAs
                      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.
 
 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
  
  Stock
          Split.
 
 Research
          and Development.
 
 Recently
          Issued Accounting Pronouncements.
 
   NOTE
          2 - GOING CONCERN
 
   NOTE
          3 - REORGANIZATION
 
  
 ·
                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.
  
      Amended
          and Restated Term Note
  Revised
          Line of Credit
  Convertible
          Note
  Conversion
          of Prior Bank Debt
  Releases
  Unsecured
          Note Exchange Offer
  
 
 Restricted
          Stock Awards
 
  
 NOTE
          4 - PROPERTY AND EQUIPMENT
 
  Description
                  
                  
                  Life
                  
                  
                  AmountShop
                      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
 
 Ò Ò Ò
  
 
   NOTE
          6 - NOTES PAYABLE - STILLWATER NATIONAL
          BANK
 
 $1,000,000
                    line of credit with Stillwater National Bank secured by a first
                    priority
                    security interest in all of Shumate’s existing and future assets. The line
                    of credit bears interest at a rate equal to the prime rate plus
                    two
                    percent. The advances available under the line of credit are
                    limited to a
                    borrowing base of the sum of (a) 80% of eligible accounts receivable,
                    and
                    (b) 50% of eligible inventory. This line of credit is secured
                    by a first
                    priority security interest in all of Shumate’s existing and future
                    assets.
                
                $
                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
  
 
 NOTE
          7 - ACCRUED EXPENSES
 
  
 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
 
  
   NOTE
          9 - RELATED PARTY NOTES PAYABLE
 
   NOTE
          10 - INCOME TAXES
 
  
   NOTE
          11 - COMMON STOCK
 
  
   
 
  
  
  
  
  
  
 NOTE
          12 - DISCONTINUED OPERATIONS / DEBT FORGIVENESS
          INCOME
 
  
  
  
 NOTE
          13 - STOCK OPTIONS AND WARRANTS
 
   
 
  
  
 Weighted
                
                
                
                Weightedaverage
                
                
                
                averageOptions
                
                Share
                    Price
                
                Warrants
                
                Share
                    PriceOutstanding
                    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
 
  
 -
                      -
                      Outstanding - -
                
                ExercisableNumber
                
                Remaining
                
                NumberExercise
                    Price
                
                
                of
                    Shares
                
                
                life
                
                
                of
                    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
 
  
 -
                    -
                    Outstanding - -
                
                ExercisableNumber
                
                Remaining
                
                NumberExercise
                    Price
                
                of
                    Shares
                
                life
                
                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
 
  
 
 NOTE
          15 - COMMITMENTS
 
  
  
   NOTE
          16 - SUBSEQUENT EVENTS
  **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 closely 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. We maintain that the controls
        and procedures in place do provide reasonable assurance that all necessary
        disclosures are communicated as required.
  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 Financial Officer, of the effectiveness of
        the
        design and operation of our disclosure controls and procedures. Based on
        the
        foregoing, 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. We are in the process of improving our internal control
        over financial reporting in an effort to remediate these deficiencies through
        improved supervision and training of our accounting staff. 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. Our management and directors
        will continue to work with our auditors and other outside advisors to ensure
        that our controls and procedures are adequate and effective.
  34
  **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).
  35
 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, filed
                    herewith.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), filed
                    herewith.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, filed herewith.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), filed
                    herewith.10.3
                Security
                    Agreement, filed herewith.10.4
                Lockbox
                    Agreement, filed herewith.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.
  36
 
 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, filed
                    herewith.10.13
                Lease
                    agreement with option to purchase by and between the Brewer Family
                    Charitable Remainder Annuity Trust No. 1 and Shumate Machine
                    Works, filed
                    herewith.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., filed herewith.23.1
                Consent
                    of Independent Public Accountants, Malone & Bailey, PC, filed
                    herewith.31.1
                Certificationof
                    Larry C. Shumate pursuant to Rule 13a-14(a),
                    filed herewith.31.2
                Certificationof
                    Matthew C. Flemming pursuant to Rule 13a-14(a),
                    filed herewith.32.1
                Certification
                    of Larry C. Shumate pursuant to 18 U.S.C Section 1350, as adopted
                    pursuant
                    to Section 906 of the Sarbanes-Oxley Act of 2002,
                    filed herewith.32.2
                Certification
                    of Matthew C. Flemming pursuant to 18 U.S.C Section 1350, as
                    adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                    filed herewith.
 ___________________
 
 **Item
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**
 
 The
        information under the caption “Accountant Fees and Services” in the proxy
        statement for our 2006 annual meeting is incorporated herein by
        reference.
  37
  **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,
              March
                  28, 2006Larry
                  C. Shumate
              
              Chief
                  Executive Officer/s/
                  Matthew C. Flemming
              
              Executive
                  Vice President, Chief
              March
                  28, 2006Matthew
                  C. Flemming
              
              Financial
                  Officer, Treasurer, Secretary, and Director/s/
                  Russell T. Clark
              
              Vice
                  President, Chief Operating Officer
              March
                  28, 2006Russell
                  T. Clark
              
              and
                  Director/s/
                  Frank X. Marshik
              
              Director
              March
                  28, 2006Frank
                  X. Marshik
  38