THIS NOTE AND THE SECURITIES UNDERLYING THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR QUALIFIED
UNDER APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION
WITHOUT, EXCEPT AS OTHERWISE AGREED BY SHUMATE INDUSTRIES, INC., AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO SHUMATE INDUSTRIES, INC. THAT SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
 
CONVERTIBLE PROMISSORY NOTE

$2,000,000.00
July 10, 2007

FOR VALUE RECEIVED, the undersigned, Shumate Industries, Inc., a Delaware
corporation (the “Maker”), hereby promises to pay to the order of Whitebox
Shumate Ltd., a British Virgin Islands corporation, or its assigns (the
“Payee”), at such place as the Payee may designate in writing, the principal sum
of Two Million and No/100 Dollars ($2,000,000.00) under the terms set forth
herein.
 
1. Interest. The unpaid principal balance hereof from time to time outstanding
shall bear interest from the date hereof at the rate of ten percent (10%) per
annum; provided, however that from and after an event of default under Section 4
below, such interest rate shall increase to fifteen (15%) per annum (but in no
event greater than the highest rate permitted by law).
 
2. Payment. Except as otherwise provided herein, and subject to any default
hereunder, the principal and interest hereof is payable as follows:
 
(a) Interest only is payable in cash in arrears on the first day of each month,
beginning on August 1, 2007 (the “Scheduled Interest Payment”). However, if
Maker gives Payee written notice five (5) days before the due date of a
particular Scheduled Interest Payment of Maker’s election to defer payment of
such Scheduled Interest Payment, the amount of such Scheduled Interest Payment
shall, from and after its otherwise scheduled due date, become part of the
principal balance hereof.
 
(b) If Maker fails to file the Registration Statement (as defined below) with
the U.S. Securities and Exchange Commission under the Securities Act and
applicable state securities laws within 180 days of the date of this Note, or if
Maker fails to obtain effectiveness of the Registration Statement under the
Securities Act and applicable state securities laws within 270 days of the date
of this Note, then for each full month (prorated for partial months) that either
or both of these failures continue (as aggregated together, the “Failure Term”),
Maker shall pay in arrears in cash, on the first day of each month, additional
interest (the “Contingent Additional Interest”, which automatically shall become
part of the principal amount of this Note) at a rate equal to $3,780.00 per
month for any portion of the Failure Term. The “Registration Statement” refers
to a registration statement filed by the Company with the SEC under the
Securities Act and applicable state securities laws pursuant to a Registration
Rights Agreement of this date between the Maker and the Payee (the “Registration
Rights Agreement”).
 
 
 

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(c) On the earlier of July 10, 2008 or the initial closing date of the
Subsequent Equity Financing as defined below (the “Maturity Date”), the
outstanding principal balance of this Note (inclusive of any Scheduled Interest
Payments converted to principal pursuant to Section 2(a) above) will be due and
payable in cash, together with all then-accrued but unpaid interest (including
any then accrued, but unpaid, Contingent Additional Interest). Maker agrees to
give Payee at least ten (10) days prior written notice of Maker’s required
payoff of this Note if the Maturity Date will be prior to July 10, 2008 (the
“Early Payment Notice”). For purposes of this Note, the “Subsequent Equity
Financing” refers to the first bona fide third party sale by Maker of its equity
securities (including, without limitation, equity or debt securities directly or
indirectly convertible or exchangeable for equity securities, alone or with any
debt securities) occurring after the date of this Note.
 
3. Conversion.
 
(a) At any time while any portion of this Note remains unpaid, the Payee may
elect (by giving written notice to Maker) to convert, at the Conversion Rate
below, all or any portion of the principal and/or accrued, but unpaid, interest
hereon into securities of Maker. Within ten (10) days after any conversion of
this Note, the Maker shall at its expense issue and deliver to Payee a
certificate or certificates for the number and type of securities issuable upon
conversion.
 
(b) The “Conversion Rate” is as follows:
 
(i) For any conversion elected in writing by the Payee (other than into the
Subsequent Equity Financing pursuant to Section 3(b)(ii) below), the Payee may
convert this Note into shares of the Maker’s Common Stock at a Conversion Rate
equal to $1.89 per share.
 
(ii) For any conversion elected in writing by the Payee into the Subsequent
Equity Financing, the Payee may convert this Note into the same securities sold
by Maker in the Subsequent Equity Financing using the price per share, unit or
other security as the applicable Conversion Rate. The Payee’s right to convert
into the Subsequent Equity Financing will expire 24 hours in advance of the
initial closing of the Subsequent Equity Financing so long as the Maker has
given written notice to the Payee pursuant to Section 3(e) below.
 
(c) The Conversion Rate (and, as applicable, the factors above used to compute
it) shall be adjusted proportionally for any subsequent stock dividend or split,
stock combination or other similar recapitalization, reclassification or
reorganization of or affecting Maker’s Common Stock. In case of any
consolidation or merger to which the Maker is a party other than a merger or
consolidation in which the Maker is the continuing corporation, or in case of
any sale or conveyance to another corporation of the property of the Maker as an
entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Maker), then instead
of receiving shares of Maker’s Common Stock or other of Maker’s securities,
Payee shall have the right thereafter to receive the kind and amount of shares
of stock and other securities and property which the Payee would have owned or
have been entitled to receive immediately after such consolidation, merger,
statutory exchange, sale or conveyance had the same portion of this Note been
paid or converted immediately prior to the effective date of such consolidation,
merger, statutory exchange, sale or conveyance and, in any such case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this Section with respect to the rights and interests
thereafter of the Payee, to the end that the provisions set forth in this
Section shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock and other securities and
property thereafter deliverable in connection with this Note. The provisions of
this subsection shall similarly apply to successive consolidations, mergers,
statutory exchanges, sales or conveyances.
 
 
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(d) Payee will have the same registration rights with respect to any Common
Stock or other securities of Maker issued to Payee upon any conversion hereof
pursuant to Section 3(b)(i) above as Payee otherwise has under the Registration
Rights Agreement. Payee will have the same registration rights with respect to
any Common Stock or other securities of Maker issued to Payee upon any
conversion hereof pursuant to Section 3(b)(ii) above as granted by the Maker to
the other purchasers of securities in the Subsequent Equity Financing.
 
(e) In addition to giving the Early Payment Notice, while any portion of this
Note remains unpaid, Maker agrees to give Payee at least ten (10) days prior
written notice of the initial closing date and time of any Subsequent Equity
Financing and any event that would adjust the Conversion Rate under Section 3(c)
above.
 
4. Default. The occurrence of any one or more of the following events shall
constitute an event of default, upon which Payee may declare the entire
principal amount of this Note, together with all accrued but unpaid interest, to
be immediately due and payable:
 
(a) The Maker shall fail to make any required payment of principal or interest
(including, without limitation, as to Contingent Additional Interest that
becomes part of the principal hereof and any interest accrued thereon) when due,
and such failure shall continue through five (5) days thereafter.
 
(b) The Maker shall be in material default under any other term or provision of
this Note, under any term or provision of the Note Purchase Agreement of this
date between Maker and Payee (the “Note Purchase Agreement”), under the warrant
to purchase 400,000 shares of Maker’s Common Stock issued in connection herewith
to Payee (the “Warrant”) or under the Registration Rights Agreement, and any
such default is not cured within ten (10) days after written notice from Payee
to Maker. Notwithstanding the foregoing, a failure by the Maker to timely file
or obtain effectiveness of the Registration Statement will not, in and of
itself, constitute an event of default (it being agreed that Contingent
Additional Interest will instead accrue hereunder upon such failure).
 
 
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(c) The Maker shall become insolvent or shall fail to pay, or become unable to
pay, its debts as they become due; or any bankruptcy, reorganization, debt
arrangement or other proceeding under any bankruptcy or insolvency law shall be
instituted by or against the Maker.
 
(d) Any representation or warranty of the Maker contained in the Note Purchase
Agreement shall be untrue in any material respect, or Maker shall fail to
materially comply with any covenants or agreements of Maker contained in this
Note, the Note Purchase Agreement, the Warrant or the Registration Rights
Agreement.
 
(e) The Maker incurs an event of default under the terms of its secured
revolving line of credit facility with Stillwater National Bank (the “Stillwater
Facility”).
 
(f) The Maker incurs aggregate debt senior in security or right of payment to
this Note (whether or not inclusive of the Stillwater Facility) in excess of
$10,000,000, without obtaining the Payee’s prior written consent.
 
Without limiting the above, the Maker acknowledges that payments on the various
scheduled due dates in Sections 2 are of essence and that any failure to timely
pay any installment of principal or interest (within any permitted grace period
above) permits Payee to declare this Note immediately due in cash in its
entirety without any prior notice of any kind to Maker, except for the specific
notices provided above.
 
6. Limitations on Conversion. Notwithstanding anything to the contrary contained
herein, the number of shares of Common Stock that Payee may acquire upon any
conversion of this Note shall be limited to the extent necessary to insure that,
following such conversion, the total number of shares of Common Stock then
beneficially owed by Payee and its affiliates and any other persons whose
beneficial ownership of Common Stock would be aggregated with the Payee’s for
purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) does not exceed 4.99% of the total number of issued and
outstanding shares of Common Stock (including for such purpose the shares of
Common Stock issuable upon such conversion). For such purposes, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. This provision shall
not restrict the number of shares of Common Stock which Payee may receive or
beneficially own in order to determine the amount of securities or other
consideration that Payee may receive in the event of a merger, sale or other
transaction as contemplated in Section 3(c) of this Note.
 
8. Applicable Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THE NOTE
SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING
EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.
 
9. Waivers. The Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of payment and all other notices of any kind in connection
with the enforcement of this Note.
 
 
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10. No Setoffs. The Maker shall pay principal and interest under the Note
without any deduction for any setoff or counterclaim.
 
11. Costs of Collection. If this Note is not paid when due, the Maker shall pay
Payee’s reasonable costs of collection, including reasonable attorney’s fees.

        SHUMATE INDUSTRIES, INC.  
   
   
  By       

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