EXHIBIT
      10.3

    


    NEITHER
      THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS WARRANT NOR THE
      SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED UNDER
      THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.
 THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
      (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL,
      IN A
      FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED
      UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
      SAID
      ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
      WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
      BY THE SECURITIES.

    


    KENTUCKY
      USA ENERGY, INC.

    WARRANT
      TO PURCHASE COMMON STOCK

    


    Warrant
      No.: 001

    Number
      of
      Shares of Common Stock: 2,500,000

    Date
      of
      Issuance: May 29, 2008 (“Issuance
      Date”)

    


    Kentucky
      USA Energy, Inc., a Delaware corporation (the “Company”),
      hereby certifies that, for good and valuable consideration, the receipt and
      sufficiency of which are hereby acknowledged, ________________, the registered
      holder hereof or its permitted assigns (the “Holder”),
      is
      entitled, subject to the terms set forth below, to purchase from the Company,
      at
      the Exercise Price (as defined below) then in effect, upon surrender of this
      Warrant to purchase Common Stock (including any Warrants to purchase Common
      Stock issued in exchange, transfer or replacement hereof, the “Warrant”),
      at
      any time or times on or after the date hereof, but not after 11:59 p.m., New
      York Time, on the Expiration Date (as defined below), Two Million Five Hundred
      (2,500,000) fully paid nonassessable shares of Common Stock (as defined below)
      (the “Warrant
      Shares”).
       Except as otherwise defined herein, capitalized terms in this Warrant
      shall have the meanings set forth in Section 15.  This Warrant is one of
      the Warrants to purchase Common Stock (the “SPA
      Warrants”)
      issued
      pursuant to that certain Securities Purchase Agreement, dated as of May 29,
      2008
      (the “Subscription
      Date”),
      by
      and among the Company and the investors (the “Buyers”)
      referred to therein (the “Securities
      Purchase Agreement”).

    


    1. EXERCISE
      OF WARRANT.

    


    (a) Mechanics
      of Exercise.
       Subject to the terms and conditions hereof (including, without limitation,
      the limitations set forth in Section 1(f)), this Warrant may be exercised by
      the
      Holder on any day on or after the date hereof, in whole or in part, by
      (i) delivery of a written notice, in the form attached hereto as
Exhibit
      A
      (the
“Exercise
      Notice”),
      of
      the Holder’s election to exercise this Warrant and (ii) (A) payment to the
      Company of an amount equal to the applicable Exercise Price multiplied by the
      number of Warrant Shares as to which this Warrant is being exercised (the
“Aggregate
      Exercise Price”)
      in
      cash or by wire transfer of immediately available funds or (B) by notifying
      the
      Company that this Warrant is being exercised pursuant to a Cashless Exercise
      (as
      defined in Section 1(d)).  The Holder shall not be required to deliver the
      original Warrant in order to affect an exercise hereunder.  Execution and
      delivery of the Exercise Notice with respect to less than all of the Warrant
      Shares shall have the same effect as cancellation of the original Warrant and
      issuance of a new Warrant evidencing the right to purchase the remaining number
      of Warrant Shares.  On or before the first (1st)
      Business Day following the date on which the Company has received each of the
      Exercise Notice and the Aggregate Exercise Price (or notice of a Cashless
      Exercise) (the “Exercise
      Delivery Documents”),
      the
      Company shall transmit by facsimile an acknowledgment of confirmation of receipt
      of the Exercise Delivery Documents to the Holder and the Company’s transfer
      agent (the “Transfer
      Agent”).
       On or before the second (2nd)
      Business Day following the date on which the Company has received all of the
      Exercise Delivery Documents (the “Share
      Delivery Date”),
      the
      Company shall (X) provided that the Transfer Agent is participating in The
      Depository Trust Company (“DTC”)
      Fast
      Automated Securities Transfer Program, credit such aggregate number of shares
      of
      Common Stock to which the Holder is entitled pursuant to such exercise to the
      Holder’s or its designee’s balance account with DTC through its Deposit
      Withdrawal Agent Commission system, or (Y) if the Transfer Agent is not
      participating in the DTC Fast Automated Securities Transfer Program, issue
      and
      dispatch by overnight courier to the address as specified in the Exercise
      Notice, a certificate, registered in the Company’s share register in the name of
      the Holder or its designee, for the number of shares of Common Stock to which
      the Holder is entitled pursuant to such exercise.  Upon delivery of the
      Exercise Delivery Documents, the Holder shall be deemed for all corporate
      purposes to have become the holder of record of the Warrant Shares with respect
      to which this Warrant has been exercised, irrespective of the date such Warrant
      Shares are credited to the Holder’s DTC account or the date of delivery of the
      certificates evidencing such Warrant Shares as the case may be.  If this
      Warrant is submitted in connection with any exercise pursuant to this Section
      1(a) and the number of Warrant Shares represented by this Warrant submitted
      for
      exercise is greater than the number of Warrant Shares being acquired upon an
      exercise, then the Company shall as soon as practicable and in no event later
      than three Business Days after any exercise and at its own expense, issue,
      a new
      Warrant (in accordance with Section 7(d)) representing the right to purchase
      the
      number of Warrant Shares purchasable immediately prior to such exercise under
      this Warrant, less the number of Warrant Shares with respect to which this
      Warrant is exercised.  No fractional shares of Common Stock are to be
      issued upon the exercise of this Warrant, but rather the number of shares of
      Common Stock to be issued shall be rounded up to the nearest whole number.
       The Company shall pay any and all taxes which may be payable with respect
      to the issuance and delivery of Warrant Shares upon exercise of this
      Warrant.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    (b) Exercise
      Price.
       For purposes of this Warrant, “Exercise
      Price”
means
      $1.50, subject to any adjustment as provided herein.

    


    (c) Company’s
      Failure to Timely Deliver Securities.
       If within three (3) Trading Days after the Company’s receipt of a copy
      (whether delivered by facsimile or any other method) of an Exercise Delivery
      Documents the Company shall fail to issue and deliver a certificate to the
      Holder and register such shares of Common Stock on the Company’s share register
      or credit the Holder’s balance account with DTC for the number of shares of
      Common Stock to which the Holder is entitled upon the Holder’s exercise of this
      Warrant, and if on or after such Trading Day the Holder purchases (in an open
      market transaction or otherwise) shares of Common Stock to deliver in
      satisfaction of a sale by the Holder of shares of Common Stock issuable upon
      such exercise that the Holder anticipated receiving from the Company, then
      the
      Company shall, within three (3) Business Days after the Holder’s request and in
      the Holder’s sole discretion, either (i) pay cash to the Holder in an amount
      equal to the Holder’s total purchase price (including brokerage commissions, if
      any) for the shares of Common Stock so purchased (the “Buy-In
      Price”),
      at
      which point the Company’s obligation to deliver such certificate (and to issue
      such shares of Common Stock) shall terminate, or (ii) promptly honor its
      obligation to deliver to the Holder a certificate or certificates representing
      such Warrant Shares and pay cash to the Holder in an amount equal to the excess
      (if any) of the Buy-In Price over the product of (A) such number of shares
      of
      Common Stock, times (B) the Closing Bid Price on the date of exercise. Nothing
      herein shall limit the holder’s right to pursue actual damages for the Company’s
      failure to maintain a sufficient number of authorized shares of Common Stock
      or
      to otherwise issue shares of Common Stock upon exercise of this Warrant in
      accordance with the terms hereof, and the Holder shall have the right to pursue
      all remedies available at law or in equity (including a decree of specific
      performance and/or injunctive relief).


    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    


    (d) Cashless
      Exercise. Notwithstanding
      anything contained herein to the contrary, if, at the time of exercise of this
      Warrant, a Registration Statement (as defined in the Registration Rights
      Agreement) covering the Warrant Shares that are the subject of the Exercise
      Notice (the “Unavailable
      Warrant Shares”)
      is not
      available for the resale of such Unavailable Warrant Shares, the Holder may,
      in
      its sole discretion, exercise this Warrant in whole or in part and, in lieu
      of
      making the cash payment otherwise contemplated to be made to the Company upon
      such exercise in payment of the Aggregate Exercise Price, elect instead to
      receive upon such exercise the “Net Number” of shares of Common Stock determined
      according to the following formula (a “Cashless
      Exercise”):

    


    Net
      Number = (A
      x
      B) - (A x C)

      
      B

    


    For
      purposes of the foregoing formula:

    


    
      	 	
              A

            	
              =

            	
              the
                total number of shares with respect to which this Warrant is then
                being
                exercised.

            


    

    


    
      	 	
              B

            	
              =

            	
              the
                Closing Sale Price of the shares of Common Stock (as reported by
                Bloomberg) on the date immediately preceding the date of the Exercise
                Notice.

            


    

    


    
      	 	
              C

            	
              =

            	
              the
                Exercise Price then in effect for the applicable Warrant Shares at
                the
                time of such exercise.

            


    

    


    (e) Disputes.
       In the case of a dispute as to the determination of the Exercise Price or
      the arithmetic calculation of the Warrant Shares, the Company shall promptly
      issue to the Holder the number of Warrant Shares that are not disputed and
      resolve such dispute in accordance with Section 12.


    
      
        
        

      

      
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    (f) Limitations
      on Exercises.

    


    (1) Beneficial
      Ownership.
       The Company shall not effect the exercise of this Warrant, and the Holder
      shall not have the right to exercise this Warrant, to the extent that after
      giving effect to such exercise, the Holder (together with the Holder’s
      affiliates) would beneficially own (directly or indirectly through Warrant
      Shares or otherwise) in excess of 4.99% of the number of shares of Common Stock
      outstanding immediately after giving effect to such exercise; provided,
      however,
      the
      percentage limitation may be increase to 9.99% at the Holder’s written request
      to the Company.  For purposes of the foregoing sentence, the aggregate
      number of shares of Common Stock beneficially owned (directly or indirectly
      through Warrant Shares or otherwise) by the Holder and its affiliates shall
      include the number of shares of Common Stock issuable upon exercise of this
      Warrant with respect to which the determination of such sentence is being made,
      but shall exclude shares of Common Stock which would be issuable upon (i)
      exercise of the remaining, unexercised portion of this Warrant beneficially
      owned by the Holder and its affiliates and (ii) exercise or conversion of the
      unexercised or unconverted portion of any other securities of the Company
      beneficially owned by the Holder and its affiliates (including, without
      limitation, any convertible notes or warrants) subject to a limitation on
      conversion or exercise analogous to the limitation contained herein beneficially
      owned by the Holder or any of its affiliates. Except as set forth in the
      preceding sentence, for purposes of this paragraph, beneficial ownership shall
      be calculated in accordance with Section 13(d) of the Securities Exchange Act
      of
      1934, as amended (the “1934
      Act”).
       For purposes of this Warrant, in determining the number of outstanding
      shares of Common Stock, the Holder may rely on the number of outstanding shares
      of Common Stock as reflected in (x) the Company’s most recent Form 10-K, Form
      10-Q, Form 8-K or any other public filing with the Securities and Exchange
      Commission, as the case may be, (y) a more recent public announcement by the
      Company or (z) any other notice by the Company or the Transfer Agent setting
      forth the number of shares of Common Stock outstanding.  For any reason at
      any time, upon the written request of the Holder, the Company shall within
      two
      Business Days confirm in writing to the Holder the number of shares of Common
      Stock then outstanding.  In any case, the number of outstanding shares of
      Common Stock shall be determined after giving effect to the conversion or
      exercise of securities of the Company, including the SPA Securities and the
      SPA
      Warrants, by the Holder and its affiliates since the date as of which such
      number of outstanding shares of Common Stock was reported.

    


    (2) Principal
      Market Regulation.
       The Company shall not be obligated to issue any shares of Common Stock
      upon exercise of this Warrant, and the Holder shall not have the right to
      receive upon exercise of this Warrant any shares of Common Stock, if the
      issuance of such shares of Common Stock would exceed the aggregate number of
      shares of Common Stock which the Company may issue upon exercise, redemption
      or
      conversion, as applicable, of the SPA Warrants and SPA Securities or otherwise
      without breaching the Company’s obligations under the rules or regulations of
      the Principal Market (the “Exchange
      Cap”),
      except that such limitation shall not apply in the event that the Company (A)
      obtains the approval of its stockholders as required by the applicable rules
      of
      the Principal Market for issuances of shares of Common Stock in excess of such
      amount or (B) obtains a written opinion from outside counsel to the Company
      that
      such approval is not required, which opinion shall be reasonably satisfactory
      to
      the Required Holders.  Until such approval or written opinion is obtained,
      no Buyer shall be issued in the aggregate, upon exercise or conversion, as
      applicable, of any SPA Warrants or SPA Securities, shares of Common Stock in
      an
      amount greater than the product of the Exchange Cap multiplied by a fraction,
      the numerator of which is the total number of shares of Common Stock underlying
      the SPA Warrants issued to such Buyer pursuant to the Securities Purchase
      Agreement on the Issuance Date and the denominator of which is the aggregate
      number of shares of Common Stock underlying the SPA Warrants issued to the
      Buyers pursuant to the Securities Purchase Agreement on the Issuance Date (with
      respect to each Buyer, the “Exchange
      Cap Allocation”).
       In the event that any Buyer shall sell or otherwise transfer any of such
      Buyer’s SPA Warrants, the transferee shall be allocated a pro rata portion of
      such Buyer’s Exchange Cap Allocation, and the restrictions of the prior sentence
      shall apply to such transferee with respect to the portion of the Exchange
      Cap
      Allocation allocated to such transferee.  In the event that any holder of
      SPA Warrants shall exercise all of such holder’s SPA Warrants into a number of
      shares of Common Stock which, in the aggregate, is less than such holder’s
      Exchange Cap Allocation, then the difference between such holder’s Exchange Cap
      Allocation and the number of shares of Common Stock actually issued to such
      holder shall be allocated to the respective Exchange Cap Allocations of the
      remaining holders of SPA Warrants on a pro rata basis in proportion to the
      number of shares of Common Stock underlying the SPA Warrants then held by each
      such holder.  To
      the
      extent required by the Principal Market, the provisions of the Exchange Cap
      shall be modified to comply with the applicable rules and regulations of the
      Principal Market, provided that any such changes shall not, in the Holder’s
      reasonable discretion, materially change the terms of the transaction
      contemplated hereby.


    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    (g) Insufficient
      Authorized Shares.
       If at any time while any of the Warrants remain outstanding the Company
      does not have a sufficient number of authorized and unreserved shares of Common
      Stock (an “Authorized
      Share Failure”)
      to
      satisfy its obligation to reserve for issuance upon exercise of the Warrants
      at
      least a number of shares of Common Stock equal to the number of shares of Common
      Stock as shall from time to time be necessary to effect the exercise of all
      of
      the SPA Warrants then outstanding  (the “Required
      Reserve Amount”),
      then
      the Company shall immediately take all action necessary to increase the
      Company’s authorized shares of Common Stock to an amount sufficient to allow the
      Company to reserve the Required Reserve Amount for the Warrants then
      outstanding.  Without limiting the generality of the foregoing sentence, as
      soon as practicable after the date of the occurrence of an Authorized Share
      Failure, but in no event later than sixty (60) days after the occurrence of
      such
      Authorized Share Failure, the Company shall hold a meeting of its stockholders
      for the approval of an increase in the number of authorized shares of Common
      Stock.  In connection with such meeting, the Company shall provide each
      stockholder with a proxy statement and shall use its reasonable best efforts
      to
      solicit its stockholders’ approval of such increase in authorized shares of
      Common Stock and to cause its board of directors to recommend to the
      stockholders that they approve such proposal.


    
      
        
        

      

      
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    2. ADJUSTMENT
      OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.

    


    The
      Exercise Price and the number of Warrant Shares shall be adjusted from time
      to
      time as follows:

    


    (a) Adjustment
      upon Issuance of Common Stock.
       In the event the Company shall at any time prior to the Expiration Date
      issue Additional Shares of Common Stock (as defined below) without consideration
      or for a consideration per share less than the Exercise Price in effect
      immediately prior to such issue, then the Exercise Price shall be reduced,
      concurrently with such issue, to a price (calculated to the nearest cent)
      determined by multiplying such Exercise Price by a fraction, (A) the numerator
      of which shall be (1) the number of shares of Common Stock outstanding
      immediately prior to such issue plus (2) the number of shares of Common Stock
      which the aggregate consideration received or to be received by the Company
      for
      the total number of Additional Shares of Common Stock so issued would purchase
      at such Exercise Price; and (B) the denominator of which shall be the number
      of
      shares of Common Stock outstanding immediately prior to such issue plus the
      number of such Additional Shares of Common Stock so issued; provided that,
      (i)
      for the purpose of this Section 2(a), all shares of Common Stock issuable upon
      conversion or exchange of convertible securities outstanding immediately prior
      to such issue shall be deemed to be outstanding, and (ii) the number of shares
      of Common Stock deemed issuable upon conversion or exchange of such outstanding
      convertible securities shall be determined without giving effect to any
      adjustments to the conversion or exchange price or conversion or exchange rate
      of such convertible securities resulting from the issuance of Additional Shares
      of Common Stock that is the subject of this calculation. For purposes of this
      Warrant, “Additional
      Shares of Common Stock”
shall
      mean all shares of Common Stock issued by the Company after the Subscription
      Date (including without limitation any shares of Common Stock issuable upon
      conversion or exchange of any convertible securities or upon exercise of any
      option or warrant, on an as-converted basis), other than: (i) shares of Common
      Stock issued or issuable upon conversion or exchange of any convertible
      securities or exercise of any options outstanding on the Subscription Date;
      (ii)
      shares of Common Stock issued or issuable by reason of a dividend, stock split,
      split-up or other distribution on shares of Common Stock that is covered by
      Section 2(b) and Section 3 below; or (iii) shares of Common Stock (or options
      with respect thereto) issued or issuable to employees or directors of, or
      consultants to, the Company or any of its subsidiaries pursuant to a plan,
      agreement or arrangement approved by the Board of Directors of the Company.
      The
      provisions of this Section 2(a) shall not operate to increase the Exercise
      Price.

    


    (b) Adjustment
      upon Subdivision or Combination of Common Stock.
       If the Company at any time after the Subscription Date subdivides (by any
      stock split, stock dividend, recapitalization or otherwise) one or more classes
      of its outstanding shares of Common Stock into a greater number of shares,
      the
      Exercise Price in effect immediately prior to such subdivision will be
      proportionately reduced and the number of Warrant Shares will be proportionately
      increased.  If the Company at any time on or after the Subscription Date
      combines (by combination, reverse stock split or otherwise) one or more classes
      of its outstanding shares of Common Stock into a smaller number of shares,
      the
      Exercise Price in effect immediately prior to such combination will be
      proportionately increased and the number of Warrant Shares will be
      proportionately decreased.  Any adjustment under this Section 2(b) shall
      become effective at the close of business on the date the subdivision or
      combination becomes effective.


    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    (c) Other
      Events.
       If any event occurs of the type contemplated by the provisions of this
      Section 2 but not expressly provided for by such provisions (including, without
      limitation, the granting of stock appreciation rights, phantom stock rights
      or
      other rights with equity features), then the Company’s Board of Directors will
      make an appropriate adjustment in the Exercise Price and the number of Warrant
      Shares so as to protect the rights of the Holder; provided that no such
      adjustment pursuant to this Section 2(c) will increase the Exercise Price or
      decrease the number of Warrant Shares as otherwise determined pursuant to this
      Section 2.

    


    3. RIGHTS
      UPON DISTRIBUTION OF ASSETS.

    


    If
      the
      Company shall declare or make any dividend or other distribution of its assets
      (or rights to acquire its assets) to holders of shares of Common Stock, by
      way
      of return of capital or otherwise (including, without limitation, any
      distribution of cash, stock or other securities, property or options by way
      of a
      dividend, spin off, reclassification, corporate rearrangement, scheme of
      arrangement or other similar transaction) (a “Distribution”),
      at
      any time after the issuance of this Warrant, then, in each such
      case:

    


    (a) any
      Exercise Price in effect immediately prior to the close of business on the
      record date fixed for the determination of holders of shares of Common Stock
      entitled to receive the Distribution shall be reduced, effective as of the
      close
      of business on such record date, to a price determined by multiplying such
      Exercise Price by a fraction of which (i) the numerator shall be the Closing
      Bid
      Price of a share of Common Stock on the Trading Day immediately preceding such
      record date minus the value of the Distribution (as determined in good faith
      by
      the Company’s Board of Directors) applicable to one share of Common Stock, and
(ii)
      the
      denominator shall be the Closing Bid Price of a share of Common Stock on the
      Trading Day immediately preceding such record date; and

    


    (b) the
      number of Warrant Shares shall be increased to a number of shares equal to
      the
      number of shares of Common Stock obtainable immediately prior to the close
      of
      business on the record date fixed for the determination of holders of shares
      of
      Common Stock entitled to receive the Distribution multiplied by the reciprocal
      of the fraction set forth in the immediately preceding paragraph (a); provided
      that in the event that the Distribution is of shares of Common Stock (or common
      stock) (“Other
      Shares of Common Stock”)
      of a
      company whose common shares are traded on a national securities exchange or
      a
      national automated quotation system, then the Holder may elect to receive a
      warrant to purchase Other Shares of Common Stock in lieu of an increase in
      the
      number of Warrant Shares, the terms of which shall be identical to those of
      this
      Warrant, except that such warrant shall be exercisable into the number of shares
      of Other Shares of Common Stock that would have been payable to the Holder
      pursuant to the Distribution had the Holder exercised this Warrant immediately
      prior to such record date and with an aggregate exercise price equal to the
      product of the amount by which the exercise price of this Warrant was decreased
      with respect to the Distribution pursuant to the terms of the immediately
      preceding paragraph (a) and the number of Warrant Shares calculated in
      accordance with the first part of this paragraph (b).


    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    


    4. FUNDAMENTAL
      TRANSACTIONS; CHANGE OF CONTROL.

    


    (a) Fundamental
      Transactions.
      The
      Company shall not enter into or be party to a Fundamental Transaction unless
      (i)  the Successor Entity assumes in writing all of the obligations of the
      Company under this Warrant and the other Transaction Documents in accordance
      with the provisions of this Section 4 pursuant to written agreements in form
      and
      substance satisfactory to the Required Holders and approved by the Required
      Holders prior to such Fundamental Transaction, including agreements to deliver
      to each holder of Warrants in exchange for such Warrants a security of the
      Successor Entity evidenced by a written instrument substantially similar in
      form
      and substance to this Warrant, including, without limitation, an adjusted
      exercise price equal to the value for the shares of Common Stock reflected
      by
      the terms of such Fundamental Transaction, and exercisable for a corresponding
      number of shares of capital stock equivalent to the shares of Common Stock
      acquirable and receivable upon exercise of this Warrant (without regard to
      any
      limitations on the exercise of this Warrant) prior to such Fundamental
      Transaction, and satisfactory to the Required Holders and (ii) the
      Successor Entity (including its Parent Entity) is a publicly traded corporation
      whose common stock is quoted on or listed for trading on an Eligible Market.
       Upon the occurrence of any Fundamental Transaction, the Successor Entity
      shall succeed to, and be substituted for (so that from and after the date of
      such Fundamental Transaction, the provisions of this Warrant referring to the
      “Company” shall refer instead to the Successor Entity), the Company and may
      exercise every right and power of the Company and shall assume all of the
      obligations of the Company under this Warrant with the same effect as if such
      Successor Entity had been named as the Company herein.  Upon consummation
      of the Fundamental Transaction, the Successor Entity shall deliver to the Holder
      confirmation that there shall be issued upon exercise of this Warrant at any
      time after the consummation of the Fundamental Transaction, in lieu of the
      shares of the Common Stock (or other securities, cash, assets or other property)
      issuable upon the exercise of the Warrant prior to such Fundamental Transaction,
      such shares of the publicly traded common stock (or its equivalent) of the
      Successor Entity (including its Parent Entity) which the Holder would have
      been
      entitled to receive upon the happening of such Fundamental Transaction had
      this
      Warrant been converted immediately prior to such Fundamental Transaction, as
      adjusted in accordance with the provisions of this Warrant.  In addition to
      and not in substitution for any other rights hereunder, prior to the
      consummation of any Fundamental Transaction pursuant to which holders of shares
      of Common Stock are entitled to receive securities or other assets with respect
      to or in exchange for shares of Common Stock (a “Corporate
      Event”),
      the
      Company shall make appropriate provision to insure that the Holder will
      thereafter have the right to receive, at the Holder’s option, upon an exercise
      of this Warrant at any time after the consummation of the Fundamental
      Transaction but prior to the Expiration Date, in lieu of the shares of the
      Common Stock otherwise issuable upon the exercise of the Warrant prior to such
      Fundamental Transaction, such shares of stock, securities, cash, assets or
      any
      other property whatsoever (including warrants or other purchase or subscription
      rights) which the Holder would have been entitled to receive upon the happening
      of such Fundamental Transaction had the Warrant been exercised immediately
      prior
      to such Fundamental Transaction. Provisions made pursuant to the preceding
      sentence shall be in the form and substance reasonably satisfactory to the
      Required Holders. The provisions of this Section shall apply similarly and
      equally to successive Fundamental Transactions and Corporate Events and shall
      be
      applied without regard to any limitations on the exercise of this
      Warrant.


    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    


    (b) Change
      of Control.
      In
      addition to and not in substitution for any other rights hereunder, in the
      event
      the Company consummates a stock purchase agreement or other business combination
      with another Person whereby such other Person acquires more than the 50% of
      either the outstanding shares of Voting Stock (not including any shares of
      Voting Stock held by the other Person or other Persons making or party to,
      or
      associated or affiliated with the other Persons making or party to, such stock
      purchase agreement or other business combination), the Holder at its option
      shall have the right to cause the Company to pay the Black-Scholes value of
      this
      Warrant subject to a volatility cap of 60.

    


    5. NONCIRCUMVENTION.

    


    The
      Company hereby covenants and agrees that the Company will not, by amendment
      of
      its Certificate of Incorporation, Bylaws or through any reorganization, transfer
      of assets, consolidation, merger, scheme of arrangement, dissolution, issue
      or
      sale of securities, or any other voluntary action, avoid or seek to avoid the
      observance or performance of any of the terms of this Warrant, and will at
      all
      times in good faith carry out all the provisions of this Warrant and take all
      action as may be required to protect the rights of the Holder.  Without
      limiting the generality of the foregoing, the Company (i) shall not
      increase the par value of any shares of Common Stock receivable upon the
      exercise of this Warrant above the Exercise Price then in effect,
      (ii) shall take all such actions as may be necessary or appropriate in
      order that the Company may validly and legally issue fully paid and
      nonassessable shares of Common Stock upon the exercise of this Warrant, and
      (iii) shall, so long as any of the SPA Warrants are outstanding, take all action
      necessary to reserve and keep available out of its authorized and unissued
      shares of Common Stock, solely for the purpose of effecting the exercise of
      the
      SPA Warrants, the number of shares of Common Stock as shall from time to time
      be
      necessary to effect the exercise of the SPA Warrants then outstanding (without
      regard to any limitations on exercise).

    


    6. WARRANT
      HOLDER NOT DEEMED A STOCKHOLDER.

    


    Except
      as
      otherwise specifically provided herein, the Holder, solely in such Person’s
      capacity as a holder of this Warrant, shall not be entitled to vote or be deemed
      the holder of share capital of the Company for any purpose, nor shall anything
      contained in this Warrant be construed to confer upon the Holder, solely in
      such
      Person’s capacity as the Holder of this Warrant, any of the rights of a
      stockholder of the Company or any right to vote, give or withhold consent to
      any
      corporate action (whether any reorganization, issue of stock, reclassification
      of stock, consolidation, merger, conveyance or otherwise), receive notice of
      meetings, or subscription rights, or otherwise, prior to the issuance to the
      Holder of the Warrant Shares which such Person is then entitled to receive
      upon
      the due exercise of this Warrant.  In addition, nothing contained in this
      Warrant shall be construed as imposing any liabilities on the Holder to purchase
      any securities (upon exercise of this Warrant or otherwise) or as a stockholder
      of the Company, whether such liabilities are asserted by the Company or by
      creditors of the Company. Notwithstanding this Section 6, the Company shall
      provide the Holder with copies of the same notices and other information given
      to the stockholders of the Company generally, contemporaneously with the giving
      thereof to the stockholders.


    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    


    7. REISSUANCE
      OF WARRANTS.

    


    (a) Transfer
      of Warrant.
       If this Warrant is to be transferred, the Holder shall surrender this
      Warrant to the Company, whereupon the Company will issue promptly following
      satisfaction of the transfer provisions contained in the Securities Purchase
      Agreement and deliver upon the order of the Holder a new Warrant (in accordance
      with Section 7(d)), in the name of the validly registered assignee or
      transferee, representing the right to purchase the number of Warrant Shares
      being transferred by the Holder and, if less than the total number of Warrant
      Shares then underlying this Warrant is being transferred, a new Warrant (in
      accordance with Section 7(d)) to the Holder representing the right to purchase
      the number of Warrant Shares not being transferred.

    


    (b) Lost,
      Stolen or Mutilated Warrant.
       Upon receipt by the Company of evidence reasonably satisfactory to the
      Company of the loss, theft, destruction or mutilation of this Warrant and,
      in
      the case of loss, theft or destruction, of any indemnification undertaking
      by
      the Holder to the Company in customary form and, in the case of mutilation,
      upon
      surrender and cancellation
      of this Warrant, the Company shall execute and deliver to the Holder a new
      Warrant (in accordance with Section 7(d)) representing the right to purchase
      the
      Warrant Shares then underlying this Warrant.

    


    (c) Exchangeable
      for Multiple Warrants.
       This Warrant is exchangeable, upon the surrender hereof by the Holder at
      the principal office of the Company, for a new Warrant or Warrants (in
      accordance with Section 7(d)) representing in the aggregate the right to
      purchase the number of Warrant Shares then underlying this Warrant, and each
      such new Warrant will represent the right to purchase such portion of such
      Warrant Shares as is designated by the Holder at the time of such surrender;
      provided,
      however,
      that no
      Warrants for fractional shares of Common Stock shall be given.

    


    (d) Issuance
      of New Warrants.
       Whenever the Company is required to issue a new Warrant pursuant to the
      terms of this Warrant, such new Warrant (i) shall be of like tenor with this
      Warrant, (ii) shall represent, as indicated on the face of such new Warrant,
      the
      right to purchase the Warrant Shares then underlying this Warrant (or in the
      case of a new Warrant being issued pursuant to Section 7(a) or Section 7(c),
      the
      Warrant Shares designated by the Holder which, when added to the number of
      shares of Common Stock underlying the other new Warrants issued in connection
      with such issuance, does not exceed the number of Warrant Shares then underlying
      this Warrant), (iii) shall have an issuance date, as indicated on the face
      of
      such new Warrant which is the same as the Issuance Date, and (iv) shall have
      the
      same rights and conditions as this Warrant.

    


    8. NOTICES.

    


    Whenever
      notice is required to be given under this Warrant, unless otherwise provided
      herein, such notice shall be given in accordance with Section 8(f) of the
      Securities Purchase Agreement. The Company shall provide the Holder with prompt
      written notice of all actions taken pursuant to this Warrant, including in
      reasonable detail a description of such action and the reason therefore.
 Without limiting the generality of the foregoing, the Company will give
      written notice to the Holder (i) immediately upon any adjustment of the Exercise
      Price, setting forth in reasonable detail, and certifying, the calculation
      of
      such adjustment and (ii) at least fifteen (15) days prior to the date on which
      the Company closes its books or takes a record (A) with respect to any dividend
      or distribution upon the shares of Common Stock or (B) for determining rights
      to
      vote with respect to any Fundamental Transaction, dissolution or liquidation,
      provided in each case that such information shall be made known to the public
      prior to or in conjunction with such notice being provided to the
      Holder.


    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    


    9. AMENDMENT
      AND WAIVER.

    


    Except
      as
      otherwise provided herein, the provisions of this Warrant may be amended and
      the
      Company may take any action herein prohibited, or omit to perform any act herein
      required to be performed by it, only if the Company has obtained the written
      consent of the Required Holders; provided that no such action may increase
      the
      exercise price of any SPA Warrant or decrease the number of shares or class
      of
      stock obtainable upon exercise of any SPA Warrant without the written consent
      of
      the Holder.  No such amendment shall be effective to the extent that it
      applies to less than all of the holders of the SPA Warrants then
      outstanding.

    


    10. GOVERNING
      LAW.

    


    This
      Warrant shall be governed by and construed and enforced in accordance with,
      and
      all questions concerning the construction, validity, interpretation and
      performance of this Warrant shall be governed by, the internal laws of the
      State
      of New York, without giving effect to any choice of law or conflict of law
      provision or rule (whether of the State of New York or any other jurisdictions)
      that would cause the application of the laws of any jurisdictions other than
      the
      State of New York.

    


    11. CONSTRUCTION;
      HEADINGS.

    


    This
      Warrant shall be deemed to be jointly drafted by the Company and all the Buyers
      and shall not be construed against any person as the drafter hereof.  The
      headings of this Warrant are for convenience of reference and shall not form
      part of, or affect the interpretation of, this Warrant.

    


    12. DISPUTE
      RESOLUTION.

    


    In
      the
      case of a dispute as to the determination of the Exercise Price or the
      arithmetic calculation of the Warrant Shares, the Company shall submit the
      disputed determinations or arithmetic calculations via facsimile within two
      Business Days of receipt of the Exercise Notice giving rise to such dispute,
      as
      the case may be, to the Holder.  If the Holder and the Company are unable
      to agree upon such determination or calculation of the Exercise Price or the
      Warrant Shares within three Business Days of such disputed determination or
      arithmetic calculation being submitted to the Holder, then the Company shall
      within two Business Days submit via facsimile (a) the disputed determination
      of
      the Exercise Price to an independent, reputable investment bank selected by
      the
      Company and approved by the Holder (such approval not to be unreasonably
      withheld or delayed) or (b) the disputed arithmetic calculation of the Warrant
      Shares to the Company’s independent, outside accountant.  The Company shall
      cause at its expense the investment bank or the accountant, as the case may
      be,
      to perform the determinations or calculations and notify the Company and the
      Holder of the results no later than ten Business Days from the time it receives
      the disputed determinations or calculations.  Such investment bank’s or
      accountant’s determination or calculation, as the case may be, shall be binding
      upon all parties absent demonstrable error.


    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    


    13. REMEDIES,
      OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.

    


    The
      remedies provided in this Warrant shall be cumulative and in addition to all
      other remedies available under this Warrant and the other Transaction Documents,
      at law or in equity (including a decree of specific performance and/or other
      injunctive relief), and nothing herein shall limit the right of the Holder
      right
      to pursue actual damages for any failure by the Company to comply with the
      terms
      of this Warrant.  The Company acknowledges that a breach by it of its
      obligations hereunder will cause irreparable harm to the Holder and that the
      remedy at law for any such breach may be inadequate.  The Company therefore
      agrees that, in the event of any such breach or threatened breach, the holder
      of
      this Warrant shall be entitled, in addition to all other
      available remedies, to an injunction restraining any breach, without the
      necessity of showing economic loss and without any bond or other security being
      required.

    


    14. TRANSFER.

    


    This
      Warrant may be offered, sold, assigned or transferred by the Holder without
      the
      consent of the Company, provided that the provisions of Section 2(f) of the
      Securities Purchase Agreement are complied with in all respects

    


    15. CERTAIN
      DEFINITIONS.

    


    For
      purposes of this Warrant, the following terms shall have the following
      meanings:

    


    (a) “Bloomberg”
means
      Bloomberg Financial Markets.

    


    (b) “Business
      Day”
means
      any day other than Saturday, Sunday or other day on which commercial banks
      in
      The City of New York are authorized or required by law to remain
      closed.

    


    (c) “Closing
      Bid Price”
and
      “Closing
      Sale Price”
means,
      for any security as of any date, the last closing bid price and last closing
      trade price, respectively, for such security on the Principal Market, as
      reported by Bloomberg, or, if the Principal Market begins to operate on an
      extended hours basis and does not designate the closing bid price or the closing
      trade price, as the case may be, then the last bid price or last trade price,
      respectively, of such security prior to 4:00 p.m., New York Time, as reported
      by
      Bloomberg, or, if the Principal Market is not the principal securities exchange
      or trading market for such security, the last closing bid price or last trade
      price, respectively, of such security on the principal securities exchange
      or
      trading market where such security is listed or traded as reported by Bloomberg,
      or if the foregoing do not apply, the last closing bid price or last trade
      price, respectively, of such security in the over-the-counter market on the
      electronic bulletin board for such security as reported by Bloomberg, or, if
      no
      closing bid price or last trade price, respectively, is reported for such
      security by Bloomberg, the average of the bid prices, or the ask prices,
      respectively, of any market makers for such security as reported in the “pink
      sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
 If the Closing Bid Price or the Closing Sale Price cannot be calculated
      for a security on a particular date on any of the foregoing bases, the Closing
      Bid Price or the Closing Sale Price, as the case may be, of such security on
      such date shall be the fair market value as mutually determined by the Company
      and the Holder.  If the Company and the Holder are unable to agree upon the
      fair market value of such security, then such dispute shall be resolved pursuant
      to Section 12.  All such determinations to be appropriately adjusted for
      any stock dividend, stock split, stock combination or other similar transaction
      during the applicable calculation period.


    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    


    (d) “Common
      Stock”
means
      (i) the Company’s shares of Common Stock, par value $0.0001 per share, and
      (ii) any share capital into which such Common Stock shall have been changed
      or any share capital resulting from a reclassification of such Common
      Stock.

    


    (e) “Eligible
      Market”
means
      the Principal Market, The New York Stock Exchange, Inc., the Nasdaq National
      Market, the Nasdaq Small Cap Market or the American Stock
      Exchange.

    


    (f) “Expiration
      Date”
means
      the date five (5) years after the Issuance Date or, if such date falls on a
      day
      other than a Business Day or on which trading does not take place on the
      Principal Market (a “Holiday”),
      the
      next date that is not a Holiday.

    


    (g) “Fundamental
      Transaction”
means
      that the Company shall, directly or indirectly, in one or more related
      transactions, (i) consolidate or merge with or into (whether or not the Company
      is the surviving corporation) another Person, or (ii) sell, assign, transfer,
      convey or otherwise dispose of all or substantially all of the properties or
      assets of the Company to another Person, or (iii) allow another Person to make
      a
      purchase, tender or exchange offer that is accepted by the holders of more
      than
      the 50% of the outstanding shares of Common Stock (not including any shares
      of
      Common Stock held by the Person or Persons making or party to, or associated
      or
      affiliated with the Persons making or party to, such purchase, tender or
      exchange offer), or (iv) consummate a stock purchase agreement or other business
      combination (including, without limitation, a reorganization, recapitalization,
      spin-off or scheme of arrangement) with another Person whereby such other Person
      acquires more than the 50% of the outstanding shares of Common Stock (not
      including any shares of Common Stock held by the other Person or other Persons
      making or party to, or associated or affiliated with the other Persons making
      or
      party to, such stock purchase agreement or other business
      combination.

    


    (h) “Parent
      Entity”
of
      a
      Person means an entity that, directly or indirectly, controls the applicable
      Person and whose common stock or equivalent equity security is quoted or listed
      on an Eligible Market, or if there is more than one such Person or Parent
      Entity, the Person or Parent Entity with the largest public market
      capitalization as of the date of consummation of the Fundamental
      Transaction.


    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    


    (i) “Person”
means
      an individual, a limited liability company, a partnership, a joint venture,
      a
      corporation, a trust, an unincorporated organization, any other entity and
      a
      government or any department or agency thereof.

    


    (j) “Principal
      Market”
means
      the NASD Over-the-Counter Bulletin Board.

    


    (k) “Registration
      Rights Agreement”
means
      that certain registration rights agreement by and among the Company and the
      Buyers.

    


    (l) “Required
      Holders”
means
      the holders of the SPA Warrants representing at least a majority of shares
      of
      Common Stock underlying the SPA Warrants then outstanding.

    


    (m) “SPA
      Securities”
means
      the Notes issued pursuant to the Securities Purchase Agreement.

    


    (n) “Successor
      Entity”
means
      the Person (or, if so elected by the Required Holders, the Parent Entity) formed
      by, resulting from or surviving any Fundamental Transaction or the Person (or,
      if so elected by the Required Holders, the Parent Entity) with which such
      Fundamental Transaction shall have been entered into.

     

    [Remainder
      of Page Intentionally Left Blank]


    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    


    IN
      WITNESS WHEREOF,
      the
      Company has caused this Warrant to Purchase Common Stock to be duly executed
      as
      of the Issuance Date set out above.

    


    
      	
              KENTUCKY
                USA ENERGY, INC.

            
	 
	
              By:

            	 
	
              Name:

            	
                 
                Steven D. Eversole

            
	
              Title:

            	
                 
                Chief Executive Officer

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    EXHIBIT
      A

    


    EXERCISE
      NOTICE

    TO
      BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE

    WARRANT
      TO PURCHASE COMMON STOCK

    


    KENTUCKY
      USA ENERGY, INC.

    


    The
      undersigned holder hereby exercises the right to purchase __________ of the
      shares of Common Stock (“Warrant
      Shares”)
      of
      Kentucky USA Energy, Inc., a Delaware corporation (the “Company”),
      evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).
      Capitalized terms used herein and not otherwise defined shall have the
      respective meanings set forth in the Warrant.

    


    1.
       Form
      of Exercise Price.
       The Holder intends that payment of the Exercise Price shall be made
      as:

    


    
      	 	
              ·

            	
              a
                “Cash
                Exercise”
                with respect to __________ Warrant
                Shares

            


    

    


    and/or

    


    
      	 	
              ·

            	
              a
                “Cashless
                Exercise”
                with respect to __________ Warrant
                Shares.

            


    

    


    2.
       Payment
      of Exercise Price.
       In the event that the holder has elected a Cash Exercise with respect to
      some or all of the Warrant Shares to be issued pursuant hereto, the holder
      shall
      pay the Aggregate Exercise Price in the sum of $__________ to the Company in
      accordance with the terms of the Warrant.

    


    3.
       Delivery
      of Warrant Shares.
       The Company shall deliver to the holder __________ Warrant Shares in
      accordance with the terms of the Warrant.

    


    4.
       Delivery
      of Warrant.
       The Registered Holder shall deliver the Warrant to the
      Company.

    


    Date:
      __________ __, ____

    


    Name
      of Registered Holder

    


    
      	
              By:
                

            	 
	 	
              Name:

            
	 	
              Title: