<PAGE>

                                                                    EXHIBIT 10.4

                                                                       EXHIBIT C

                                 FORM OF WARRANT

THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT 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 APPLICABLE STATE SECURITIES LAWS OR (B)
AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 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. ANY TRANSFEREE OF THIS
WARRANT SHOULD CAREFULLY REVIEW THE TERMS OF THIS WARRANT, INCLUDING SECTION
2(f) HEREOF. THE SECURITIES REPRESENTED BY THIS WARRANT MAY BE LESS THAN THE
NUMBER SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 2(f) HEREOF.

                            GALAXY ENERGY CORPORATION

                        WARRANT TO PURCHASE COMMON STOCK

Warrant No.:________________                              Number of Shares: ____
Date of Issuance: ______, 2004

Galaxy Energy Corporation, a Colorado corporation (the "COMPANY"), hereby
certifies that, for Ten United States Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, ____________________, the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant (if required by Section
2(f)), 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 herein) ________________
(_______) [INSERT (INITIAL WARRANTS) QUOTIENT OF (I) 40% OF THE SUM OF (A) THE
ORIGINAL PRINCIPAL AMOUNT OF INITIAL NOTES PURCHASED BY THE HOLDER AT THE
INITIAL CLOSING PLUS (B) THE ORIGINAL PRINCIPAL AMOUNT OF THE ADDITIONAL NOTES
THE HOLDER HAS AGREED TO PURCHASE AT THE ADDITIONAL CLOSING (AS SET FORTH
OPPOSITE SUCH HOLDER'S NAME ON THE SCHEDULE OF BUYERS TO THE SECURITIES PURCHASE
AGREEMENT), DIVIDED BY (II) THE WARRANT EXERCISE PRICE AS OF THE INITIAL
CLOSING; (REPLACEMENT WARRANTS) THE NUMBER OF SHARES FOR WHICH THE WARRANT WHICH
THIS WARRANT IS REPLACING WAS EXERCISED PURSUANT TO SECTION 3(b) OF SUCH PRIOR
WARRANT] fully paid nonassessable shares of Common Stock (as defined herein) of
the Company (the "WARRANT SHARES") at the purchase price per share provided in
Section 1(b) below; provided, however, that in no event shall the holder be
entitled or required to exercise this Warrant for a number of Warrant Shares in
excess of that

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number of Warrant Shares that, upon giving effect to such exercise, would cause
the aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such exercise. For purposes of the foregoing proviso, the aggregate
number of shares of Common Stock beneficially owned 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 proviso
is being made, but shall exclude shares of Common Stock that would be issuable
upon (i) exercise of the remaining, unexercised SPA Warrants (as defined below)
beneficially owned by the holder and its affiliates and (ii) exercise,
conversion or exchange of the unexercised, unconverted or unexchanged portion of
any other securities of the Company beneficially owned by the holder and its
affiliates (including the Notes (as defined below) and any other convertible
notes or preferred stock) subject to a limitation on conversion, exercise or
exchange analogous to the limitation contained herein. 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. For purposes of this Warrant, in determining the number
of outstanding shares of Common Stock a holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's most recent
Form 10-Q or Form 10-K, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written request of any holder, the Company shall promptly, but in no
event later than one (1) Business Day following the receipt of such notice,
confirm in writing to any such 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, exercise or exchange of
securities of the Company, including the Notes, and the SPA Warrants by such
holder and its affiliates, since the date as of which such number of outstanding
shares of Common Stock was reported.

      Section 1.

            (a)   Securities Purchase Agreement. This Warrant is one of the
warrants issued pursuant to Section 1 of that certain Securities Purchase
Agreement dated as of August 19, 2004, among the Company and the Persons (as
defined below) referred to therein (as such agreement may be amended from time
to time as provided in such agreement, the "SECURITIES PURCHASE AGREEMENT") or
of any warrants issued in exchange or substitution therefor or replacement
thereof (including any warrants issued pursuant to Section 3 of the warrants
issued pursuant to Section 1 of the Securities Purchase Agreement or any similar
provisions of any warrants issued in exchange or substitution therefor or
replacement thereof) (all such warrants being collectively referred to as the
"SPA WARRANTS"). Each capitalized term used, and not otherwise defined herein,
shall have the meaning ascribed thereto in the Securities Purchase Agreement.

            (b)   Definitions. The following words and terms as used in this
Warrant shall have the following meanings:

                  (i)   "APPROVED STOCK PLAN" means any employee benefit plan
that has been approved by the Board of Directors and shareholders of the Company
prior to the date of

                                      -2-
<PAGE>

the Securities Purchase Agreement, pursuant to which the Company's securities
may be issued to any consultant, employee, officer or director for services
provided to the Company.

                  (ii)  "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.

                  (iii)  "COMMON STOCK" means (i) the Company's common stock,
$0.001 par value per share, and (ii) any capital stock into which such Common
Stock shall have been changed or any capital stock resulting from a
reclassification of such Common Stock.

                  (iv)   "CONVERTIBLE SECURITIES" means any stock or securities
(other than Options) directly or indirectly convertible into or exchangeable or
exercisable for Common Stock.

                  (v)    "EARLY EXERCISE" means the first exercise of this
Warrant within any 20 consecutive Trading Day period that occurs on an
Replacement Warrant Exercise Eligibility Date.

                  (vi)   "EXPIRATION DATE" means the date that is the later of
(A) the date that is three (3) years after the Warrant Date (as defined in
Section 14) or, if such date does not fall on a Business Day, then the next
Business Day, and (B) if this Warrant was issued in replacement of another
Warrant pursuant to Section 3(b) of such other Warrant, then the date which is
20 Trading Days after the date on which a Registration Statement (as defined in
the Registration Rights Agreement) covering the resale of all of the Warrant
Shares has been declared effective by the Securities and Exchange Commission in
accordance with the terms of the Registration Rights Agreement.

                  (vii)  "MANDATORY EXERCISE PERIOD" means any period of twenty
(20) consecutive Trading Days commencing after the date on which a Registration
Statement (as defined in the Registration Rights Agreement) covering the resale
of all of the Warrant Shares has been declared effective by the Securities and
Exchange Commission in accordance with the terms of the Registration Rights
Agreement and ending prior to June 19, 2007 during which the Weighted Average
Price of the Common Stock on each such Trading Day is equal to or greater than
the Mandatory Exercise Trigger Price.

                  (viii) "MANDATORY EXERCISE TRIGGER PRICE" means 150% of the
Warrant Exercise Price on the date of issuance of this Warrant (subject to
adjustment for stock splits, stock dividends and other similar transactions).

                  (ix)   "NOTES" means the convertible notes of the Company
issued pursuant to the Securities Purchase Agreement, and all convertible notes
issued in exchange therefor or replacement thereof pursuant to the terms of such
convertible notes.

                  (x)    "OPTIONS" means any rights, warrants or options to
subscribe for or purchase Common Stock or Convertible Securities.

                                      -3-
<PAGE>

                  (xi)   "PERSON" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization or a government or any department or agency thereof
or any other legal entity.

                  (xii)  "PRINCIPAL MARKET" means the principal securities
exchange or trading market for a security.

                  (xiii) "REGISTRATION RIGHTS AGREEMENT" means that agreement
dated August 19, 2004 by and among the Company and the Persons referred to
therein, as such agreement may be amended from time to time as provided in such
agreement.

                  (xiv)  "REPLACEMENT WARRANT EXERCISE ELIGIBILITY DATE" means
any Trading Day occurring after the date on which a Registration Statement (as
defined in the Registration Rights Agreement) covering the resale of the shares
of Common Stock issuable upon exercise of this Warrant has been declared
effective by the Securities and Exchange Commission in accordance with the terms
of the Registration Rights Agreement, on which any share of Common Stock trades
on the Principal Market at a price greater than the or equal to the Mandatory
Exercise Trigger Price.

                  (xv)   "REPLACEMENT WARRANT EXERCISE PERIOD" means the period
consisting of (A) the consecutive Trading Days immediately preceding an Early
Exercise, up to a maximum of nineteen (19) Trading Days, on which the Weighted
Average Price of the Common Stock exceeded the Mandatory Exercise Trigger Price,
if any, (B) the date of the Early Exercise and (C) the consecutive Trading Days
following the date of the Early Exercise such that the period consists of a
total of 20 Trading Days.

                  (xvi)  "SECURITIES ACT" means the Securities Act of 1933, as
amended.

                  (xvii)  "TRADING DAY" means any day on which the Common Stock
is traded on the principal securities exchange or securities market on which the
Common Stock is then traded; provided that "Trading Day" shall not include any
day on which the Common Stock is scheduled to trade, or actually trades, on such
exchange or market for less than 4.5 hours.

                  (xviii) "WARRANT" means this Warrant and all Warrants issued
in exchange, transfer or replacement thereof pursuant to the terms of such
Warrants.

                  (xix)  "WARRANT EXERCISE PRICE" shall be equal to, with
respect to any Warrant Share, [INSERT (INITIAL WARRANTS) 115% OF THE ARITHMETIC
AVERAGE OF THE WEIGHTED AVERAGE PRICE OF THE COMMON STOCK ON EACH OF THE 20
CONSECUTIVE TRADING DAYS IMMEDIATELY PRECEDING THE INITIAL CLOSING DATE;
(REPLACEMENT WARRANTS) THE GREATER OF (A) 115% OF THE ARITHMETIC AVERAGE OF THE
WEIGHTED AVERAGE PRICE OF THE COMMON STOCK ON EACH TRADING DAY DURING THE
APPLICABLE REPLACEMENT WARRANT EXERCISE PERIOD AND (B) 172.5% OF THE WARRANT
EXERCISE PRICE OF THE WARRANT THIS WARRANT IS REPLACING PURSUANT TO SECTION 3(b)
OF SUCH PRIOR WARRANT ON THE DATE OF ISSUANCE OF SUCH PRIOR WARRANT], subject to
adjustment as hereinafter provided.

                  (xx)  "WEIGHTED AVERAGE PRICE" means, for any security as of
any date, the dollar volume-weighted average price for such security on its
Principal Market during the

                                      -4-
<PAGE>

period beginning at 9:30 a.m., New York City Time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending
at 4:00 p.m., New York City Time (or such other time as the Principal Market
publicly announces is the official close of trading), as reported by Bloomberg
Financial Markets ("BLOOMBERG") through its "Volume at Price" functions, or, if
the foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30 a.m., New York City Time (or
such other time as such over-the-counter market publicly announces is the
official open of trading), and ending at 4:00 p.m., New York City Time (or such
other time as such over-the-counter market publicly announces is the official
close of trading), as reported by Bloomberg, or, if no dollar volume-weighted
average price is reported for such security by Bloomberg for such hours, the
average of the highest closing bid price and the lowest closing ask price of any
of the market makers for such security as reported in the "pink sheets" by the
National Quotation Bureau, Inc. If the Weighted Average Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Weighted Average Price of such security on such date shall be the fair market
value as mutually determined by the Company and the holder of this Warrant. If
the Company and the holder of this Warrant are unable to agree upon the fair
market value of the Common Stock, then such dispute shall be resolved pursuant
to Section 2(a) below. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination or other similar transaction
during any period during which the Weighted Average Price is being determined.

      Section 2. Exercise of Warrant.

            (a)   Subject to the terms and conditions hereof, this Warrant may
be exercised by the holder hereof then registered on the books of the Company,
in whole or in part, at any time on any Business Day on or after the opening of
business on the date hereof and prior to 11:59 P.M. New York Time on the
Expiration Date by (i) delivery of a written notice, in the form of the
subscription form attached as Exhibit A hereto (the "EXERCISE NOTICE"), of such
holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, (ii) (A) payment to the Company of an
amount equal to the Warrant Exercise Price multiplied by the number of Warrant
Shares as to which this Warrant is being exercised (the "AGGREGATE EXERCISE
PRICE") by wire transfer of immediately available funds (or by check if the
Company has not provided the holder of this Warrant with wire transfer
instructions for such payment) or (B) by notifying the Company that this Warrant
is being exercised pursuant to a Cashless Exercise (as defined in Section 2(e)),
and (iii) if required by Section 2(f) or unless the Holder has previously
delivered this Warrant to the Company and it or a new replacement Warrant has
not yet been delivered to the Holder, the surrender to a common carrier for
overnight delivery to the Company as soon as practicable following such date,
this Warrant (or an indemnification undertaking with respect to this Warrant in
the case of its loss, theft or destruction); provided, that if such Warrant
Shares are to be issued in any name other than that of the registered holder of
this Warrant, such issuance shall be deemed a transfer and the provisions of
Section 8 shall be applicable. In the event of any exercise of the rights
represented by this Warrant in compliance with this Section 2(a), the Company
shall on the second (2nd) Business Day (the "WARRANT SHARE DELIVERY DATE")
following the date of its receipt of the Exercise Notice, the Aggregate Exercise
Price (or notice of Cashless Exercise) and if required by Section 2(f) (or
unless the holder of this Warrant has previously delivered this Warrant to the
Company and it or a new replacement Warrant has not yet been delivered to the

                                      -5-
<PAGE>

holder), this Warrant (or an indemnification undertaking with respect to this
Warrant in the case of its loss, theft or destruction) (the "EXERCISE DELIVERY
DOCUMENTS"), (A) provided that the transfer agent is participating in The
Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and
provided that the holder is eligible to receive shares through DTC, credit such
aggregate number of shares of Common Stock to which the holder shall be entitled
to the holder's or its designee's balance account with DTC through its Deposit
Withdrawal Agent Commission system or (B) issue and deliver to the address
specified in the Exercise Notice, a certificate, registered in the name of the
holder or its designee, for the number of shares of Common Stock to which the
holder shall be entitled. Upon (x) delivery of the Exercise Notice and (y) the
Aggregate Exercise Price referred to in clause (ii)(A) above or notification to
the Company of a Cashless Exercise referred to in Section 2(e), the holder of
this Warrant 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 (the date thereof being referred to as the "DEEMED ISSUANCE
DATE"), irrespective of the date of delivery of this Warrant as required by
clause (iii) above or the certificates evidencing such Warrant Shares. In the
case of a dispute as to the determination of the Warrant Exercise Price, the
Weighted Average Price of a security or the arithmetic calculation of the number
of Warrant Shares, the Company shall promptly issue to the holder the number of
shares of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile within one
(1) Business Day of receipt of the holder's Exercise Notice. If the holder and
the Company are unable to agree upon the determination of the Warrant Exercise
Price, the Weighted Average Price or arithmetic calculation of the number of
Warrant Shares within one (1) Business Day of such disputed determination or
arithmetic calculation being submitted to the holder, then the Company shall
immediately submit via facsimile (i) the disputed determination of the Warrant
Exercise Price or the Weighted Average Price to an independent, reputable
investment banking firm agreed to by the Company and the holder of this Warrant
or (ii) the disputed arithmetic calculation of the number of Warrant Shares to
its independent, outside public accountant. The Company shall cause the
investment banking firm 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 two (2) Business Days after the time it receives the
disputed determinations or calculations. Such investment banking firm's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent error.

            (b)   If this Warrant is submitted for exercise, as may be required
by Section 2(f), and unless the rights represented by this Warrant shall have
expired or shall have been fully exercised, the Company shall, as soon as
practicable and in no event later than three (3) Business Days after receipt of
this Warrant (the "WARRANT DELIVERY DATE") and at its own expense, issue a new
Warrant identical in all respects to this Warrant exercised except it shall
represent rights 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 such Warrant is exercised (together with,
in the case of a cashless exercise, the number of Warrant Shares surrendered in
lieu of payment of the Exercise Price).

            (c)   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 issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.

                                      -6-
<PAGE>

            (d)   If the Company shall fail for any reason or for no reason (x)
to issue and deliver to the holder within three (3) Business Days of receipt of
the Exercise Delivery Documents a certificate for the number of shares of Common
Stock to which the holder is entitled or to credit the holder's balance account
with DTC for such number of shares of Common Stock to which the holder is
entitled upon the holder's exercise of this Warrant or (y) to issue and deliver
to the holder on the Warrant Delivery Date a new Warrant for the number of
shares of Common Stock to which such holder is entitled pursuant to Section 2(b)
hereof, if any, then the Company shall, in addition to any other remedies under
this Warrant or the Securities Purchase Agreement or otherwise available to such
holder, including any indemnification under Section 8 of the Securities Purchase
Agreement, pay as additional damages in cash to such holder on each day after
such third (3rd) Business Day that such shares of Common Stock are not issued
and delivered to the holder, in the case of clause (x) above, or such third
(3rd) Business Day that such Warrant is not delivered, in the case of clause (y)
above, in an amount equal to the sum of (i) 0.5% of the product of (A) the
number of shares of Common Stock not issued to the holder on or prior to the
Warrant Share Delivery Date and (B) the Weighted Average Price of the Common
Stock on the Warrant Share Delivery Date, in the case of the failure to deliver
Common Stock, and (ii) if the Company has failed to deliver a Warrant to the
holder on or prior to the Warrant Delivery Date, 0.5% of the product of (x) the
number of shares of Common Stock issuable upon exercise of the Warrant as of the
Warrant Delivery Date, and (y) the Weighted Average Price of the Common Stock on
the Warrant Delivery Date; provided that in no event shall cash damages accrue
pursuant to this Section 2(d) during the period, if any, in which any Warrant
Shares are the subject of a bona fide dispute that is subject to and being
resolved pursuant to, and in compliance with the time periods and other
provisions of, the dispute resolution provisions of Section 2(a). Alternatively,
subject to the dispute resolution provisions of Section 2(a), at the election of
the holder made in the holder's sole discretion, the Company shall pay to the
holder, in lieu of the additional damages referred to in the preceding sentence
(but in addition to all other available remedies that the holder may pursue
hereunder and under the Securities Purchase Agreement (including indemnification
pursuant to Section 8 thereof)), 110% of the amount by that (A) the holder's
total purchase price (including brokerage commissions, if any) for shares of
Common Stock purchased to make delivery in satisfaction of a sale by such holder
of the shares of Common Stock to which the holder is entitled but has not
received upon an exercise, exceeds (B) the net proceeds received by the holder
from the sale of the shares of Common Stock to which the holder is entitled but
has not received upon such exercise.

            (e)   If, despite the Company's obligations under the Securities
Purchase Agreement and the Registration Rights Agreement, the Warrant Shares to
be issued are not registered and available for resale pursuant to a registration
statement in accordance with the Registration Rights Agreement, including during
a Grace Period (as defined in the Registration Rights Agreement), then
notwithstanding anything contained herein to the contrary, the holder of this
Warrant may, at its election exercised 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"):

                                      -7-
<PAGE>

      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 Weighted Average Price of the Common Stock on the
                  trading day immediately preceding the date of the delivery of
                  the Exercise Notice; and

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

            (f)   Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon exercise of this Warrant in accordance with the terms hereof, the
holder of this Warrant shall not be required to physically surrender this
Warrant to the Company unless it is being exercised for all of the Warrant
Shares represented by the Warrant. The holder and the Company shall maintain
records showing the number of Warrant Shares exercised and issued and the dates
of such exercises or shall use such other method, reasonably satisfactory to the
holder and the Company, so as not to require physical surrender of this Warrant
upon each such exercise. In the event of any dispute or discrepancy, such
records of the Company establishing the number of Warrant Shares to which the
holder is entitled shall be controlling and determinative in the absence of
error. Notwithstanding the foregoing, if this Warrant is exercised as aforesaid,
the holder may not transfer this Warrant unless the holder first physically
surrenders this Warrant to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the holder a new Warrant of like tenor,
registered as the holder may request, representing in the aggregate the
remaining number of Warrant Shares represented by this Warrant. The holder and
any assignee, by acceptance of this Warrant, acknowledge and agree that, by
reason of the provisions of this paragraph, following exercises of any portion
of this Warrant, the number of Warrant Shares represented by this Warrant may be
less than the number stated on the face hereof. Each Warrant shall bear the
following legend:

            ANY TRANSFEREE OF THIS WARRANT SHOULD CAREFULLY REVIEW THE TERMS OF
            THIS WARRANT, INCLUDING SECTION 2(f) HEREOF. THE SECURITIES
            REPRESENTED BY THIS WARRANT MAY BE LESS THAN THE NUMBER SET FORTH ON
            THE FACE HEREOF PURSUANT TO SECTION 2(f) HEREOF.

                                      -8-
<PAGE>

      Section 3. Mandatory Exercise of Warrants; Issuance Of Replacement
                 Warrants Upon Exercise Of Warrants.

            a.    Mandatory Exercise of Warrants. Within one Business Day of the
last day of the Mandatory Exercise Period, the Company shall deliver notice to
the holder of this Warrant confirming that the Mandatory Exercise Period has
occurred and certifying as to whether the Conditions to Mandatory Exercise are
satisfied (the "MANDATORY EXERCISE NOTICE"). Subject to satisfaction (or waiver
by the holder hereof) of the Conditions to Mandatory Exercise, within five (5)
Business Days after the receipt of the Mandatory Exercise Notice (the "MANDATORY
EXERCISE DEADLINE"), the holder of this Warrant, subject to the first paragraph
of this Warrant, shall submit an Exercise Notice in accordance with Section 2 (a
"MANDATORY EXERCISE NOTICE"), electing to exercise this Warrant, pursuant to a
Cash Exercise (a "MANDATORY EXERCISE"), for all of the then remaining Warrant
Shares which are not subject to an Exercise Notice delivered to the Company by
the holder on or prior to delivery of the Mandatory Exercise Notice, and shall
submit to the Company the Aggregate Exercise Price therefor by wire transfer of
immediately available funds (or by check if the Company has not provided the
holder of this Warrant with wire transfer instructions for such payment). This
Warrant shall be exercised in its entirety in accordance with Section 2 on the
date on which the Company receives the Aggregate Exercise Price pursuant to the
preceding sentence (the "MANDATORY EXERCISE DATE"). Upon the written request of
the holder of this Warrant, the Company shall promptly, but in no event later
than one (1) Business Day following the receipt of such request, confirm in
writing the status of the Company's compliance with each of the Conditions to
Mandatory Exercise.

            b.    Issuance of Replacement Warrants.

                  (i)   Upon the occurrence of a Mandatory Exercise, the Company
shall deliver to the holder hereof, within seven (7) Business Days of the
Mandatory Exercise Date, and at the Company's own expense, a new warrant, in the
same form as this Warrant, to purchase the same number of shares of Common Stock
issued pursuant to the Mandatory Exercise. The "Warrant Exercise Price" of such
new warrant, shall equal 115% of the arithmetic average of the Weighted Average
Price of the Common Stock on each Trading Day during the Mandatory Exercise
Period (subject to adjustment for stock splits, stock dividends and other
similar transactions).

                  (ii)  Within seven (7) Business Days of the last day of any
Replacement Warrant Exercise Period, the Company shall issue to the holder
hereof, and at the Company's own expense, a new warrant, in the same form as
this Warrant, to purchase a number of shares of Common Stock equal to the sum of
(A) the number of shares of Common Stock issued or issuable pursuant to the
Early Exercise occurring within such Replacement Warrant Exercise Period and (B)
the aggregate number of shares of Common Stock issued or issuable upon any other
exercises of this Warrant during such Replacement Warrant Exercise Period. The
"Warrant Exercise Price" of such new warrant shall equal the greater of (A) 115%
of the arithmetic average of the Weighted Average Price of the Common Stock on
each Trading Day during the Replacement Warrant Exercise Period and (B) 172.5%
of the Warrant Exercise Price on the date of issuance of this Warrant (subject
to adjustment for stock splits, stock dividends and other similar transactions).

                                      -9-
<PAGE>

            c.    Conditions to Mandatory Exercise. "CONDITIONS TO MANDATORY
EXERCISE" shall mean: (i) as of the date that is 30 days prior to the first day
of the Mandatory Exercise Period and on each day through and including the
applicable Mandatory Exercise Deadline, the Registration Statement (as defined
in the Registration Rights Agreement) covering the Warrant Shares shall be
effective and available for the sale of all of the Warrant Shares then
outstanding or issuable and no Grace Period (as defined in the Registration
Rights Agreement) shall have occurred; (ii) on each day during the period
beginning 90 days prior to the last day of the Mandatory Exercise Period and
ending on and including the applicable Mandatory Exercise Deadline, the Common
Stock is quoted on The NASDAQ Stock Market's OTC Bulletin Board or listed on a
national securities exchange or quoted on the NASDAQ National Market or NASDAQ
SmallCap Market, and if the Common Stock is listed on a national securities
exchange or quoted on the NASDAQ National Market or NASDAQ SmallCap Market, the
Common Stock has not been suspended from trading on such exchange or market nor
shall delisting or suspension by such exchange or market have been threatened
either (A) in writing by such exchange or market (B) by falling below the
minimum listing maintenance requirements of such exchange or market; (iii)
during the term of this Warrant, the Company shall have delivered shares upon
exercise of this Warrant on a timely basis as set forth in Section 2(a); (iv)
during the period beginning on the Warrant Date and ending on and including the
applicable Mandatory Exercise Deadline, there shall not have occurred (x) the
public announcement of a pending, proposed or intended Change of Control (as
defined in Section 4 of the Notes) that has not been abandoned, terminated or
consummated and publicly announced as such, (y) a Triggering Event (as defined
in Section 3 of the Notes) or (z) an Event of Default (as defined in Section 11
of the Notes); and (v) from and after the Warrant Date, the Company otherwise
shall have been in compliance with, and shall not have breached or been in
breach of, any provision, covenant or representation set forth in the
Transaction Documents.

      Section 4. Covenants as to Common Stock. The Company hereby covenants and
agrees as follows:

            (a)   This Warrant is, and any Warrants issued in substitution for
or replacement of this Warrant will upon issuance be, duly authorized and
validly issued.

            (b)   All Warrant Shares that may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.

            (c)   During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved at least 150% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant.

            (d)   If, and so long as, any shares of Common Stock shall be listed
on the NASDAQ National Market, the NASDAQ SmallCap Market or another securities
exchange or trading market, the shares of Common Stock issuable upon exercise of
this Warrant shall be so listed; and the Company shall so list on such exchange
or market, and shall maintain such listing

                                      -10-
<PAGE>

of, any other shares of capital stock of the Company issuable upon the exercise
of this Warrant if and so long as any shares of the same class shall be listed
on such securities exchange or market.

            (e)   The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, 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 to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above $0.001 per share, and (ii) will 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.

            (f)   This Warrant will be binding upon any entity succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets.

      Section 5. Taxes. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.

      Section 6. Warrant Holder Not Deemed a Shareholder. No holder, as such, of
this Warrant shall be entitled to vote or receive dividends or be deemed the
holder of shares of the Company for any purpose (other than to the extent that
the holder is deemed to be a beneficial holder of shares under applicable
securities laws after taking into account the limitation set forth in the first
paragraph of this Warrant), nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
shareholder 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, receive dividends or subscription rights, or otherwise, prior to the
Deemed Issuance Date of the Warrant Shares that such holder 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 such holder to
purchase any securities (upon exercise of this Warrant or otherwise) or as a
shareholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company will
provide the holder of this Warrant with copies of the same notices and other
information given to the shareholders of the Company generally,
contemporaneously with the giving thereof to the shareholders.

      Section 7. Representations of Holder. The holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant, and upon
exercise hereof (other than pursuant to a Cashless Exercise) will acquire the
Warrant Shares, for its own account and not with a view towards, or for resale
in connection with, the public sale or distribution of this Warrant or the
Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
the holder does not agree to hold this Warrant or any of the Warrant Shares for
any minimum or other specific term and reserves

                                      -11-
<PAGE>

the right to dispose of this Warrant and the Warrant Shares at any time in
accordance with or pursuant to a registration statement or an exemption under
the Securities Act. The holder of this Warrant further represents, by acceptance
hereof, that, as of this date, such holder is an "accredited investor" as such
term is defined in Rule 501(a)(3) of Regulation D promulgated by the Securities
and Exchange Commission under the Securities Act (an "ACCREDITED INVESTOR").
Each delivery of an Exercise Notice, other than in connection with a Cashless
Exercise, shall constitute confirmation at such time by the holder of the
representations concerning the Warrant Shares set forth in the first two
sentences of this Section 7, unless contemporaneous with the delivery of such
Exercise Notice the holder notifies the Company in writing that it is not making
such representations (a "REPRESENTATION NOTICE"). If the holder delivers a
Representation Notice in connection with an exercise, it shall be a condition to
such holder's exercise of this Warrant and the Company's obligations set forth
in Section 2 in connection with such exercise, that the Company receive such
other representations as the Company considers reasonably necessary to assure
the Company that the issuance of its securities upon exercise of this Warrant
shall not violate any United States or state securities laws.

      Section 8. Ownership and Transfer.

            (a)   The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
the holder hereof), a register for this Warrant, in which the Company shall
record the name and address of the person in whose name this Warrant has been
issued, as well as the name and address of each transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder thereof for all purposes, notwithstanding any notice to the
contrary, but in all events recognizing any transfers made in accordance with
the terms of this Warrant.

            (b)   This Warrant and the rights granted hereunder shall be
assignable by the holder hereof without the consent of the Company.

            (c)   The Company is obligated to register the Warrant Shares for
resale under the Securities Act pursuant to the Registration Rights Agreement
and the initial holder of this Warrant (and certain assignees thereof) is
entitled to the registration rights in respect of the Warrant Shares as set
forth in the Registration Rights Agreement.

      Section 9. Adjustment of Warrant Exercise Price and Number of Warrant
Shares. The Warrant Exercise Price and the number of shares of Common Stock
issuable upon exercise of this Warrant shall be adjusted from time to time as
follows:

            (a)   Adjustment of Warrant Exercise Price and Number of Shares upon
Issuance of Common Stock. If and whenever on or after the Warrant Date, the
Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (including the issuance or sale of shares of Common Stock owned or
held by or for the account of the Company, but excluding Exempted Issuances (as
defined below)), for a consideration per share less than a price (the
"APPLICABLE PRICE") equal to the Warrant Exercise Price in effect immediately
prior to such issuance or sale, then immediately after such issue or sale the
Warrant Exercise Price then in effect shall be reduced to an amount equal to
such consideration per share. Upon each such adjustment of the Warrant Exercise
Price pursuant to the immediately preceding

                                      -12-
<PAGE>

sentence, the number of shares of Common Stock acquirable upon exercise of this
Warrant shall be adjusted to the number of shares determined by multiplying the
Warrant Exercise Price in effect immediately prior to such adjustment by the
number of shares of Common Stock acquirable upon exercise of this Warrant
immediately prior to such adjustment and dividing the product thereof by the
Warrant Exercise Price resulting from such adjustment. For purposes of this
Warrant, "EXEMPTED ISSUANCES" shall mean: (I) shares of Common Stock issued or
deemed to be issued by the Company pursuant to an Approved Stock Plan; (II)
shares of Common Stock issued or deemed to be issued by the Company upon the
conversion, exchange or exercise of any right, option, obligation or security
outstanding on the date prior to the Warrant Date and set forth in Schedule 3(c)
of the Securities Purchase Agreement, provided that the terms of such option,
obligation or security are not amended on or after the date of the Securities
Purchase Agreement, or (III) shares of Common Stock issued or deemed to be
issued by the Company upon conversion of the Notes or exercise of the SPA
Warrants.

            (b)   Effect on Warrant Exercise Price of Certain Events. For
purposes of determining the adjusted Warrant Exercise Price under Section 9(a)
above, the following shall be applicable:

                  (i)   Issuance of Options. If the Company in any manner grants
or sells any Options and the lowest price per share for which one share of
Common Stock is issuable upon the exercise of any such Option or upon
conversion, exchange or exercise of any Convertible Securities issuable upon
exercise of any such Option is less than the Applicable Price, then such share
of Common Stock shall be deemed to be outstanding and to have been issued and
sold by the Company at the time of the granting or sale of such Option for such
price per share. For purposes of this Section 9(b)(i), the "lowest price per
share for which one share of Common Stock is issuable upon exercise of any such
Option or upon conversion, exchange or exercise of any Convertible Security
issuable upon exercise of any such Option" shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by the Company
with respect to any one share of Common Stock upon the granting or sale of the
Option, upon exercise of the Option and upon conversion, exchange or exercise of
any Convertible Security issuable upon exercise of such Option. No further
adjustment of the Warrant Exercise Price shall be made upon the actual issuance
of such Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion,
exchange or exercise of such Convertible Securities.

                  (ii)  Issuance of Convertible Securities. If the Company in
any manner issues or sells any Convertible Securities and the lowest price per
share for which one share of Common Stock is issuable upon such conversion,
exchange or exercise thereof is less than the Applicable Price, then such share
of Common Stock shall be deemed to be outstanding and to have been issued and
sold by the Company at the time of the issuance or sale of such Convertible
Securities for such price per share. For the purposes of this Section 9(b)(ii),
the "lowest price per share for which one share of Common Stock is issuable upon
such conversion, exchange or exercise" shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to one share of Common Stock upon the issuance or sale of the
Convertible Security and upon conversion, exchange or exercise of such
Convertible Security. No further adjustment of the Warrant Exercise Price shall
be made upon the actual issuance of such Common Stock upon conversion, exchange
or exercise of such Convertible

                                      -13-
<PAGE>

Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of the Warrant Exercise Price
had been or are to be made pursuant to other provisions of this Section 9(b), no
further adjustment of the Warrant Exercise Price shall be made by reason of such
issue or sale.

                  (iii) Change in Option Price or Rate of Conversion. If the
purchase, exchange or exercise price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion, exchange or exercise
of any Convertible Securities, or the rate at which any Options or Convertible
Securities are convertible into or exchangeable or exercisable for Common Stock
changes at any time, the Warrant Exercise Price in effect at the time of such
change shall be adjusted to the Warrant Exercise Price that would have been in
effect at such time had such Options or Convertible Securities provided for such
changed purchase, exchange or exercise price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold and the number of shares of Common Stock acquirable hereunder
shall be correspondingly readjusted. For purposes of this Section 9(b)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
date of issuance of this Warrant are changed in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and the
Common Stock deemed issuable upon exercise, conversion or exchange thereof shall
be deemed to have been issued as of the date of such change. No adjustment shall
be made if such adjustment would result in an increase of the Warrant Exercise
Price then in effect.

            (c)   Effect on Warrant Exercise Price of Certain Events. For
purposes of determining the adjusted Warrant Exercise Price under Sections 9(a)
and 9(b), the following shall be applicable:

                  (i)   Calculation of Consideration Received. In case any
Options are issued in connection with the issue or sale of other securities of
the Company, together comprising one integrated transaction or series of related
transactions, (A) the Options will be deemed to have been issued for a
consideration equal to the greater of $0.01 and the specific aggregate
consideration, if any, allocated to such Options (in either case, the "OPTION
CONSIDERATION") and, for purposes of applying the provisions of this Section 9,
the Option Consideration shall be allocated pro rata among all the shares of
Common Stock issuable upon exercise of such Options to determine the
consideration per each such share of Common Stock and (B) the other securities
will be deemed to have been issued for an aggregate consideration equal to the
aggregate consideration received by the Company for the Options and other
securities (determined as provided below with respect to each share of Common
Stock represented thereby), less the sum of (1) the Black-Scholes Value (as
defined below) of such Options and (2) the Option Consideration. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of such consideration received by the Company will be the
fair value of such consideration, except where such consideration consists of
marketable securities, in which case the amount of consideration received by the
Company will be the Weighted Average Price of such securities on the date of
receipt of such securities. If any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with

                                      -14-
<PAGE>

any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the holder of this Warrant. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within five (5) Business Days after the tenth
(10th) day following the Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the holder of this Warrant. The
determination of such appraiser shall be final and binding upon all parties
absent error, and the fees and expenses of such appraiser shall be borne by the
Company.

                  (ii)  Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (2) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

                  (iii) Black-Scholes Value. The "BLACK-SCHOLES VALUE" of any
Options shall mean the sum of the amounts resulting from applying the
Black-Scholes pricing model to each such Option, which calculation is made with
the following inputs: (i) the "option striking price" being equal to the lowest
exercise price possible under the terms of such Option on the date of the
issuance of such Option (the "VALUATION DATE"), (ii) the "interest rate" being
equal to the interest rate on one-year United States Treasury Bills issued most
recently prior to the Valuation Date, (iii) the "time until option expiration"
being the time from the Valuation Date until the expiration date of such Option,
(iv) the "current stock price" being equal to the Weighted Average Price of the
Common Stock on the Valuation Date, (v) the "volatility" being the 100-day
historical volatility of the Common Stock as of the Valuation Date (as reported
by the Bloomberg "HVT" screen), and (vi) the "dividend rate" being equal to
zero. Within three (3) Business Days after the Company Valuation Date, each of
the Company and the holder of this Warrant shall deliver to the other a written
calculation of its determination of the Black-Scholes value of the Options. If
the holder and the Company are unable to agree upon the calculation of the
Black-Scholes Value of the Options within five (5) Business Days of the
Valuation Date, then the Company shall submit via facsimile the disputed
calculation to an investment banking firm (jointly selected by the Company and
the holder of this Warrant) within seven (7) Business Days of the Valuation
Date. The Company shall cause such investment banking firm to perform the
calculations and notify the company and the holder of the results no later than
ten (10) Business Days after the Valuation Date. Such investment banking firm's
calculation of the Black-Scholes Value of the Options shall be deemed conclusive
absent error. The Company shall bear the fees and expenses of such investment
banking firm for providing such calculation.

            (d)   Adjustment of Warrant Exercise Price upon Subdivision or
Combination of Common Stock. If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect

                                      -15-
<PAGE>

immediately prior to such subdivision will be proportionately reduced and the
number of shares of Common Stock obtainable upon exercise of this Warrant will
be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) its outstanding shares of Common Stock into a smaller number of
shares, the Warrant Exercise Price in effect immediately prior to such
combination will be proportionately increased and the number of shares of Common
Stock obtainable upon exercise of this Warrant will be proportionately
decreased. Any adjustment under this Section 9(d) shall become effective at the
close of business on the date the subdivision or combination becomes effective

            (e)   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 Common Stock, by way of return of capital or otherwise
(including any distribution of cash, stock or other securities, property or
options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction) (a "DISTRIBUTION"), at any time
after the issuance of this Warrant, then, in each such case:

                  (i)   the Warrant Exercise Price in effect immediately prior
to the close of business on the record date fixed for the determination of
holders 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 Warrant Exercise Price by a fraction of which (A) the
numerator shall be the Weighted Average Price of the 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 (B) the denominator shall be the Weighted Average
Price of the Common Stock on the trading day immediately preceding such record
date; and

                  (ii)  either (A) the number of Warrant Shares obtainable upon
exercise of this Warrant 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 Common
Stock entitled to receive the Distribution multiplied by the reciprocal of the
fraction set forth in the immediately preceding clause (i), or (B) in the event
that the Distribution is of common stock of a company whose common stock is
traded on a national securities exchange or a national automated quotation
system, then the holder of this Warrant shall receive an additional warrant, the
terms of which shall be identical to those of this Warrant, except that such
warrant shall be exercisable for the amount of the assets that would have been
payable to the holder of this Warrant pursuant to the Distribution had the
holder exercised this Warrant immediately prior to such record date and with an
exercise price equal to 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 clause (i).

            (f)   Certain Events. If any event occurs of the type contemplated
by the provisions of this Section 9 but not expressly provided for by such
provisions (including 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 Warrant Exercise Price and
the number of shares of Common Stock obtainable upon exercise of this Warrant so
as to protect the rights of the holders of the SPA Warrants; provided that no
such

                                      -16-
<PAGE>

adjustment will increase the Warrant Exercise Price or decrease the number of
shares of Common Stock obtainable as otherwise determined pursuant to this
Section 9.

            (g)   Notices.

                  (i)   Immediately upon any adjustment of the Warrant Exercise
Price, the Company will give written notice thereof to the holder of this
Warrant, setting forth in reasonable detail, and certifying, the calculation of
such adjustment.

                  (ii)  The Company will give written notice to the holder of
this Warrant at least ten (10) 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 Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Organic Change (as defined below), dissolution or
liquidation, provided that such information shall be made known to the public
prior to or in conjunction with such notice being provided to such holder.

                  (iii) The Company will also give written notice to the holder
of this Warrant at least ten (10) days prior to the date on which any Organic
Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.

      Section 10. Purchase Rights; Reorganization, Reclassification,
Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to
Section 9 above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of its capital stock
(the "PURCHASE RIGHTS"), then the holder of this Warrant will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights that such holder could have acquired if such holder had held the
number of shares of Common Stock acquirable upon complete exercise of this
Warrant immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.

                  (b)   Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction that is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "ACQUIRING ENTITY") a written agreement (in form and substance
satisfactory to the holders of SPA Warrants representing at least two-thirds
(2/3) of the shares of Common Stock obtainable upon exercise of the SPA Warrants
then outstanding) to deliver to each holder of SPA Warrants in exchange for each
such SPA Warrant, a security of the Acquiring Entity evidenced by a written
instrument substantially similar in form and substance

                                      -17-
<PAGE>

to this Warrant and satisfactory to the holders of such SPA Warrant (including,
an adjusted warrant exercise price equal to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and exercisable
for a corresponding number of shares of Common Stock acquirable and receivable
upon exercise of such SPA Warrant (without regard to any limitations on
exercises), if the value so reflected is less than the Warrant Exercise Price in
effect immediately prior to such consolidation, merger or sale). Prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance satisfactory to the holders of such SPA
Warrants representing at least two-thirds (2/3) of the shares of Common Stock
obtainable upon exercise of the SPA Warrants then outstanding) to ensure that
each of the holders of the SPA Warrants will thereafter have the right to
acquire and receive in lieu of or in addition to (as the case may be) the shares
of Common Stock immediately theretofore acquirable and receivable upon the
exercise of such holder's SPA Warrants (without regard to any limitations on
exercises), such shares of stock, securities or assets that would have been
issued or payable in such Organic Change with respect to or in exchange for the
number of shares of Common Stock that would have been acquirable and receivable
upon the exercise of such holder's Warrant as of the date of such Organic Change
(without taking into account any limitations or restrictions on the
exerciseability of this Warrant).

      Section 11. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt
of an indemnification undertaking (or in the case of a mutilated Warrant, the
Warrant), issue a new Warrant of like denomination and tenor as this Warrant so
lost, stolen, mutilated or destroyed.

      Section 12. Notice. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) Business Day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:

            If to the Company:

                  Galaxy Energy Corporation
                  1331 17th Street, Suite 730
                  Denver, CO  80202
                  Telephone:   303-293-2300
                  Facsimile:   303-293-2417
                  Attention:   Chief Executive Officer

            With copy to:

                  Dill Dill Carr Stonbraker & Hutchings, P.C.
                  455 Sherman Street, Suite 300
                  Denver, Colorado  80203
                  Telephone:   303-777-3737
                  Facsimile:   303-777-3823

                                      -18-
<PAGE>

                  Attention:   Fay Matsukage, Esq.

If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Buyers to the Securities Purchase Agreement, with
copies to such holder's representatives as set forth on such Schedule of Buyers,
or, in the case of the holder or any other Person named above, at such other
address and/or facsimile number and/or to the attention of such other person as
the recipient party has specified by written notice to the other party at least
five (5) days prior to the effectiveness of such change. Written confirmation of
receipt (A) given by the recipient of such notice, consent, waiver or other
communication, (B) mechanically or electronically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by a nationally
recognized overnight delivery service shall be rebuttable evidence of personal
service, receipt by facsimile or deposit with a nationally recognized overnight
delivery service in accordance with clause (i), (ii) or (iii) above,
respectively.

      Section 13. Limitation on Number of Warrant Shares. Prior to the date on
which Shareholder Approval (as defined in Section 4(k) of the Securities
Purchase Agreement) has been obtained, the Company shall not be obligated to
issue any Warrant Shares upon exercise of the SPA Warrants if the issuance of
such shares of Common Stock would exceed that number of Warrant Shares which the
Company may issue upon exercise of the SPA Warrants (the "EXCHANGE CAP") without
breaching the Company's obligations under the rules or regulations of the
Principal Market, if at the time of any determination, the Common Stock is
listed on a national securities exchange or quoted on the NASDAQ National Market
or NASDAQ SmallCap Market, except that such limitation shall not apply in the
event that the Company obtains a written opinion from outside counsel to the
Company that approval of the Company's shareholders is not required under the
applicable rules of the Principal Market, which opinion shall be reasonably
satisfactory to the holders representing at least two-thirds (2/3) of the
Warrant Shares then issuable upon exercise of outstanding SPA Warrants. Until
Shareholder Approval or such written opinion is obtained, no holder of SPA
Warrants shall be issued, upon exercise of the SPA Warrants, Warrant Shares in
an amount greater than such holder's Cap Allocation Amount (as defined in the
Notes). In the event that any holder of SPA Warrants shall sell or otherwise
transfer any of such SPA Warrants, the transferee shall be allocated a pro rata
portion of such holder's Cap Allocation Amount. In the event that, after the
Initial Closing Date (as defined in the Securities Purchase Agreement), any
holder of the SPA Warrants shall convert all of such holder's Notes and 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 Cap Allocation Amount, then the
difference between such holder's Cap Allocation Amount and the number of Warrant
Shares and Conversion Shares (as defined in the Securities Purchase Agreement)
actually issued to such holder shall be allocated to the respective Cap
Allocation Amounts of the remaining holders of SPA Warrants and Notes on a pro
rata basis in proportion to the Warrant Shares and Conversion Shares issuable
upon exercise and conversion of the SPA Warrants and the Notes, respectively,
then held by each such holder. In the event that upon the delivery of an
Exercise Notice the Company is prohibited from issuing Warrant Shares as a
result of the operation of this Section 13, the Company shall repurchase for
cash, within five (5) Business Days, the portion of this Warrant with respect to
which Warrant Shares cannot be issued as result of this Section 13, at a price
per Warrant Share equal to the difference between the Weighted

                                      -19-
<PAGE>

Average Price of the Common Stock and the Warrant Exercise Price of such Warrant
Shares as of the date of the attempted exercise.

      Section 14. Date. The date of this Warrant is August 19, 2004 (the
"WARRANT DATE"). This Warrant, in all events, shall be wholly void and of no
effect after 11:59 P.M., New York Time, on the Expiration Date, except that
notwithstanding any other provisions hereof, the provisions of Section 8 shall
continue in full force and effect after such date as to any Warrant Shares or
other securities issued upon the exercise of this Warrant.

      Section 15. Amendment and Waiver. Except as otherwise provided herein, the
provisions of the SPA Warrants 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
holders of SPA Warrants representing at least two-thirds (2/3) of the shares of
Common Stock obtainable upon exercise of the SPA Warrants then outstanding;
provided that no such action may increase the Warrant Exercise Price of any SPA
Warrant or decrease the number of shares or change the class of stock obtainable
upon exercise of any SPA Warrant without the written consent of the holder of
such SPA Warrant.

      Section 16. Descriptive Headings; Governing Law. The descriptive headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. All questions
concerning the construction, validity, enforcement and interpretation 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 jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of New York.

      Section 17. Rules of Construction. Unless the context otherwise requires,
(a) all references to Sections, Schedules or Exhibits are to Sections, Schedules
or Exhibits contained in or attached to this Warrant, (b) each accounting term
not otherwise defined in this Warrant has the meaning assigned to it in
accordance with GAAP, (c) words in the singular or plural include the singular
and plural and pronouns stated in either the masculine, the feminine or neuter
gender shall include the masculine, feminine and neuter and (d) the use of the
word "including" in this Warrant shall be by way of example rather than
limitation.

                                      -20-
<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
Cecil D. Gritz, its Chief Operating Officer, as of the 19th day of August, 2004.

                                            GALAXY ENERGY CORPORATION

                                            By: ________________________________
                                            Name:  Cecil D. Gritz
                                            Title: Chief Operating Officer

                                      -21-
<PAGE>

                              EXHIBIT A TO WARRANT

                                 EXERCISE NOTICE

        TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT

                            GALAXY ENERGY CORPORATION

      The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("WARRANT SHARES") of Galaxy
Energy Corporation, a Colorado corporation (the "COMPANY"), evidenced by the
attached Warrant (the "WARRANT"). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

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

          ____________     a "CASH EXERCISE" with respect to _________________
                           Warrant Shares; and/or

          ____________     a "CASHLESS  EXERCISE"  with  respect to  ___________
                           Warrant  Shares (to the extent permitted by the terms
                           of the Warrant).

      2. Payment of Warrant 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 __________
Warrant Shares in accordance with the terms of the Warrant in the following name
and to the following address:

Issue to:_______________________________________________________________________

      Facsimile Number: ________________________________________________________

      DTC Participant Number and Name (if electronic book entry transfer):______

      Account Number (if electronic book entry transfer):_______________________

Date: _______________ __, ______

  Name of Registered Holder

By: ____________________________
Name:
Title:

                                      -22-
<PAGE>

                                 ACKNOWLEDGMENT

      The Company hereby acknowledges this Exercise Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated ________________, 200_
from the Company and acknowledged and agreed to by [TRANSFER AGENT].

                                                GALAXY ENERGY CORPORATION

                                                By: ____________________________
                                                Name: __________________________
                                                Title: _________________________

                                      -23-
<PAGE>

                              EXHIBIT B TO WARRANT

                              FORM OF WARRANT POWER

FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of Galaxy Energy Corporation., a
Colorado corporation, represented by warrant certificate no. _____, standing in
the name of the undersigned on the books of said corporation. The undersigned
does hereby irrevocably constitute and appoint ______________, attorney to
transfer the warrants of said corporation, with full power of substitution in
the premises.

Dated: _________, 200_

                                                ________________________________

                                                Name:  _________________________
                                                Title: _________________________

                                      -24-