Document:

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                                                                    EXHIBIT 10.3
         VOID AFTER 5:00 P.M., NEW YORK CITY
         TIME, ON OCTOBER 4, 2009
         (UNLESS EXTENDED PURSUANT TO SECTION 2 HEREOF)

         THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
         NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
         "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
         STATES OR ANY OTHER JURISDICTION. THE SECURITIES REPRESENTED HEREBY MAY
         NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
         REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
         LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE
         EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.

                                             Right to Purchase 440,000 Shares of
                                            Common Stock, no par value per share

Date: October 4, 2004

                              NGAS RESOURCES, INC.
                             STOCK PURCHASE WARRANT

         THIS CERTIFIES THAT, for value received, BAYSTAR CAPITAL II, LP, or its
registered assigns, is entitled to purchase from NGAS Resources, Inc., a
corporation organized under the laws of British Columbia, Canada (the
"COMPANY"), at any time or from time to time during the period specified in
Section 2 hereof, FOUR HUNDRED FORTY THOUSAND (440,000) fully paid and
nonassessable shares (the "WARRANT SHARES") of the Company's common stock, no
par value per share (the "COMMON STOCK"), at an exercise price per share (the
"EXERCISE PRICE") equal to $6.00. The number of Warrant Shares and the Exercise
Price are subject to adjustment as provided in Section 4 hereof. The term
"WARRANT" or "WARRANTS" and all references thereto, as used throughout this
instrument, shall mean this instrument as originally executed, or if later
amended or supplemented, then as so amended or supplemented, including all
Warrants issued upon transfer or exchange of this Warrant as provided herein,
issued pursuant to that certain Securities Purchase Agreement, dated as of
October 4, 2004, by and among the Company and the other signatories thereto (the
"SECURITIES PURCHASE AGREEMENT").

         This Warrant is subject to the following terms, provisions and
conditions:

         1.       Exercise of Warrant.

                  (a) Subject to the provisions hereof, including, without
limitation, the limitations contained in Section 9 hereof, this Warrant may be
exercised by the holder hereof, in whole or in part, by the surrender of this
Warrant, together with a completed exercise agreement in the form attached
hereto (the "EXERCISE AGREEMENT"), to the Company during normal business hours
on any business day at the Company's principal executive offices (or such other
office or agency of the Company as it may designate by written notice to the
holder hereof), and upon payment to the Company in cash, by certified or
official bank check or by wire transfer for the account of the Company, of the
Exercise Price for the Warrant Shares specified in the Exercise Agreement.

                  (b) The Warrant Shares purchased upon exercise of this Warrant
in accordance with this Section 1 shall be deemed to be issued to the holder
hereof or the holder's designee, as the record owner of such shares, as of the
close of business on the date on which this Warrant shall have been surrendered,
the completed Exercise Agreement shall have been delivered, and payment shall
have been made for such shares as set forth above

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or, if such date is not a business day, on the next succeeding business day. The
Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the holder hereof or
the holder's designee within a reasonable time, not exceeding two business days,
after this Warrant shall have been so exercised (the "DELIVERY PERIOD"). If the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, and so long as the
certificates therefor do not bear a legend (pursuant to the terms of the
Securities Purchase Agreement) and the holder is not obligated to return such
certificate for the placement of a legend thereon (pursuant to the Securities
Purchase Agreement), the Company shall cause its transfer agent to
electronically transmit the Warrant Shares so purchased to the holder or the
holder's designee by crediting the account of the holder or the holder's
designee or its respective nominee with DTC through its Deposit Withdrawal Agent
Commission system ("DTC TRANSFER"). If the aforementioned conditions to a DTC
Transfer are not satisfied, the Company shall deliver to the holder or the
holder's designee physical certificates representing the Warrant Shares so
purchased. Notwithstanding the foregoing, the holder or the holder's designee
may instruct the Company to deliver to the holder or such designee physical
certificates representing the Warrant Shares so purchased in lieu of delivering
such shares by way of DTC Transfer. Any certificates so delivered shall be in
such denominations as may be reasonably requested by the holder hereof or the
holder's designee, shall be registered in the name of the holder or such other
name as shall be designated by the holder and, following the date on which the
Warrant Shares have been registered under the Securities Act pursuant to that
certain Registration Rights Agreement, dated as of October 4, 2004, by and among
the Company and the other signatories thereto (the "REGISTRATION RIGHTS
AGREEMENT") or otherwise may be sold by the holder pursuant to Rule 144
promulgated under the Securities Act (or a successor rule), shall not bear any
restrictive legend. If this Warrant shall have been exercised only in part, then
the Company shall, at its expense, at the time of delivery of such certificates,
deliver to the holder a new Warrant representing the number of shares with
respect to which this Warrant shall not then have been exercised.

                  (c) If, at any time, a holder of this Warrant submits this
Warrant, an Exercise Agreement and payment to the Company of the Exercise Price
for each of the Warrant Shares specified in the Exercise Agreement, and the
Company fails for any reason (other than the reasons contemplated by Section 9
hereof) to deliver, on or prior to the fourth business day following the
expiration of the Delivery Period for such exercise, the number of shares of
Common Stock to which the holder is entitled upon such exercise (an "EXERCISE
DEFAULT"), then the Company shall pay to the holder payments ("EXERCISE DEFAULT
PAYMENTS") for an Exercise Default in the amount of (i) (N/365), multiplied by
(ii) the amount by which the Market Price (as defined in Section 10 hereof) of
the Common Stock on the date the Exercise Agreement giving rise to the Exercise
Default is transmitted in accordance with this Section 1 (the "EXERCISE DEFAULT
DATE") exceeds the Exercise Price in respect of such Warrant Shares, multiplied
by (iii) the number of shares of Common Stock the Company failed to so deliver
in such Exercise Default, multiplied by (iv) .24, where N equals the number of
days from the Exercise Default Date to the date that the Company effects the
full exercise of this Warrant which gave rise to the Exercise Default. The
accrued Exercise Default Payment for each calendar month shall be paid in cash
and shall be made to the holder by the fifth day of the month following the
month in which it has accrued. 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 as required pursuant to the terms of
Section 3(b) hereof 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. Period of Exercise. This Warrant shall be exercisable at any time or
from time to time during the period (the "EXERCISE PERIOD") commencing on the
date of initial issuance of this Warrant (the "ISSUE DATE") and ending at 5:00
p.m., New York City time, on the fifth anniversary of the Issue Date. The
Exercise Period shall automatically be extended by one day for each day on which
(a) the Company does not have a number of shares of Common Stock reserved for
issuance upon exercise hereof at least equal to the number of shares of Common
Stock issuable upon exercise hereof or otherwise fails to deliver shares of
Common Stock in the names set forth in Section 1 hereof upon exercise hereof, or
(b) the Warrant Shares are not then otherwise registered for resale as required
pursuant to the terms of the Registration Rights Agreement.

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         3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:

                  (a) Shares to be Fully Paid. All Warrant Shares shall, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid and non-assessable and free from all taxes, liens, claims and encumbrances.

                  (b) Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise in full of this Warrant (without giving effect
to the limitations on exercise set forth in Section 9 hereof).

                  (c) Listing. The Company shall promptly secure the listing or
quotation of the shares of Common Stock issuable upon exercise of this Warrant
upon each national securities exchange or automated or electronic quotation
system, if any, upon which shares of Common Stock are then listed or quoted or
become listed or quoted (subject to official notice of issuance upon exercise of
this Warrant) and shall maintain, so long as any other shares of Common Stock
shall be so listed or quoted, such listing or quotation of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list or apply for quotation on each national securities
exchange or automated or electronic quotation system, as the case may be, and
shall maintain such listing or quotation 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 or quoted on such national securities
exchange or automated or electronic quotation system.

                  (d) Certain Actions Prohibited. The Company shall not, by
amendment of its charter 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 economic benefit inuring to the holder
hereof and 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) 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, and (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.

                  (e) Successors and Assigns. This Warrant shall be binding upon
any entity succeeding to the Company by merger, consolidation, or acquisition of
all or substantially all of the Company's assets.

                  (f) Blue Sky Laws. The Company shall, on or before the date of
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required in connection therewith or as a condition thereto
to (i) qualify to do business in any jurisdiction where it would not otherwise
be required to qualify but for this Section 3(f), (ii) subject itself to general
taxation in any such jurisdiction or (iii) file a general consent to service of
process in any such jurisdiction.

         4. Antidilution Provisions. During the Exercise Period, the Exercise
Price, the Trigger Price (as defined in subsection (e) below) and the number of
Warrant Shares issuable hereunder shall be subject to adjustment from time to
time as provided in this Section 4.

                  (a) Stock Splits, Stock Dividends, Etc. If, at any time during
the Exercise Period, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Trigger Price and the Exercise Price in effect
immediately prior to such increase shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a

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reverse stock split, combination, reclassification or other similar event, the
Trigger Price and the Exercise Price in effect immediately prior to such
decrease shall be proportionately increased.

                  (b) Merger, Consolidation, Etc. If, at any time during the
Exercise Period, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the Company
with any other entity (other than a merger in which the Company is the surviving
or continuing entity and its capital stock is unchanged), (iii) any sale or
transfer of all or substantially all of the assets of the Company or (iv) any
share exchange or other transaction pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a "CORPORATE CHANGE"), then the holder hereof shall
thereafter have the right to receive upon exercise of this Warrant, in lieu of
the Warrant Shares otherwise issuable, such shares of stock, securities and/or
other property as would have been issued or payable in such Corporate Change
with respect to or in exchange for the number of Warrant Shares which would have
been issuable upon exercise had such Corporate Change not taken place (without
giving effect to the limitations contained in Section 9), and in any such case,
appropriate provisions (in form and substance reasonably satisfactory to the
holder hereof) shall be made with respect to the rights and interests of the
holder to the end that the economic value of this Warrant is in no way
diminished by such Corporate Change and that the provisions hereof (including,
without limitation, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is not the Company, an immediate
adjustment of the Exercise Price, the Trigger Price and the Warrant Shares so
that the Exercise Price, the Trigger Price and the Warrant Shares immediately
after the Corporate Change reflects the same relative value as compared to the
value of the surviving entity's common stock that existed between the Exercise
Price, the Trigger Price and the Warrant Shares and the value of the Company's
Common Stock immediately prior to such Corporate Change) shall thereafter be
applicable, as nearly as may be practicable in relation to any shares of stock
or securities thereafter deliverable upon the exercise thereof. The Company
shall not effect any Corporate Change unless (A) the holder hereof has received
written notice of such transaction at least 45 days prior thereto, but in no
event later than 15 days prior to the record date for the determination of
stockholders entitled to vote with respect thereto, and (B) the resulting
successor or acquiring entity (if not the Company) assumes by written instrument
(in form and substance reasonable satisfactory to the holder hereof) the
obligations of the Company under this Warrant. The above provisions shall apply
regardless of whether or not there would have been a sufficient number of shares
of Common Stock authorized and available for issuance upon exercise hereof as of
the date of such transaction, and shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.

                  (c) Distributions. If, at any time during the Exercise Period,
the Company shall declare or make any distribution of its assets (or rights to
acquire its assets) to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise (including any dividend or
distribution to the Company's stockholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a
"DISTRIBUTION"), then the holder hereof shall be entitled, upon any exercise of
this Warrant after the date of record for determining stockholders entitled to
such Distribution (or if no such record is taken, the date on which such
Distribution is declared or made), to receive the amount of such assets which
would have been payable to the holder with respect to the Warrant Shares
issuable upon such exercise (without giving effect to the limitations contained
in Section 9) had the holder hereof been the holder of such Warrant Shares on
the record date for the determination of stockholders entitled to such
Distribution (or if no such record is taken, the date on which such Distribution
is declared or made).

                  (d) Convertible Securities and Purchase Rights. If, at any
time during the Exercise Period, the Company issues any securities or other
instruments which are convertible into or exercisable or exchangeable for Common
Stock ("CONVERTIBLE SECURITIES") or options, warrants or other rights to
purchase or subscribe for Common Stock or Convertible Securities ("PURCHASE
RIGHTS") pro rata to the record holders of any class of Common Stock, whether or
not such Convertible Securities or Purchase Rights are immediately convertible,
exercisable or exchangeable, then the holder hereof shall be entitled, upon any
exercise of this Warrant after the date of record for determining stockholders
entitled to receive such Convertible Securities or Purchase Rights (or if no
such record is taken, the date on which such Convertible Securities or Purchase
Rights are issued), to receive the aggregate number of Convertible Securities or
Purchase Rights which the holder would have received with respect to the Warrant
Shares issuable upon such exercise (without giving effect to the limitations
contained in Section 9) had the holder hereof been the holder of such Warrant
Shares on the record date for the determination of

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stockholders entitled to receive such Convertible Securities or Purchase Rights
(or if no such record is taken, the date on which such Convertible Securities or
Purchase Rights were issued). If the right to exercise or convert any such
Convertible Securities or Purchase Rights would expire in accordance with their
terms prior to the exercise of this Warrant, then the terms of such Convertible
Securities or Purchase Rights shall provide that such exercise or convertibility
right shall remain in effect until 30 days after the date the holder receives
such Convertible Securities or Purchase Rights pursuant to the exercise hereof.

                  (e) Dilutive Issuances.

                           (i) Adjustment Upon Dilutive Issuance. If, at any
time during the Exercise Period, the Company issues or sells, or in accordance
with subparagraph (ii) of this Section 4(e) is deemed to have issued or sold,
any shares of Common Stock for no consideration or for a consideration per share
less than the Trigger Price in effect on the date of issuance or sale (or deemed
issuance or sale) (a "DILUTIVE ISSUANCE"), then effective immediately upon the
Dilutive Issuance, (1) the Trigger Price shall be adjusted so as to equal an
amount determined by multiplying such Trigger Price by the following fraction:

                                   N(0) + N(1)
                                   -----------
                                   N(0) + N(2)

                  where:

                  N0 = the number of shares of Common Stock outstanding
immediately prior to the issuance, sale or deemed issuance or sale of such
additional shares of Common Stock in such Dilutive Issuance (without taking into
account any shares of Common Stock issuable upon conversion, exchange or
exercise of any Convertible Securities or Purchase Rights, including the Notes
or Warrants);

                  N1 = the number of shares of Common Stock which the aggregate
consideration, if any, received or receivable by the Company for the total
number of such additional shares of Common Stock so issued, sold or deemed
issued or sold in such Dilutive Issuance (which, in the case of a deemed
issuance or sale, shall be calculated in accordance with subparagraph (ii)
below) would purchase at the Trigger Price in effect immediately prior to such
Dilutive Issuance; and

                  N2 = the number of such additional shares of Common Stock so
issued, sold or deemed issued or sold in such Dilutive Issuance;

and (2) following such adjustment to the Trigger Price, the Exercise Price in
effect on the date of such Dilutive Issuance shall be adjusted so as to equal an
amount determined by multiplying such Exercise Price by a fraction, the
numerator of which is the Trigger Price as so adjusted and the denominator of
which is the Trigger Price in effect on the date of such Dilutive Issuance prior
to such adjustment. For purposes of this Section 4(e), the "TRIGGER PRICE" shall
initially equal $5.21 per share, but shall be subject to adjustment as provided
in this Section 4. Notwithstanding the foregoing, no adjustment shall be made
pursuant to this Section 4(e) if such adjustment would result in an increase in
either the Trigger Price or the Exercise Price.

                           (ii) Effect on Trigger Price and Exercise Price of
Certain Events. For purposes of determining the adjusted Trigger Price and
Exercise Price under clause (i) of this Section 4(e), the following will be
applicable:

                                    (1) Issuance of Purchase Rights. If the
Company issues or sells any Purchase Rights, whether or not immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such Purchase Rights (and the price of any conversion of Convertible
Securities, if applicable) is less than the Trigger Price in effect on the date
of issuance or sale of such Purchase Rights, then the maximum total number of
shares of Common Stock issuable upon the exercise of all such Purchase Rights
(assuming full conversion, exercise or exchange of Convertible Securities, if
applicable) shall, as of the date of the issuance or sale of such Purchase
Rights, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For purposes of the preceding sentence, the
"price per share for which Common

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Stock is issuable upon the exercise of such Purchase Rights" shall be determined
by dividing (A) the total amount, if any, received or receivable by the Company
as consideration for the issuance or sale of all such Purchase Rights, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the exercise of all such Purchase Rights, plus, in the case of
Convertible Securities issuable upon the exercise of such Purchase Rights, the
minimum aggregate amount of additional consideration payable upon the
conversion, exercise or exchange thereof (determined in accordance with the
calculation method set forth in clause (ii)(2) of this Section 4(e)) at the time
such Convertible Securities first become convertible, exercisable or
exchangeable, by (B) the maximum total number of shares of Common Stock issuable
upon the exercise of all such Purchase Rights (assuming full conversion,
exercise or exchange of Convertible Securities, if applicable). No further
adjustment to the Trigger Price or the Exercise Price shall be made upon the
actual issuance of such Common Stock upon the exercise of such Purchase Rights
or upon the conversion, exercise or exchange of Convertible Securities issuable
upon exercise of such Purchase Rights.

                                    (2) Issuance of Convertible Securities. If
the Company issues or sells any Convertible Securities, whether or not
immediately convertible, exercisable or exchangeable, and the price per share
for which Common Stock is issuable upon such conversion, exercise or exchange is
less than the Trigger Price in effect on the date of issuance or sale of such
Convertible Securities, then the maximum total number of shares of Common Stock
issuable upon the conversion, exercise or exchange of all such Convertible
Securities shall, as of the date of the issuance or sale of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. If the Convertible Securities so issued or
sold do not have a fluctuating conversion or exercise price or exchange ratio,
then for the purposes of the preceding sentence, the "price per share for which
Common Stock is issuable upon such conversion, exercise or exchange" shall be
determined by dividing (A) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion, exercise or exchange thereof
(determined in accordance with the calculation method set forth in this clause
(ii)(2) of this Section 4(e)) at the time such Convertible Securities first
become convertible, exercisable or exchangeable, by (B) the maximum total number
of shares of Common Stock issuable upon the exercise, conversion or exchange of
all such Convertible Securities. If the Convertible Securities so issued or sold
have a fluctuating conversion or exercise price or exchange ratio (a "VARIABLE
RATE CONVERTIBLE SECURITY"), then for purposes of the next preceding sentence,
the "price per share for which Common Stock is issuable upon such conversion,
exercise or exchange" shall be deemed to be the lowest price per share which
would be applicable (assuming all holding period and other conditions to any
discounts contained in such Variable Rate Convertible Security have been
satisfied) if the conversion price of such Variable Rate Convertible Security on
the date of issuance or sale thereof was seventy-five percent (75%) of the
actual conversion price on such date (the "ASSUMED VARIABLE MARKET PRICE"), and,
further, if the conversion price of such Variable Rate Convertible Security at
any time or times thereafter is less than or equal to the Assumed Variable
Market Price last used for making any adjustment under this Section 4(e) with
respect to any Variable Rate Convertible Security, the Trigger Price and the
Exercise Price in effect at such time shall be readjusted to equal the Trigger
Price and the Exercise Price which would have resulted if the Assumed Variable
Market Price at the time of issuance of the Variable Rate Convertible Security
had been seventy-five percent (75%) of the actual conversion price of such
Variable Rate Convertible Security existing at the time of the adjustment
required by this sentence. No further adjustment to the Trigger Price or the
Exercise Price shall be made upon the actual issuance of such Common Stock upon
conversion, exercise or exchange of such Convertible Securities.

                                    (3) Change in Option Price or Conversion
Rate. If there is a change at any time in (A) the amount of additional
consideration payable to the Company upon the exercise of any Purchase Rights;
(B) the amount of additional consideration, if any, payable to the Company upon
the conversion, exercise or exchange of any Convertible Securities; or (C) the
rate at which any Convertible Securities are convertible into or exercisable or
exchangeable for Common Stock (in each such case, other than under or by reason
of provisions designed to protect against dilution), the Trigger Price and the
Exercise Price in effect at the time of such change shall be readjusted to the
Trigger Price and the Exercise Price which would have been in effect at such
time had such Purchase Rights or Convertible Securities still outstanding
provided for such changed additional consideration or changed conversion,
exercise or exchange rate, as the case may be, at the time initially issued or
sold.

                                    (4) Calculation of Consideration Received.
If any Common Stock, Purchase Rights or Convertible Securities are issued or
sold for cash, the consideration received therefor will be the

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amount received by the Company therefor. In case any Common Stock, Purchase
Rights or Convertible Securities are issued or sold for a consideration part or
all of which shall be other than cash, including in the case of a strategic or
similar arrangement in which the other entity will provide services to the
Company, purchase services from the Company or otherwise provide intangible
consideration to the Company, the amount of the consideration other than cash
received by the Company (including the net present value of the consideration
expected by the Company for the provided or purchased services) shall be the
fair market value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration received by
the Company will be the Market Price thereof as of the date of receipt. In case
any Common Stock, Purchase Rights or Convertible Securities are issued in
connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefor will be deemed to be
the fair market value of such portion of the net assets and business of the
non-surviving corporation as is attributable to such Common Stock, Purchase
Rights or Convertible Securities, as the case may be. Notwithstanding anything
else herein to the contrary, if Common Stock, Purchase Rights or Convertible
Securities are issued or sold in conjunction with each other as part of a single
transaction or in a series of related transactions, the holder hereof may elect
to determine the amount of consideration deemed to be received by the Company
therefor by deducting the fair value of any type of securities (the "DISREGARDED
SECURITIES") issued or sold in such transaction or series of transactions. If
the holder makes an election pursuant to the immediately preceding sentence, no
adjustment to the Trigger Price or the Exercise Price shall be made pursuant to
this Section 4(e) for the issuance of the Disregarded Securities or upon any
conversion, exercise or exchange thereof. For example, if the Company were to
issue convertible notes having a face value of $1,000,000 and warrants to
purchase shares of Common Stock at an exercise price equal to the Market Price
of the Common Stock on the date of issuance of such warrants in exchange for
$1,000,000 of consideration, the fair value of the warrants would be subtracted
from the $1,000,000 of consideration received by the Company for the purposes of
determining whether the shares of Common Stock issuable upon conversion of the
convertible notes shall be deemed to be issued at a price per share below the
Trigger Price and, if so, for purposes of determining any adjustment to the
Trigger Price and the Exercise Price hereunder as a result of the issuance of
the convertible notes. The Company shall calculate, using standard commercial
valuation methods appropriate for valuing such assets, the fair market value of
any consideration other than cash or securities; provided, however, that if the
holder hereof does not agree to such fair market value calculation within three
business days after receipt thereof from the Company, then such fair market
value shall be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Company and reasonably
acceptable to the holder, with the costs of such appraisal to be borne by the
Company.

                                    (5) Issuances Pursuant to Existing
Securities. If the Company issues (or becomes obligated to issue) shares of
Common Stock pursuant to any antidilution or similar adjustments (other than as
a result of stock splits, stock dividends and the like) contained in any
Convertible Securities or Purchase Rights outstanding as of the date hereof but
not included in Section 3(c) of the Disclosure Schedule to the Securities
Purchase Agreement, then all shares of Common Stock so issued shall be deemed to
have been issued for no consideration. If the Company issues (or becomes
obligated to issue) shares of Common Stock pursuant to any antidilution or
similar adjustments contained in any Convertible Securities or Purchase Rights
included in Section 3(c) of the Disclosure Schedule to the Securities Purchase
Agreement as a result of the issuance of the Notes or Warrants pursuant to the
Securities Purchase Agreement and the number of shares that the Company issues
(or is obligated to issue) as a result of such initial issuance exceeds the
amount specified in Section 3(c) of the Disclosure Schedule to the Securities
Purchase Agreement, such excess shares shall be deemed to have been issued for
no consideration.

                           (iii) Limitation on Adjustments for Dilutive
Issuances. Notwithstanding the foregoing or any other provision of this Warrant
to the contrary, in no event shall the Trigger Price or the Exercise Price be
adjusted as a result of a Dilutive Issuance to the extent (but only to the
extent) that such adjustment would result in this Warrant, together with all
other Warrants (including any Warrants that have already been exercised for
Common Stock) and all Notes (including any portions of any Notes that have
already been converted into Common Stock), being convertible into and
exercisable for more than an aggregate of 3,000,487 shares of Common Stock. In
the event that any Dilutive Issuance would result in an adjustment to the
Trigger Price and the Exercise Price of the Warrants and such adjustment is
limited by operation of this Section 4(e)(iii), such adjustment shall be
allocated pro rata among the Warrants then outstanding. In the event that any
Dilutive Issuance would result in an adjustment to both the Conversion Price of
the Notes and the Trigger Price and the Exercise Price of the Warrants and such
adjustment is limited by operation of this 4(e)(iii), such adjustment shall
first be made to the Conversion Price of the

                                       7
<PAGE>

Notes to the maximum extent possible within the limitations set forth therein,
and only if such adjustment to the Conversion Price of the Notes has been made
in full shall any adjustments be made to the Trigger Price and the Exercise
Price of the Warrants (allocated pro rata in accordance with the foregoing
sentence).

                  (f) Exceptions to Adjustment of Trigger Price and Exercise
Price. Notwithstanding the foregoing, no adjustment to the Trigger Price or the
Exercise Price shall be made upon (i) the issuance of Common Stock upon the
exercise or conversion of any Convertible Securities or Purchase Rights
outstanding on the Issue Date and disclosed in Section 3(c) of the Disclosure
Schedule to the Securities Purchase Agreement in accordance with the terms of
such Convertible Securities and Purchase Rights as of such date; (ii) the grant
of options to purchase Common Stock, with exercise prices not less than the
Market Price of the Common Stock on the date of grant, or the grant of
restricted shares of Common Stock, in each case which are issued to employees,
officers, directors or consultants of the Company for the primary purpose of
soliciting or retaining their employment or service pursuant to an equity
compensation plan approved by the Company's Board of Directors, and the issuance
of shares of Common Stock upon the exercise thereof; (iii) the issuance of
securities pursuant to a bona fide underwritten public offering; or (iv) the
issuance of shares of Common Stock upon conversion of the Notes or the exercise
of the Warrants; (v) the issuance of securities in a bona fide business
acquisition; or (vi) the issuance of securities in connection with a strategic
business partnership with an oil and gas company, the primary purpose of which,
in the reasonable judgment of the Company's Board of Directors, is not to raise
additional capital.

                  (g) Other Action Affecting Trigger Price and Exercise Price.
If, at any time during the Exercise Period, the Company takes any action
affecting the Common Stock that would be covered by Section 4(a) through (e),
but for the manner in which such action is taken or structured, which would in
any way diminish the value of this Warrant, then the Trigger Price and the
Exercise Price shall be adjusted in such manner as the Board of Directors of the
Company shall in good faith determine to be equitable under the circumstances.

                  (h) Adjustment in Number of Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant at each such
Exercise Price shall be adjusted by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of shares of
Common Stock issuable upon exercise of this Warrant at such Exercise Price
immediately prior to such adjustment and dividing the product so obtained by the
adjusted Exercise Price.

                  (i) Notice of Adjustment. Upon the occurrence of any event
which requires any adjustment or readjustment of the Trigger Price and/or the
Exercise Price or change in number or type of stock, securities and/or other
property issuable upon exercise of this Warrant, then, and in each such case,
the Company shall give notice thereof to the holder hereof, which notice shall
state the Trigger Price and the Exercise Price resulting from such adjustment or
readjustment and any change in the number of type of stock, securities and/or
other property issuable upon exercise of this Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based. Such calculation shall be certified by the chief financial
officer of the Company.

                  (j) No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.

                  (k) Other Notices. In case at any time:

                           (i) the Company shall declare any dividend upon the
Common Stock payable in shares of stock of any class or make any other
distribution (other than dividends or distributions payable in cash out of
retained earnings consistent with the Company's past practices with respect to
declaring dividends and making distributions) to the holders of the Common
Stock;

                           (ii) the Company shall offer for subscription pro
rata to the holders of the Common Stock any additional shares of stock of any
class or other rights;

                                       8
<PAGE>

                           (iii) there shall be any capital reorganization of
the Company, or reclassification of the Common Stock, or consolidation or merger
of the Company with or into, or sale of all or substantially all of its assets
to, another corporation or entity; or

                           (iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;

then, in each such case, the Company shall give to the holder of this Warrant
(A) notice of the date or estimated date on which the books of the Company shall
close or a record shall be taken for determining the holders of Common Stock
entitled to receive any such dividend, distribution, or subscription rights or
for determining the holders of Common Stock entitled to vote in respect of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up and (B) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, notice of the date (or, if not then known, a reasonable estimate
thereof by the Company) when the same shall take place. Such notice shall also
specify the date on which the holders of Common Stock shall be entitled to
receive such dividend, distribution, or subscription rights or to exchange their
Common Stock for stock or other securities or property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding-up, as the case may be. Such notice shall be given at
least thirty (30) days prior to the record date or the date on which the
Company's books are closed in respect thereto. Failure to give any such notice
or any defect therein shall not affect the validity of the proceedings referred
to in clauses (i), (ii), (iii) and (iv) above. Notwithstanding the foregoing,
the Company shall publicly disclose the substance of any notice delivered
hereunder prior to delivery of such notice to the holder hereof.

         5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.

         6. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.

         7. Transfer, Exchange, Redemption and Replacement of Warrant.

                  (a) Restriction on Transfer. This Warrant and the rights
granted to the holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed assignment in the
form attached hereto, at the office or agency of the Company referred to in
Section 7(e) below, provided, however, that any transfer or assignment shall be
subject to the conditions set forth in Sections 7(f) and 9 hereof and to the
provisions of Section 5 of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Section 8 hereof are assignable only in
accordance with the provisions of the Registration Rights Agreement.

                  (b) Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Section 7(e) below, for new
Warrants of like tenor of different denominations representing in the aggregate
the right to purchase the number of shares of Common Stock which may be
purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares (at the Exercise Price therefor) as shall be
designated by the holder hereof at the time of such surrender.

                  (c) Replacement of Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft, or

                                       9
<PAGE>

destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.

                  (d) Cancellation; Payment of Expenses. Upon the surrender of
this Warrant in connection with any transfer, exchange, or replacement as
provided in this Section 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
holder of this Warrant or transferees) and charges payable in connection with
the preparation, execution, and delivery of Warrants pursuant to this Section 7.
The Company shall indemnify and reimburse the holder of this Warrant for all
losses and damages arising as a result of or related to any breach of the terms
of this Warrant, including costs and expenses (including legal fees) incurred by
such holder in connection with the enforcement of its rights hereunder.

                  (e) Warrant Register. 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
and each prior owner of this Warrant.

                  (f) Transfer or Exchange Without Registration. If, at the time
of the surrender of this Warrant in connection with any transfer or exchange of
this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares
issuable hereunder) shall not be registered under the Securities Act and under
applicable state securities or blue sky laws, the Company may require, as a
condition of allowing such transfer or exchange, (i) that the holder or
transferee of this Warrant, as the case may be, furnish to the Company a written
opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
such transfer or exchange may be made without registration under the Securities
Act and under applicable state securities or blue sky laws (the cost of which
shall be borne by the Company if the Company's counsel renders such an opinion,
and up to $1,000 of such cost shall be borne by the Company if the holder's
counsel is required to render such opinion), (ii) that the holder or transferee
execute and deliver to the Company an investment letter in form and substance
acceptable to the Company and (iii) that the transferee be an "ACCREDITED
INVESTOR" as defined in Rule 501(a) promulgated under the Securities Act;
provided, however, that no such opinion, letter, or status as an "accredited
investor" shall be required in connection with a transfer pursuant to Rule 144
under the Securities Act.

         8. Registration Rights. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement, including the right to assign such rights to certain assignees, as
set forth therein.

         9. Additional Restrictions on Exercise and Transfer. In no event shall
the holder hereof have the right to exercise any portion of this Warrant for
shares of Common Stock or to dispose of any portion of this Warrant to the
extent that such right to effect such exercise or disposition would result in
the holder and its affiliates together beneficially owning more than 4.99% of
the outstanding shares of Common Stock. For purposes of this Section 9,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder.
The restriction contained in this Section 9 may not be altered, amended, deleted
or changed in any manner whatsoever unless the holders of a majority of the
outstanding shares of Common Stock and the holder hereof shall approve, in
writing, such alteration, amendment, deletion or change.

         10. Certain Definitions. For purposes of this Warrant, the following
capitalized terms shall have the respective meanings assigned to them:

                  (a) "BUSINESS DAY" means any day, other than a Saturday or
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law, regulation or executive order to close.

                                       10
<PAGE>

                  (b) "MARKET PRICE" means, for any security as of any date, the
last sales price of such security on the principal trading market where such
security is listed or traded as reported by Bloomberg Financial Markets (or a
comparable reporting service of national reputation selected by the Company and
reasonably acceptable to the holder hereof if Bloomberg Financial Markets is not
then reporting closing bid prices of such security) (in any case, "BLOOMBERG"),
or if the foregoing does not apply, the last reported sales price of such
security on a national exchange or in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
such price is reported for such security by Bloomberg, the average of the bid
prices of all market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc., in each case for such date or, if such
date was not a trading day for such security, on the next preceding date which
was a trading day. If the Market Price cannot be calculated for such security as
of either of such dates on any of the foregoing bases, the Market Price of such
security on such date shall be the fair market value as reasonably determined by
an investment banking firm selected by the Company and reasonably acceptable to
the holder hereof, with the costs of such appraisal to be borne by the Company.

                  (c) "NOTES" shall have the meaning assigned to such term in
the Securities Purchase Agreement.

                  (d) "TRADING DAY" means any day on which principal United
States securities exchange or trading market where the Common Stock is then
listed or traded, is open for trading.

         11. Miscellaneous.

                  (a) Governing Law; Jurisdiction. This Warrant shall be
governed by and construed in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed in the State of Delaware. The
Company irrevocably consents to the jurisdiction of the United States federal
courts and the state courts located in the County of New Castle, State of
Delaware, in any suit or proceeding based on or arising under this Warrant and
irrevocably agrees that all claims in respect of such suit or proceeding may be
determined in such courts. The Company irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding in such forum.
The Company further agrees that service of process upon the Company mailed by
first class mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding. Nothing herein shall affect the
right of the holder to serve process in any other manner permitted by law. The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.

                  (b) Construction. Whenever the context requires, the gender of
any word used in this Warrant includes the masculine, feminine or neuter, and
the number of any word includes the singular or plural. Unless the context
otherwise requires, all references to articles and sections refer to articles
and sections of this Warrant, and all references to schedules are to schedules
attached hereto, each of which is made a part hereof for all purposes. The
descriptive headings of the several articles and sections of this Warrant are
inserted for purposes of reference only, and shall not affect the meaning or
construction of any of the provisions hereof.

                  (c) Severability. If any provision of this Warrant shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Warrant or the validity or enforceability of this Warrant in
any other jurisdiction.

                  (d) Entire Agreement; Amendments. This Warrant contains the
entire understanding of the Company and the holder hereof with respect to the
matters covered herein. Subject to any additional express provisions of this
Warrant, no provision of this Warrant may be waived other than by an instrument
in writing signed by the party to be charged with enforcement, and no provision
of this Warrant may be amended other than by an instrument in writing signed by
the Company and the holder.

                  (e) Notices. Any notices required or permitted to be given
under the terms of this Warrant shall be sent by certified or registered mail
(return receipt requested) or delivered personally, by responsible overnight
carrier or by confirmed facsimile, and shall be effective five days after being
placed in the mail, if mailed, or upon receipt or refusal of receipt, if
delivered personally or by responsible overnight carrier or confirmed

                                       11
<PAGE>

facsimile, in each case addressed to a party. The initial addresses for such
communications shall be as follows, and each party shall provide notice to the
other parties of any change in such party's address:

                           (i)      If to the Company:
                                    NGAS Resources, Inc.
                                    120 Prosperous Place, Suite 201
                                    Lexington, Kentucky  40509
                                    Telephone:  (859) 263-3948
                                    Facsimile:  (859) 263-4228
                                    Attention: William Daugherty, President

                                    with a copy simultaneously transmitted by
                                    like means (which transmittal shall not
                                    constitute notice hereunder) to:
                                    Stahl & Zelmanovitz
                                    767 Third Avenue, Suite 1401
                                    New York, New York 10017
                                    Telephone: (212) 826-6435
                                    Facsimile: (212) 826-6402
                                    Attention: Douglas Stahl, Esq.

                           (ii) If to the holder, at such address as shall be
set forth in the Warrant Register from time to time.

                  (f) Successors and Assigns. This Warrant shall be binding upon
and inure to the benefit of the parties and their successors and assigns. Except
as provided herein, the Company shall not assign this Warrant or its obligations
hereunder. The holder hereof may assign or transfer this Warrant and such
holders rights hereunder in accordance with Section 7 hereof.

                  (g) Equitable Relief. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to the holder by
vitiating the intent and purpose of this Warrant. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations hereunder
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Warrant, that the holder 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.

                [REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]

                                       12
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.

                                         NGAS RESOURCES, INC.

                                         By: /s/ William G. Barr III
                                             -----------------------------------
                                              William G. Barr III
                                              Vice President -- Acquisitions and
                                              Legal Affairs

                                       13<PAGE>

                                                                    EXHIBIT 10.4
                          REGISTRATION RIGHTS AGREEMENT

         This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of
October 4, 2004, is made by and among NGAS Resources, Inc., a corporation
organized under the laws of British Columbia, Canada (the "COMPANY"), and
BayStar Capital II, LP (together with its affiliates, the "INITIAL INVESTOR").

         This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of
October 4, 2004, is made by and among NGAS Resources, Inc., a corporation
organized under the laws of British Columbia, Canada (the "COMPANY"), and
BayStar Capital II, LP (together with its affiliates, the "INITIAL INVESTOR").

                                   BACKGROUND

         A. In connection with that certain Securities Purchase Agreement of
even date herewith by and among the Company and the Initial Investor (the
"Securities Purchase Agreement"), the Company has agreed, upon the terms and
subject to the conditions contained therein, to issue and sell to the Initial
Investor (i) convertible promissory notes (the "Notes") that are convertible
into shares of the Company's common stock, no par value per share (the "Common
Stock"), and (ii) warrants (the "Warrants") to acquire shares of Common Stock.
The shares of Common Stock issuable upon conversion or redemption of or
otherwise pursuant to the Notes are referred to herein as the "Conversion
Shares" and the shares of Common Stock issuable upon exercise of or otherwise
pursuant to the Warrants are referred to herein as the "Warrant Shares."

         B. To induce the Initial Investor to execute and deliver the Securities
Purchase Agreement, and to consummate the transactions contemplated thereby, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended, and the rules and regulations thereunder, or any
similar successor statute (collectively, the "Securities Act"), and applicable
state securities laws.

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor, intending to be legally bound, hereby agree as follows:

1.   DEFINITIONS.

         (a) As used in this Agreement, the following terms shall have the
following meanings:

                   (i) "Investor" means the Initial Investor and any transferees
or assignees who agree to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.

                   (ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").

                   (iii) "Registrable Securities" means (a) the Conversion
Shares, (b) the Warrant Shares, and (c) any shares of capital stock issued or
issuable, from time to time, as a distribution on or in exchange for or
otherwise with respect to any of the foregoing (including the Notes and the
Warrants), whether as default payments, on account of anti-dilution or other
adjustments or otherwise.

                   (iv) "Registration Statement" means a registration statement
of the Company under the Securities Act.

                                       1
<PAGE>

         (b) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.

2.   REGISTRATION.

         (a) Mandatory Registration. The Company shall prepare promptly and file
with the SEC as soon as practicable, but in no event later than the thirtieth
(30th) day following the date hereof (the "Filing Date"), a Registration
Statement on Form S-3 (or, if Form S-3 is not then available, on such form of
Registration Statement as is then available to effect a registration of all of
the Registrable Securities, subject to the consent of the Initial Investor)
covering the resale of 120% of the Registrable Securities. The Registration
Statement filed hereunder, to the extent allowable under the Securities Act and
the Rules promulgated thereunder (including Rule 416), shall state that such
Registration Statement also covers such indeterminate number of additional
shares of Common Stock as may become issuable upon conversion of the Notes and
exercise of the Warrants to prevent dilution resulting from stock splits, stock
dividends or similar transactions. The Registrable Securities included on the
Registration Statement shall be allocated among the Investors as set forth in
Section 11(k) hereof. The Registration Statement (and each amendment or
supplement thereto, and each request for acceleration of effectiveness thereof)
shall be provided to (and subject to the approval of) the Initial Investor and
their counsel prior to its filing or other submission.

         (b) Payments by the Company. The Company shall use its best efforts to
cause the Registration Statement required to be filed pursuant to Section 2(a)
hereof to become effective as soon as practicable, but in no event later than
the sixtieth (60th) day following the date hereof. At the time of effectiveness,
the Company shall ensure that such Registration Statement covers at least 120%
of the Registrable Securities issuable upon full conversion of the Notes
(without giving effect to any limitations on conversion contained in the Notes)
and exercise of the Warrants (without giving effect to any limitations on
exercise contained in the Warrants), including, if necessary, by filing an
amendment prior to the effective date of the Registration Statement to increase
the number of Registrable Securities covered thereby. If (i) (A) the
Registration Statement required to be filed pursuant to Section 2(a) hereof is
not filed with the SEC prior to the Filing Date or declared effective by the SEC
on or before the one hundred twentieth (120th) day following the date hereof
(the "Registration Deadline") or (B) any Registration Statement required to be
filed pursuant to Section 3(b) hereof is not declared effective by the SEC on or
before the sixtieth (60th) day following the applicable Registration Trigger
Date (as defined in Section 3(b) below), or (ii) if, after any such Registration
Statement has been declared effective by the SEC, sales of any of the
Registrable Securities required to be covered by such Registration Statement
(including any Registrable Securities required to be registered pursuant to
Section 3(b) hereof) cannot be made pursuant to such Registration Statement (by
reason of a stop order or the Company's failure to update the Registration
Statement or for any other reason outside the control of the Investors) or (iii)
the Common Stock is not listed or included for quotation on the Nasdaq SmallCap
Market (the "SmallCap Market"), the Nasdaq National Market (the "National
Market"), the New York Stock Exchange (the "NYSE") or the American Stock
Exchange (the "AMEX") at any time after the Registration Deadline hereunder,
then the Company will make payments to each Investor in such amounts and at such
times as shall be determined pursuant to this Section 2(b) as partial relief for
the damages to the Investors by reason of any such delay in or reduction of
their ability to sell the Registrable Securities (which remedy shall not be
exclusive of any other remedies available at law or in equity). The Company
shall pay to each Investor an amount equal to the product of (i) the aggregate
principal balance of the Notes then outstanding (including, for this purpose,
the principal balance of any Notes that have been converted into Conversion
Shares then held by such Investor as if such Notes had not been so converted),
multiplied by (ii) (A) ten thousandths (.010), for each 30 day period (or
portion thereof) up to the one hundred eightieth (180th) day, and (B) fifteen
thousandths (.015), for each 30 day period (or portion thereof) from and after
the one hundred eightieth (180th) day, (w) after the Filing Date and prior to
the date the Registration Statement is filed with the SEC pursuant to Section
2(a), (x) after the Registration Deadline and prior to the date the Registration
Statement filed pursuant to Section 2(a) is declared effective by the SEC, (y)
after the sixtieth (60th) day following a Registration Trigger Date and prior to
the date the Registration Statement filed pursuant to Section 3(b) hereof is
declared effective by the SEC, and (z) during which sales of any Registrable
Securities cannot be made pursuant to any such Registration Statement after the
Registration Statement has been declared effective or the Common Stock is not
listed or included for quotation on the SmallCap Market, the National Market,
NYSE or AMEX; provided, however, that, for purpose of calculating the payment
amount owed to any given Investor, there shall be excluded from each such period
any delays which are solely attributable to changes required by such Investor in
the Registration Statement with respect to information relating to such
Investor, including, without limitation, changes to the plan of distribution
(other than any corrections of Company mistakes with respect to information
previously provided by such Investor). All such amounts required to be paid
hereunder shall be paid in cash within five days after

                                       2
<PAGE>

the end of each period that gives rise to such obligation, provided that, if any
such period extends for more than thirty (30) days, interim payments shall be
made for each such 30 day period.

         (c) Piggy-Back Registrations. If, at any time prior to the expiration
of the Registration Period (as defined in Section 3(a) below), there is not
effective and available for use by the Investors a Registration Statement
covering the resale of at least 120% of the Registrable Securities then issued
or issuable upon full conversion of the Notes and exercise of the Warrants
(without giving effect to any limitations on conversion or exercise contained
therein) and the Company shall file with the SEC a Registration Statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities (other than on Form S-4 or Form
S-8 or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee benefit
plans), the Company shall send to each Investor written notice of such filing,
and if, within 15 days after the date of such notice, such Investor shall so
request in writing, the Company shall include in such Registration Statement all
or any part of any Registrable Securities not then covered by an effective
Registration Statement available for use by the Investors that such Investor
requests to be registered. Notwithstanding the foregoing, in the event that, in
connection with any underwritten public offering, the managing underwriter(s)
thereof shall impose a limitation on the number of shares of Common Stock which
may be included in the Registration Statement because, in such underwriter(s)'
judgment, marketing or other factors dictate such limitation is necessary to
facilitate public distribution, then the Company shall be obligated to include
in such Registration Statement only such limited portion of the Registrable
Securities with respect to which such Investor has requested inclusion hereunder
as the underwriter shall permit; provided, however, that (i) the Company shall
not exclude any Registrable Securities unless the Company has first excluded all
outstanding securities, the holders of which are not contractually entitled to
inclusion of such securities in such Registration Statement or are not
contractually entitled to pro rata inclusion with the Registrable Securities,
(ii) after giving effect to the immediately preceding proviso, any such
exclusion of Registrable Securities shall be made pro rata among the Investors
seeking to include Registrable Securities and the holders of other securities
having the contractual right to inclusion of their securities in such
Registration Statement by reason of demand registration rights, in proportion to
the number of Registrable Securities or other securities, as applicable, sought
to be included by each such Investor or other holder, and (iii) no such
reduction shall reduce the amount of Registrable Securities included in the
registration below twenty-five (25%) of the total amount of securities included
in such registration. No right to registration of Registrable Securities under
this Section 2(c) shall be construed to limit any registration required under
Section 2(a) hereof. If an offering in connection with which an Investor is
entitled to registration under this Section 2(c) is an underwritten offering,
then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering.

         (d) Eligibility for Form S-3. The Company represents and warrants that
it meets the requirements for the use of Form S-3 for registration of the sale
by the Initial Investor and any other Investor of the Registrable Securities and
the Company shall file all reports and statements required to be filed by the
Company with the SEC in a timely manner so as to thereafter maintain such
eligibility for the use of Form S-3.

3.   OBLIGATIONS OF THE COMPANY.

         In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:

         (a) The Company shall respond promptly to any and all comments made by
the staff of the SEC to any Registration Statement required to be filed
hereunder, and shall submit to the SEC, before the close of business on the
business day immediately following the business day on which the Company learns
(either by telephone or in writing) that no review of such Registration
Statement will be made by the SEC or that the staff of the SEC has no further
comments on such Registration Statement, as the case may be, a request for
acceleration of the effectiveness of such Registration Statement to a time and
date as soon as practicable. The Company shall keep such Registration Statement
effective pursuant to Rule 415 at all times until such date as is the earlier of
(i) the date on which all of the Registrable Securities have been sold and (ii)
the date on which all of the Registrable Securities may be immediately sold to
the public without registration or restriction pursuant to Rule 144(k) under the
Securities Act or any successor provision (the "Registration Period"), which
Registration Statement (including any amendments or supplements thereto and

                                       3
<PAGE>

prospectuses contained therein and all documents incorporated by reference
therein) (A) shall comply in all material respects with the requirements of the
Securities Act and the rules and regulations of the SEC promulgated thereunder
and (B) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein not misleading. The financial statements of the Company
included in any such Registration Statement or incorporated by reference therein
(x) shall comply as to form in all material respects with the applicable
accounting requirements and the published rules and regulations of the SEC
applicable with respect thereto, (y) shall be prepared in accordance with U.S.
generally accepted accounting principles, consistently applied during the
periods involved (except as may be otherwise indicated in such financial
statements or the notes thereto or, in the case of unaudited interim statements,
to the extent they may not include footnotes or may be condensed on summary
statements) and (z) fairly present in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
immaterial year-end adjustments).

         (b) The Company shall (i) prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to any Registration
Statement required to be filed hereunder and the prospectus used in connection
with any such Registration Statement as may be necessary to keep such
Registration Statement effective at all times during the Registration Period,
and (ii) during the Registration Period, comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities of
the Company covered by any such Registration Statement until such time as all of
such Registrable Securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth in
such Registration Statement. In the event the number of shares available under a
Registration Statement filed pursuant to this Agreement is, for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"Registration Trigger Date"), insufficient to cover 120% of the Registrable
Securities then issued or issuable (without giving effect to any limitations on
conversion or exercise contained in the Notes or the Warrants), the Company
shall provide each Investor written notice of such Registration Trigger Date
within three business days thereafter and shall amend the Registration
Statement, or file a new Registration Statement (on the short form available
therefor, if applicable), or both, so as to cover 120% of the Registrable
Securities then issued or issuable (without giving effect to any limitations on
conversion or exercise contained in the Notes or the Warrants) as of the
Registration Trigger Date, in each case, as soon as practicable, but in any
event within 15 days after the Registration Trigger Date. The Company shall
cause such amendment(s) and/or new Registration Statement(s) to become effective
as soon as practicable following the filing thereof.

         (c) The Company shall furnish to each Investor whose Registrable
Securities are included in a Registration Statement and such Investor's legal
counsel (i) promptly after the same is prepared and publicly distributed, filed
with the SEC or received by the Company, as applicable, one copy of the
Registration Statement and any amendment thereto, each preliminary prospectus
and prospectus and each amendment or supplement thereto, and, in the case of the
Registration Statement required to be filed pursuant to Section 2(a), each
letter written by or on behalf of the Company to the SEC or the staff of the SEC
(including, without limitation, any request to accelerate the effectiveness of
the Registration Statement or amendment thereto), and each item of
correspondence from the SEC or the staff of the SEC, in each case relating to
the Registration Statement (other than any portion thereof that contains
information for which the Company has sought confidential treatment), (ii) on
the date of effectiveness of the Registration Statement or any amendment
thereto, a notice stating that the Registration Statement or amendment has been
declared effective, and (iii) such number of copies of a prospectus, including a
preliminary prospectus, all amendments and supplements thereto and all such
other documents as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor.

         (d) The Company shall use its best efforts to (i) register and qualify
the Registrable Securities covered by any Registration Statement under such
other securities or "blue sky" laws of such jurisdictions in the United States
as each Investor who holds Registrable Securities being offered reasonably
requests, (ii) prepare and file in those jurisdictions such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (A) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (B) subject itself to general taxation in any such jurisdiction,
(C) file a general consent to service of process in any such jurisdiction, (D)
provide any undertakings that cause the Company undue expense or burden, or (E)

                                       4
<PAGE>

make any change in its Certificate of Incorporation, Bylaws or other
organizational documents, which in each case the Board of Directors of the
Company determines to be contrary to the best interests of the Company and its
stockholders.

         (e) As promptly as practicable after becoming aware of such event, the
Company shall (i) notify each Investor by telephone and facsimile of the
happening of any event, as a result of which the prospectus included in any
Registration Statement that includes Registrable Securities, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (ii) promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
such number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request.

         (f) The Company shall use its best efforts (i) to prevent the issuance
of any stop order or other suspension of effectiveness of any Registration
Statement that includes Registrable Securities, and, if such an order is issued,
to obtain the withdrawal of such order at the earliest practicable moment
(including in each case by amending or supplementing such Registration
Statement), and (ii) to notify each Investor who holds Registrable Securities
being sold (or, in the event of an underwritten offering, the managing
underwriters) of the issuance of such order and the resolution thereof (and if
such Registration Statement is supplemented or amended, deliver such number of
copies of such supplement or amendment to each Investor as such Investor may
reasonably request).

         (g) The Company shall permit a single firm of counsel designated by the
Initial Investor to review any Registration Statement required to be filed
hereunder and all amendments and supplements thereto a reasonable period of time
prior to its filing with the SEC, and not file any document in a form to which
such counsel reasonably objects.

         (h) The Company shall make generally available to its security holders
as soon as practicable, but in no event later than 90 days after the close of
the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement. The Company will be
deemed to have complied with its obligations under this Section 3(h) upon the
Company's filing, on an appropriate form, the appropriate report of the Company
as required by the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Exchange Act").

         (i) The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement that includes such
Investor's Registrable Securities, (iii) the release of such information is
ordered pursuant to a subpoena or other order from a court or governmental body
of competent jurisdiction, (iv) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement, or (v) such Investor consents to the form and content of any
such disclosure. The Company shall, upon learning that disclosure of any
information concerning an Investor is sought in or by a court or governmental
body of competent jurisdiction or through other means, give prompt notice to
such Investor prior to making such disclosure, and cooperate with the Investor,
at the Investor's expense, in taking appropriate action to prevent disclosure
of, or to obtain a protective order for, such information.

         (j) The Company shall use its best efforts to promptly cause all of the
Registrable Securities covered by any Registration Statement to be listed or
designated for quotation on the SmallCap Market, the National Market, the NYSE,
the AMEX or any other national securities exchange or automated quotation system
and on each additional national securities exchange or automated quotation
system on which securities of the same class or series issued by the Company are
then listed or quoted, if any, if the listing or quotation of such Registrable
Securities is then permitted under the rules of such exchange or automated
quotation system, and in any event, without limiting the generality of the
foregoing, to arrange for or maintain at least two market makers to register
with the National Association of Securities Dealers, Inc. (the "NASD") as such
with respect to the Registrable Securities.

         (k) The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement required to be filed pursuant to Section 2(a)
hereof.

                                       5
<PAGE>

         (l) The Company shall cooperate with any Investor who holds Registrable
Securities being offered and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities to be offered
pursuant to any Registration Statement and enable such certificates to be in
such denominations or amounts, as the case may be, and registered in such names,
as such Investor or the managing underwriter or underwriters, if any, may
reasonably request. Without limiting the generality of the foregoing, within
three business days after any Registration Statement that includes Registrable
Securities is declared effective by the SEC, the Company shall cause legal
counsel selected by the Company to deliver to the transfer agent for the
Registrable Securities (with copies to any Investor whose Registrable Securities
are included in such Registration Statement), an opinion of such counsel in the
form attached hereto as Exhibit A.

         (m) At the request of any Investor, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to any Registration Statement required to be filed hereunder and the
prospectus used in connection with such Registration Statement as may be
necessary in order to change the plan of distribution set forth in such
Registration Statement.

         (n) The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including, without limitation, the Securities Act and the Exchange Act and the
rules and regulations thereunder promulgated by the SEC.)

         (o) From and after the date of this Agreement, the Company shall not,
and shall not agree to, allow the holders of any securities of the Company to
include any of their securities which are not Registrable Securities in the
Registration Statement required to be filed pursuant to Section 2(a) or 3(b)
hereof without the consent of the holders of a majority in interest of the
Registrable Securities.

         (p) The Company shall make available for inspection by (i) each
Investor, (ii) any underwriter participating in any disposition pursuant to any
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector to enable such Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; provided, however, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(A) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (B) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (C) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. Nothing herein shall be deemed to
limit any Investor's ability to sell Registrable Securities in a manner that is
otherwise consistent with applicable laws and regulations.

         (q) In the case of an underwritten public offering, at the request of
any Investor, the Company shall furnish, on the date of effectiveness of the
Registration Statement (i) an opinion, dated as of such date, from counsel
representing the Company addressed to any such Investor and in form, scope and
substance as is customarily given in an underwritten public offering and (ii) a
letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and any such Investor.

4.   OBLIGATIONS OF THE INVESTORS.

         In connection with the registration of the Registrable Securities, each
Investor shall have the following obligations:

         (a) It shall be a condition precedent to the obligations of the Company
to effect the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition

                                       6
<PAGE>

of the Registrable Securities held by it as shall be reasonably required to
effect the registration of such Registrable Securities and shall execute such
documents in connection with such registration as the Company may reasonably
request. At least five trading days prior to the first anticipated filing date
of the Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor.

         (b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement required to be filed hereunder, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from such Registration Statement.

         (c) Upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 3(e) or 3(f) with respect to any
Registration Statement including Registrable Securities, each Investor shall
immediately discontinue disposition of Registrable Securities pursuant to such
Registration Statement until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Sections 3(e) and 3(f), as
applicable, and, if so directed by the Company, such Investor shall deliver to
the Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in such Investor's possession
of the prospectus covering such Registrable Securities current at the time of
receipt of such notice. Notwithstanding the foregoing or anything to the
contrary in this Agreement, but subject to compliance with applicable laws, the
Company shall cause the transfer agent for the Registrable Securities to deliver
unlegended shares of Common Stock to a transferee of an Investor in accordance
with the terms of the Notes and Warrants, as applicable, in connection with any
sale of Registrable Securities with respect to which any such Investor has
entered into a contract for sale prior to receipt of such notice and for which
any such Investor has not yet settled.

         (d) No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below, and (iv) complies with all applicable laws
in connection therewith. Notwithstanding anything in this Section 4(d) to the
contrary, this Section 4(d) is not intended to limit any Investor's rights under
Sections 2(a) or 3(b) hereof.

5    EXPENSES OF REGISTRATION.

         All expenses (other than underwriting discounts and commissions)
incurred by the Company or the Investors in connection with registrations,
filings or qualifications pursuant to Sections 2 and 3 above (including, without
limitation, all registration, listing and qualification fees, printers and
accounting fees, the fees and disbursements of counsel for the Company and up to
$10,000 of the fees and disbursements of one counsel selected by the Investors)
shall be borne by the Company. In addition, the Company shall pay each
Investor's costs and expenses (including legal fees) incurred in connection with
the enforcement of the rights of such Investor hereunder.

6.   INDEMNIFICATION.

         In the event any Registrable Securities are included in a Registration
Statement under this Agreement:

         (a) To the extent permitted by law, the Company shall indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, members, employees and agents of each
such Investor and each person, if any, who controls each such Investor within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act (each, an "Investor Indemnified Person"), against any joint or several
losses, claims, damages, liabilities or expenses (collectively, together with
actions, proceedings or inquiries by any regulatory or self-regulatory
organization, whether commenced or threatened, in respect thereof, "Claims") to
which any of them may become subject insofar as such Claims arise out of or are
based upon: (A) any untrue statement or alleged untrue statement of a material
fact in a Registration Statement or the omission or alleged omission to state
therein a material fact required to be stated or necessary to make the
statements therein not misleading, (B) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the

                                       7
<PAGE>

Company files any amendment thereof or supplement thereto with the SEC) or the
omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (C) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act or any other
law (including, without limitation, any state securities law), rule or
regulation relating to the offer or sale of the Registrable Securities (the
matters in the foregoing clauses (A) through (C), collectively, "Violations").
Subject to the restrictions set forth in Section 6(c) with respect to the number
of legal counsel, the Company shall reimburse each Investor and each other
Investor Indemnified Person, promptly as such expenses are incurred and are due
and payable, for any reasonable legal fees or other reasonable expenses incurred
by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (x) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Investor
Indemnified Person expressly for use in the Registration Statement or any such
amendment thereof or supplement thereto; (y) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(z) with respect to any preliminary prospectus, shall not inure to the benefit
of any Investor Indemnified Person if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected on a timely
basis in the prospectus, as then amended or supplemented, if such corrected
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof, and the Investor Indemnified Person was promptly advised in writing not
to use the incorrect prospectus prior to the use giving rise to a Violation and
such Investor Indemnified Person, notwithstanding such advice, used it. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Investor Indemnified Person and shall survive the
transfer of the Registrable Securities by the Investors pursuant to Section 9
hereof.

         (b) In connection with any Registration Statement in which an Investor
is participating, (i) each such Investor shall, severally and not jointly,
indemnify, hold harmless and defend, to the same extent and in the same manner
set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, its employees and each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, and any other stockholder selling
securities pursuant to the Registration Statement or any of its directors or
officers or any person who controls such stockholder within the meaning of the
Securities Act or the Exchange Act (each, a "Company Indemnified Person"),
against any Claims to which any of them may become subject insofar as such
Claims arise out of or are based upon any Violation, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and (ii)
subject to the restrictions set forth in Section 6(c), such Investor shall
reimburse the Company Indemnified Persons, promptly as such expenses are
incurred and are due and payable, for any legal fees or other reasonable
expenses incurred by them in connection with investigating or defending any such
Claim; provided, however, that the indemnification obligations contained in this
Section 6(b) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld; and provided, further, that the
Investor shall be liable under this Agreement (including this Section 6(b) and
Section 7) for only that amount as does not exceed the net proceeds actually
received by such Investor as a result of the sale of Registrable Securities
pursuant to such Registration Statement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Company Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investor pursuant to Section 9 hereof. Notwithstanding
anything to the contrary contained herein, the indemnification obligations
contained in this Section 6(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Company Indemnified Person if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.

         (c) Promptly after receipt by any party entitled to indemnification
under this Section 6 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a Claim in respect
thereof is to made against any indemnifying party under this Section 6, deliver
to the indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the indemnified party;
provided, however, that such indemnifying party shall not be entitled to assume
such defense and an indemnified party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable

                                       8
<PAGE>

opinion of counsel retained by the indemnifying party, the representation by
such counsel of the indemnified party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between such
indemnified party and any other party represented by such counsel in such
proceeding or the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and any
such indemnified party reasonably determines that there may be legal defenses
available to such indemnified party that are in conflict with those available to
such indemnifying party. The indemnifying party shall pay for only one separate
legal counsel for the indemnified parties, and such legal counsel shall be
selected by Investors holding a majority in interest of the Registrable
Securities included in the Registration Statement to which the Claim relates (if
the parties entitled to indemnification hereunder are Investor Indemnified
Persons) or by the Company (if the parties entitled to indemnification hereunder
are Company Indemnified Persons). The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
indemnified party under this Section 6, except to the extent that the
indemnifying party is actually prejudiced in its ability to defend such action.
The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as such expense, loss, damage or liability is incurred and is due and
payable.

7.   CONTRIBUTION.

         To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party shall make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law as is appropriate to
reflect the relative fault of the indemnifying party, on the one hand, and the
indemnified party, on the other hand, with respect to the Violation giving rise
to the applicable Claim; provided, however, that (a) no contribution shall be
made under circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Section 6, (b) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any seller of
Registrable Securities who was not guilty of such fraudulent misrepresentation,
and (c) contribution (together with any indemnification or other obligations
under this Agreement) by any seller of Registrable Securities shall be limited
in amount to the net amount of proceeds received by such seller from the sale of
such Registrable Securities.

8.   REPORTS UNDER THE EXCHANGE ACT.

         With a view to making available to the Investors the benefits of Rule
144 promulgated under the Securities Act or any other similar rule or regulation
of the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:

         (a) file with the SEC in a timely manner and make and keep available
all reports and other documents required of the Company under the Securities Act
and the Exchange Act so long as the Company remains subject to such requirements
and the filing and availability of such reports and other documents is required
for the applicable provisions of Rule 144; and

         (b) furnish to each Investor so long as such Investor holds Notes,
Warrants or Registrable Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit such Investor to sell such securities under Rule
144 without registration.

9.   ASSIGNMENT OF REGISTRATION RIGHTS.

The rights of the Investors hereunder, including the right to have the Company
register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or any
portion of the Notes, Warrants or Registrable Securities if: (a) the Investor
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company after such assignment, (b)
the Company is furnished with written notice of (i) the name and address of such
transferee or assignee, and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) following such
transfer or assignment, the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, (d) the transferee or assignee agrees in writing for the
benefit of the Company to be bound by all of

                                       9
<PAGE>

the provisions contained herein, and (e) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement, the Notes and the Warrants, as applicable. In addition, and
notwithstanding anything to the contrary contained in this Agreement, the
Securities Purchase Agreement, the Notes or the Warrants, the Securities (as
defined in the Securities Purchase Agreement) may be pledged, and all rights of
the Investor under this Agreement or any other agreement or document related to
the transactions contemplated hereby may be assigned, without further consent of
the Company, to a bona fide pledgee in connection with an Investor's margin or
brokerage account.

10.   AMENDMENT OF REGISTRATION RIGHTS.

         Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company, the
Initial Investor (to the extent such Initial Investor or any of its affiliates
still owns Notes, Warrants or Registrable Securities) and the Investor(s) who
hold a majority in interest of the Registrable Securities or, in the case of a
waiver, with the written consent of the party charged with the enforcement of
any such provision; provided, however, that (a) no amendment hereto which
restricts the ability of an Investor to elect not to participate in an
underwritten offering shall be effective against any Investor which does not
consent in writing to such amendment; (b) no consideration shall be paid to an
Investor by the Company in connection with an amendment hereto unless each
Investor similarly affected by such amendment receives a pro rata amount of
consideration from the Company; and (c) unless an Investor otherwise agrees,
each amendment hereto must similarly affect each Investor. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.

11.   MISCELLANEOUS.

         (a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.

         (b) Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally, by responsible overnight carrier or by
confirmed facsimile, and shall be effective five days after being placed in the
mail, if mailed, or upon receipt or refusal of receipt, if delivered personally
or by responsible overnight carrier or confirmed facsimile, in each case
addressed to a party. The initial addresses for such communications shall be as
follows, and each party shall provide notice to the other parties of any change
in such party's address:

         If to the Company:
                           NGAS Resources, Inc.
                           120 Prosperous Place, Suite 201
                           Lexington, Kentucky  40509
                           Telephone: (859) 263-3948
                           Facsimile:  (859) 263-4228
                           Attention:  William Daugherty, President

         with a copy simultaneously transmitted by like means (which transmittal
shall not constitute notice hereunder) to:

                           Stahl & Zelmanovitz
                           767 Third Avenue, Suite 1401
                           New York, New York  10017
                           Telephone: (212) 826-6435
                           Facsimile:  (212) 826-6402
                           Attention:  Douglas Stahl, Esq.

         If to any Investor, to such address as such Investor shall have
provided in writing to the Company.

                                       10
<PAGE>

         (c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.

         (d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware applicable to contracts made and to be
performed in the State of Delaware. The Company irrevocably consents to the
jurisdiction of the United States federal courts and the state courts located in
the County of New Castle, State of Delaware in any suit or proceeding based on
or arising under this Agreement and irrevocably agrees that all claims in
respect of such suit or proceeding may be determined in such courts. The Company
irrevocably waives the defense of an inconvenient forum to the maintenance of
such suit or proceeding in such forum. The Company further agrees that service
of process upon the Company, mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect any Investor's right to serve process in
any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.

         (e) This Agreement and the other Transaction Documents (including any
schedules and exhibits hereto and thereto) constitute the entire agreement among
the parties hereto with respect to the subject matter hereof and thereof. There
are no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement and the other
Transaction Documents supersede all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof and thereof.

         (f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.

         (g) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.

         (h) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.

         (i) Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.

         (j) Unless other expressly provided herein, all consents, approvals and
other determinations to be made by the Investors pursuant to this Agreement
shall be made by the Investors holding a majority in interest of the Registrable
Securities (determined as if all Notes and Warrants then outstanding had been
converted into or exercised for Registrable Securities) held by all Investors.

         (k) The initial number of Registrable Securities included on any
Registration Statement filed pursuant to Section 2(a) or 3(b), and each increase
to the number of Registrable Securities included thereon, shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time of such establishment or increase, as the case may be.
In the event an Investor shall sell or otherwise transfer any of such holder's
Registrable Securities, each transferee shall be allocated a pro rata portion of
the number of Registrable Securities included on a Registration Statement for
such transferor. Any shares of Common Stock included on a Registration Statement
and which remain allocated to any person or entity which does not hold any
Registrable Securities shall be allocated to the remaining Investors, pro rata
based on the number of shares of Registrable Securities then held by such
Investors. For the avoidance of doubt, the number of Registrable Securities held
by any Investor shall be determined as if all Notes and Warrants then
outstanding were converted into or exercised for Registrable Securities.

         (l) Each party to this Agreement has participated in the negotiation
and drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party to
this Agreement.

                                       11
<PAGE>

         (m) For purposes of this Agreement, the term "business day" means any
day other than a Saturday or Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law, regulation or
executive order to close, and the term "trading day" means any day on which the
SmallCap Market or, if the Common Stock is not then traded on the SmallCap
Market, the principal national securities exchange, automated quotation system
or other trading market where the Common Stock is then listed, quoted or traded,
is open for trading.

                                       12
<PAGE>

         IN WITNESS WHEREOF, the undersigned Initial Investor and the Company
have caused this Agreement to be duly executed as of the date first above
written.

NGAS RESOURCES, INC.

By: /s/ William G. Barr III
    ------------------------------------------------------
     William G. Barr III,
     Vice President -- Acquisitions and Legal Affairs

INITIAL INVESTOR:

         BayStar Capital II, LP
-----------------------------------------------------------
               (Print or Type Name of Purchaser)

By:  BayStar Capital Management, LLC, its general partner

By: /s/ Steven M. Lamar
    ------------------------------------------------------
     Steven M. Lamar,
     Managing Member

                                       13

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