Document:

Form
      of

    Registration
      Rights Agreement

    

    

    This
      Registration Rights Agreement (the “Agreement”)
      is
      made and entered into as of _______ ___, 2006 (the “Effective
      Date”)
      among
      United Fuel & Energy Corporation, a Nevada corporation (the “Company”),
      the
      parties set forth Exhibit
      A
      hereto
      (each, a “Purchaser”
and
      collectively, the “Purchasers”),
      and
      the parties set forth on the signature page.

    

    R
      e c i t a l s:

    

    A.  The
      Purchasers have purchased shares of Series A 8% Convertible Preferred Stock
      (the
“Shares”)
      from
      the Company pursuant to Subscription Agreements (each, a “Subscription
      Agreement”
and
      collectively, the “Subscription
      Agreements”)
      by and
      between the Company and each Purchaser.

    

    B. The
      Company has issued a warrant (the “Placement
      Agent Warrant”)
      to
      purchase shares of the Company's Common Stock to Sanders Morris Harris Inc.,
      a
      Texas corporation (“SMH”).

    

    C. 
      The
      Company, the Purchasers, and SMH desire to set forth the registration rights
      to
      be granted by the Company to the Purchasers and SMH.

    

    Now,
      Therefore,
      in
      consideration of the mutual promises, representations, warranties, covenants,
      and conditions set forth herein, in the Subscription Agreements, or otherwise,
      the parties mutually agree as follows: 

    

    A
      g r e e m e n t:

    

    1. Certain
      Definitions.
      As used
      in this Agreement, the following terms shall have the following respective
      meanings:

    

    “Blackout
      Period”
means,
      with respect to a registration, a period in each case commencing on the day
      immediately after the Company notifies the Purchasers and SMH that they are
      required, pursuant to Section 4(f), to suspend offers and sales of Registrable
      Securities during which the Company, in the good faith judgment of its Board
      of
      Directors, determines (because of the existence of, or in anticipation of,
      any
      acquisition, financing activity, or other transaction involving the Company,
      or
      the unavailability for reasons beyond the Company's control of any required
      financial statements, disclosure of information which is in its best interest
      not to publicly disclose, or any other event or condition of similar
      significance to the Company) that the registration and distribution of the
      Registrable Securities to be covered by such registration statement, if any,
      would be seriously detrimental to the Company and its shareholders and ending
      on
      the earlier of (1) the date upon which the material non-public information
      commencing the Blackout Period is disclosed to the public or ceases to be
      material and (2) such time as the Company notifies the selling Holders that
      the
      Company will no longer delay such filing of the Registration Statement,
      recommence taking steps to make such Registration Statement effective, or allow
      sales pursuant to such Registration Statement to resume; provided,
      however,
      that the
      Company shall limit its use of Blackout Periods so as to not exceed 30
      consecutive Trading Days. 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Business
      Day”
means
      any day of the year, other than a Saturday, Sunday, or other day on which the
      Commission is required or authorized to close.

    

    “Closing
      Date”
means
      the date on which the final closing of the offering of the Series A Preferred
      Stock occurs pursuant to the terms of that certain Private Placement Memorandum
      dated March 27, 2006. 

    

    “Commission”
means
      the Securities and Exchange Commission or any other federal agency at the time
      administering the Securities Act.

    

    “Common
      Stock”
means
      the common stock, $.001 par value per share, of the Company and any and all
      shares of capital stock or other equity securities of: (i) the Company which
      are
      added to or exchanged or substituted for the Common Stock by reason of the
      declaration of any stock dividend or stock split, the issuance of any
      distribution or the reclassification, readjustment, recapitalization, or other
      such modification of the capital structure of the Company; and (ii) any other
      corporation, now or hereafter organized under the laws of any state or other
      governmental authority, with which the Company is merged, which results from
      any
      consolidation or reorganization to which the Company is a party, or to which
      is
      sold all or substantially all of the shares or assets of the Company, if
      immediately after such merger, consolidation, reorganization, or sale, the
      Company or the stockholders of the Company own equity securities having in
      the
      aggregate more than 50% of the total voting power of such other
      corporation.

    

    “Equity
      Securities”
means
      (i) any Common Stock, (ii) any security convertible, with or without
      consideration, into any Common Stock (including any option to purchase such
      a
      convertible security), (iii) any security carrying any warrant or right to
      subscribe to or purchase any Common Stock, or (iv) any such warrant or
      right.

    

    “Exchange
      Act”
means
      the Securities Exchange Act of 1934, as amended, and the rules and regulations
      of the Commission promulgated thereunder.

    

    “Family
      Member”
means
      (a) with respect to any individual, such individual's spouse, any descendants
      (whether natural or adopted), any trust all of the beneficial interests of
      which
      are owned by any of such individuals or by any of such individuals together
      with
      any organization described in Section 501(c)(3) of the Internal Revenue Code
      of
      1986, as amended, the estate of any such individual, and any corporation,
      association, partnership, or limited liability company all of the equity
      interests of which are owned by those above described individuals, trusts,
      or
      organizations and (b) with respect to any trust, the owners of the beneficial
      interests of such trust.

    

    “Form
      S-1”
and
      “Form
      S-3”
mean
      such forms under the Securities Act as in effect on the date hereof.

     

    “Holder”
means
      each Purchaser, SMH, or any successor or Permitted Assignee of a Purchaser,
      or
      SMH who acquire rights in accordance with this Agreement with respect to the
      Registrable Securities directly or indirectly from a Purchaser or SMH, including
      from any Permitted Assignee.

    

    “Inspector”
means
      any attorney, accountant, or other agent retained by a Purchaser for the
      purposes provided in Section 4(j).

     

    
      
        
        

      

      
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    “Offering
      Price”
means
      the price per share at which the Shares have been sold to the Purchasers
      pursuant to the Subscription Agreements.

    

    “Permitted
      Assignee”
means
      (a) with respect to a partnership, its partners or former partners in
      accordance with their partnership interests, (b) with respect to a
      corporation, its shareholders in accordance with their interest in the
      corporation, (c) with respect to a limited liability company, its members
      or former members in accordance with their interest in the limited liability
      company, (d) with respect to an individual party, any Family Member of such
      party, (e) an entity that is controlled by, controls, or is under common control
      with a transferor, or (f) a party to this Agreement.

    

    The
      terms
“register,”
      “registered,”
and
      “registration”
refers
      to a registration effected by preparing and filing a registration statement
      in
      compliance with the Securities Act, and the declaration or ordering of the
      effectiveness of such registration statement.

    

    “Registrable
      Securities”
means
      (i) shares of Common Stock issuable upon the conversion of the Shares, which
      have been issued to each Purchaser pursuant to the Subscription Agreements,
      and
      (ii) shares of Common Stock issued or issuable to SMH pursuant to the Placement
      Agent Warrant, but
      in
      each case excluding
      (A) any
      Registrable Securities that have been publicly sold or may be publicly sold
      immediately without registration under the Securities Act either pursuant to
      Rule 144(k) of the Securities Act or otherwise; (B) any Registrable Securities
      sold by a person in a transaction pursuant to a registration statement filed
      under the Securities Act; or (C) any Registrable Securities that are at the
      time
      subject to an effective registration statement under the Securities Act.

    

    “Registration
      Default Date”
means
      the date which is the earlier to occur of (i) 60 days after the date on which
      the Registration Statement is filed with the Commission and (ii) 120 days after
      the Closing Date (or, in the event of a review by the Commission of such
      Registration Statement, 180 days).

    

    “Registration
      Default Period”
means
      the period following the Registration Default Date during which any Registration
      Event occurs and is continuing.

    

    “Registration
      Event”
means
      the occurrence of any of the following events:

    

    (a) the
      Registration Statement covering Registrable Securities is not declared effective
      by the Commission on or before the Registration Default Date, or

    

    (b) after
      the
      SEC Effective Date, sales cannot be made pursuant to the Registration Statement
      for any reason (including without limitation by reason of a stop order, or
      the
      Company's failure to update the Registration Statement) but except as excused
      pursuant to Section 3(a). 

    

    “Registration
      Statement”
means
      the registration statement required to be filed by the Company pursuant to
      Section 3(a).

    

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, or any similar federal statute
      promulgated in replacement thereof, and the rules and regulations of the
      Commission thereunder, all as the same shall be in effect at the
      time.

     

    (a)     

     

    
      
        
        

      

      
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    “SEC
      Effective Date”
means
      the date the Registration Statement is declared effective by the
      Commission.

    

    “Trading
      Day”
means
      a
      day on whichever (a) the national securities exchange, (b) the Nasdaq Stock
      Market, or (c) such other securities market, in any such case which at the
      time
      constitutes the principal securities market for the Common Stock, is open for
      general trading of securities.

    

    2. Term.
      This
      Agreement shall continue in full force and effect for a period of two (2) years
      from the Effective Date, unless terminated sooner hereunder.

    

    3. Registration.

    

    (a) Registration
      on Form S-1 or Form S-3.
      As
      promptly as reasonably practicable after the date hereof, and within 60 days
      following the Closing Date, the Company shall file with the Commission a shelf
      registration statement on Form S-1, or, if available, Form S-3 relating to
      the
      resale by the Holders of all of the Registrable Securities; provided,
      however,
      that
      the Company shall not be obligated to effect any such registration,
      qualification, or compliance pursuant to this Section 3(a), or keep such
      registration effective pursuant to Section 4: (i) in any particular jurisdiction
      in which the Company would be required to qualify to do business as a foreign
      corporation or as a dealer in securities under the securities or blue sky laws
      of such jurisdiction or to execute a general consent to service of process
      in
      effecting such registration, qualification, or compliance, in each case where
      it
      has not already done so; or (ii) during any Blackout Period.

    

    (b) Adjustment
      Upon Registration Default Date or Registration Event.
      If a
      Registration Default Date or a Registration Event occurs, then the Company
      agrees to reduce the conversion price for which the Shares are convertible
      [and
      the exercise price for the Placement Agent Warrant] by $0.25. Further, the
      Company agrees to further reduce the conversion price for which the Shares
      are
      convertible [and the exercise price for the Placement Agent Warrant] by $0.25
      for each subsequent six-month period following a Registration Default Date;
      provided, that the conversion price for which the Shares are convertible [and
      the exercise price for the Placement Agent Warrant] shall never be reduced
      to
      less that $0.75.

    

    4. Registration
      Procedures.
      In the
      case of each registration, qualification, or compliance effected by the Company
      pursuant to Section 3 hereof, the Company will keep each Holder including
      securities therein reasonably advised in writing (which may include e-mail)
      as
      to the initiation of each registration, qualification, and compliance and as
      to
      the completion thereof. With respect to any registration statement filed
      pursuant to Section 3, the Company will use its commercially reasonable best
      efforts to:

    

    (a) prepare
      and file with the Commission with respect to such Registrable Securities, a
      registration statement on Form S-1 or Form S-3, or any other form for which
      the
      Company then qualifies or which counsel for the Company shall deem appropriate,
      and which form shall be available for the sale of the Registrable Securities
      in
      accordance with the intended method(s) of distribution thereof, and use its
      commercially reasonable efforts to cause such registration statement to become
      effective as soon as possible and remain effective at least for a period ending
      with the first to occur of (i) the sale of all Registrable Securities covered
      by
      the registration statement, or (ii) the availability under Rule 144 for the
      Holder to immediately, freely resell without restriction all Registrable
      Securities covered by the registration statement (in each case, the“Effectiveness
      Period”);
      provided
      that
      no
      later than two business days before filing with the Commission a registration
      statement or prospectus or any amendments or supplements thereto, the Company
      shall (i) furnish to (A) one special counsel (“Holders
      Counsel”)
      selected by the Company for the benefit of the Holders, copies of all such
      documents proposed to be filed (excluding any exhibits other than applicable
      underwriting documents), in substantially the form proposed to be filed, which
      documents shall be subject to the review of such Holders Counsel, and (ii)
      notify each Holder of Registrable Securities covered by such registration
      statement of any stop order issued or threatened by the Commission and take
      all
      reasonable actions required to prevent the entry of such stop order or to remove
      it if entered;

    

    
      
        
        

      

      
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    (b) if
      a
      registration statement is subject to review by the Commission, promptly respond
      to all comments and diligently pursue resolution of any comments to the
      satisfaction of the Commission;

    

    (c) prepare
      and file with the Commission such amendments and supplements to such
      registration statement and the prospectus used in connection therewith as may
      be
      necessary to keep such registration statement effective during the Effectiveness
      Period (but in any event at least until expiration of the 90-day period referred
      to in Section 4(3) of the Securities Act and Rule 174, or any successor thereto,
      thereunder, if applicable), and comply with the provisions of the Securities
      Act
      with respect to the disposition of all securities covered by such registration
      statement during such period in accordance with the intended method(s) of
      disposition by the sellers thereof set forth in such registration
      statement;

    

    (d) furnish,
      without charge, to each Holder of Registrable Securities covered by such
      registration statement (i) a reasonable number of copies of such registration
      statement (including any exhibits thereto other than exhibits incorporated
      by
      reference), each amendment and supplement thereto as such Holder may request,
      (ii) such number of copies of the prospectus included in such registration
      statement (including each preliminary prospectus and any other prospectus filed
      under Rule 424 under the Securities Act) as such Holders may request, in
      conformity with the requirements of the Securities Act, and (iii) such other
      documents as such Holder may reasonably request in order to facilitate the
      disposition of the Registrable Securities owned by such Holder, but only during
      the Effectiveness Period;

    

    (e) use
      its
      commercially reasonable best efforts to register or qualify such Registrable
      Securities under such other applicable securities or blue sky laws of such
      jurisdictions as any Holder of Registrable Securities covered by such
      registration statement reasonably requests as may be necessary for the
      marketability of the Registrable Securities (such request to be made by the
      time
      the applicable registration statement is deemed effective by the Commission)
      and
      do any and all other acts and things which may be reasonably necessary or
      advisable to enable such Holder to consummate the disposition in such
      jurisdictions of the Registrable Securities owned by such Holder; provided
      that the
      Company shall not be required to (i) qualify generally to do business in any
      jurisdiction where it would not otherwise be required to qualify but for this
      paragraph (e), (ii) subject itself to taxation in any such jurisdiction, or
      (iii) consent to general service of process in any such
      jurisdiction;

    

    (f) as
      promptly as practicable after becoming aware of such event, notify each Holder
      of such Registrable Securities at any time when a prospectus relating thereto
      is
      required to be delivered under the Securities Act of the happening of any event
      which comes to the Company's attention if as a result of such event the
      prospectus included in such registration statement contains an untrue statement
      of a material fact or omits to state any material fact required to be stated
      therein or necessary to make the statements therein not misleading and the
      Company shall promptly prepare and furnish to such Holder a supplement or
      amendment to such prospectus (or prepare and file appropriate reports under
      the
      Exchange Act) so that, as thereafter delivered to the purchasers of such
      Registrable Securities, such prospectus shall not contain an untrue statement
      of
      a material fact or omit to state any material fact required to be stated therein
      or necessary to make the statements therein not misleading, unless suspension
      of
      the use of such prospectus otherwise is authorized herein or in the event of
      a
      Blackout Period, in which case no supplement or amendment need be furnished
      (or
      Exchange Act filing made) until the termination of such suspension or Blackout
      Period; 

    

    
      
        
        

      

      
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    (g) comply,
      and continue to comply during the period that such registration statement is
      effective under the Securities Act, in all material respects with the Securities
      Act and the Exchange Act and with all applicable rules and regulations of the
      Commission with respect to the disposition of all securities covered by such
      registration statement, and make available to its security holders, as soon
      as
      reasonably practicable, an earnings statement covering the period of at least
      12
      months, but not more than 18 months, beginning with the first full calendar
      month after the SEC Effective Date, which earnings statement shall satisfy
      the
      provisions of Section 11(a) of the Securities Act.

    

    (h) as
      promptly as practicable after becoming aware of such event, notify each Holder
      of Registrable Securities being offered or sold pursuant to the Registration
      Statement of the issuance by the Commission of any stop order or other
      suspension of effectiveness of the Registration Statement at the earliest
      possible time;

    

    (i) permit
      the Holders of Registrable Securities being included in the Registration
      Statement and their legal counsel, at such Holders' sole cost and expense
      (except as otherwise specifically provided in Section 6) to review and have
      a
      reasonable opportunity to comment on the Registration Statement and all
      amendments and supplements thereto at least two Business Days prior to their
      filing with the Commission;

    

    (j)
       make
      available for inspection by any Holder and any Inspector retained by such
      Holder, at such Holder's sole expense, all records as shall be reasonably
      necessary to enable such Holder to exercise its due diligence responsibility,
      and cause the Company's officers, directors, and employees to supply all
      information which such Holder or any Inspector may reasonably request for
      purposes of such due diligence; provided,
      however, that
      such
      Holder shall hold in confidence and shall not make any disclosure of any record
      or other information which the Company determines in good faith to be
      confidential, and of which determination such Holder is so notified at the
      time
      such Holder receives such information, unless (i) the disclosure of such record
      is necessary to avoid or correct a misstatement or omission in the Registration
      Statement and a reasonable time prior to such disclosure the Holder shall have
      informed the Company of the need to so correct such misstatement or omission
      and
      the Company shall have failed to correct such misstatement of omission, (ii)
      the
      release of such record is ordered pursuant to a subpoena or other order from
      a
      court or governmental body of competent jurisdiction, or (iii) the information
      in such record has been made generally available to the public other than by
      disclosure in violation of this or any other agreement. The Company shall not
      be
      required to disclose any confidential information in such records to any
      Inspector until and unless such Inspector shall have entered into a
      confidentiality agreement with the Company with respect thereto, substantially
      in the form of this Section 4(j), which agreement shall permit such Inspector
      to
      disclose records to the Holder who has retained such Inspector. Each Holder
      agrees that it shall, upon learning that disclosure of such records is sought
      in
      or by a court or governmental body of competent jurisdiction or through other
      means, give prompt notice to the Company and allow the Company, at the Company's
      expense, to undertake appropriate action to prevent disclosure of, or to obtain
      a protective order for, the records deemed confidential. The Company shall
      hold
      in confidence and shall not make any disclosure of information concerning a
      Holder provided to the Company pursuant to this Agreement unless (i) disclosure
      of such information is necessary to comply with federal or state securities
      laws, (ii) disclosure of such information to the Staff of the Division of
      Corporation Finance is necessary to respond to comments raised by the Staff
      in
      its review of the Registration Statement, (iii) disclosure of such information
      is necessary to avoid or correct a misstatement or omission in the Registration
      Statement, (iv) release of such information is ordered pursuant to a subpoena
      or
      other order from a court or governmental body of competent jurisdiction, or
      (v)
      such information has been made generally available to the public other than
      by
      disclosure in violation of this or any other agreement. The Company agrees
      that
      it shall, upon learning that disclosure of such information concerning a Holder
      is sought in or by a court or governmental body of competent jurisdiction or
      through other means, give prompt notice to such Holder and allow such Holder,
      at
      such Holder's expense, to undertake appropriate action to prevent disclosure
      of,
      or to obtain a protective order for, such information;

    

    
      
        
        

      

      
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    (k) use
      its
      commercially reasonable best efforts to cause all the Registrable Securities
      covered by the Registration Statement to be listed or quoted on the principal
      securities market on which securities of the same class or series issued by
      the
      Company are then listed or traded;

    

    (l) provide
      a
      transfer agent and registrar, which may be a single entity, for the Registrable
      Securities at all times;

    

    (m) cooperate
      with the Holders of Registrable Securities being offered pursuant to the
      Registration Statement to facilitate the timely preparation and delivery of
      certificates (not bearing any restrictive legends) representing Registrable
      Securities to be offered pursuant to the Registration Statement and enable
      such
      certificates to be in such denominations or amounts as the Holders may
      reasonably request and registered in such names as the Holders may request;
      and

    

    (n) take
      all
      other reasonable actions necessary to expedite and facilitate disposition by
      the
      Holders of the Registrable Securities pursuant to the Registration
      Statement.

    

    5. Suspension
      of Offers and Sales.
      Each
      Holder of Registrable Securities agrees that, upon receipt of any notice from
      the Company of the happening of any event of the kind described in Section
      4(f)
      hereof or of the commencement of an Blackout Period, such Holder shall
      discontinue disposition of Registrable Securities pursuant to the registration
      statement covering such Registrable Securities until such Holder's receipt
      of
      the copies of the supplemented or amended prospectus contemplated by Section
      4(f) hereof or notice of the end of the Blackout Period, and, if so directed
      by
      the Company, such Holder shall deliver to the Company (at the Company's expense)
      all copies (including, without limitation, any and all drafts), other than
      permanent file copies, then in such Holder's possession, of the prospectus
      covering such Registrable Securities current at the time of receipt of such
      notice. 

     

    

    6. Registration
      Expenses.
      The
      Company shall pay all expenses in connection with any registration, including,
      without limitation, all registration, filing, stock exchange and NASD fees,
      printing expenses, all fees and expenses of complying with securities or blue
      sky laws, the fees and disbursements of counsel for the Company and of its
      independent accountants. Each party shall pay for its own underwriting discounts
      and commissions, transfer taxes and other expenses incurred by the Holders
      for
      the registration of such Holder’s Registrable Securities. Except as provided in
      Section 10, the Company shall not be responsible for the expenses of any
      attorney or other advisor employed by a Holder of Registrable
      Securities.

    

    
      
        
        

      

      
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    7. Assignment
      of Rights.
      No
      Holder may assign its rights under this Agreement to any party without the
      prior
      written consent of the Company; provided,
      however,
      that a
      Holder may assign its rights under this Agreement without such restrictions
      to a
      Permitted Assignee as long as (a) such transfer or assignment is effected in
      accordance with applicable securities laws; (b) such transferee or assignee
      agrees in writing to become subject to the terms of this Agreement; and (c)
      the
      Company is given written notice by such Holder of such transfer or assignment,
      stating the name and address of the transferee or assignee and identifying
      the
      Registrable Securities with respect to which such rights are being transferred
      or assigned.

    

    8. Information
      by Holder.
      The
      Holder or Holders of Registrable Securities included in any registration shall
      furnish to the Company such information regarding such Holder or Holders and
      the
      distribution proposed by such Holder or Holders as the Company may request
      in
      writing.

    

    9. Delay
      of Registration.
      No
      Holder shall have any right to obtain or seek an injunction restraining or
      otherwise delaying any registration pursuant to this Agreement as the result
      of
      any controversy that might arise with respect to the interpretation or
      implementation of this Agreement.

    

    10. Indemnification.

    

    (a) In
      the
      event of the offer and sale of Registrable Securities held by Holders under
      the
      Securities Act, the Company shall, and hereby does, indemnify and hold harmless,
      to the fullest extent permitted by law, each Holder, its directors, officers,
      partners, each other person who participates as an underwriter in the offering
      or sale of such securities, and each other person, if any, who controls or
      is
      under common control with such Holder or any such underwriter within the meaning
      of Section 15 of the Securities Act, against any losses, claims, damages, or
      liabilities, joint or several, and expenses to which the Holder or any such
      director, officer, partner, or underwriter or controlling person may become
      subject under the Securities Act or otherwise, insofar as such losses, claims,
      damages, liabilities, or expenses (or actions or proceedings, whether commenced
      or threatened, in respect thereof) arise out of or are based upon any untrue
      statement or alleged untrue statement of any material fact contained in any
      registration statement under which such shares were registered under the
      Securities Act, any preliminary prospectus (but only preliminary prospectuses
      approved for distribution by the Company), final prospectus, or summary
      prospectus contained therein, or any amendment or supplement thereto, or any
      omission or alleged omission to state therein a material fact required to be
      stated therein or necessary to make the statements therein in light of the
      circumstances in which they were made not misleading, and the Company shall
      reimburse the Holder, and each such director, officer, partner, underwriter,
      and
      controlling person for any legal or any other expenses reasonably incurred
      by
      them in connection with investigating, defending, or settling any such loss,
      claim, damage, liability, action, or proceeding; provided that the foregoing
      shall not apply to, and the Company shall not be liable, in any such case (i)
      to
      the extent that any such loss, claim, damage, liability (or action or proceeding
      in respect thereof), or expense arises out of or is based upon an untrue
      statement or alleged untrue statement in or omission or alleged omission from
      such registration statement, any such preliminary prospectus, final prospectus,
      summary prospectus, amendment, or supplement in reliance upon and in conformity
      with written information furnished to the Company through an instrument duly
      executed by or on behalf of such Holder specifically stating that it is for
      use
      in the preparation thereof, (ii) provided that the Company has complied with
      its
      obligations hereunder to furnish such Holder with copies of the applicable
      prospectus, if the person asserting any such loss, claim, damage, or liability
      (or action or proceeding in respect thereof) who purchased the Registrable
      Securities that are the subject thereof did not receive a copy of an amended
      preliminary prospectus or the final prospectus (or the final prospectus as
      amended or supplemented) at or prior to the written confirmation of the sale
      of
      such Registrable Securities to such person because of the failure of such Holder
      or underwriter to so provide such amended preliminary or final prospectus and
      the untrue statement or alleged untrue statement or omission or alleged omission
      of a material fact made in such preliminary prospectus was corrected in the
      amended preliminary or final prospectus (or the final prospectus as amended
      or
      supplemented), or (iii) provided that the plan of distribution mechanics
      described in the applicable prospectus are, in form and substance, reasonable
      and customary for transactions of this type, to the extent that the Holders
      failed to comply with the terms of such plan of distribution mechanics. Such
      indemnity shall remain in full force and effect regardless of any investigation
      made by or on behalf of the Holders, or any such director, officer, partner,
      underwriter, or controlling person and shall survive the transfer of such shares
      by the Holder.

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    (b) As
      a
      condition to including any Registrable Securities to be offered by a Holder
      in
      any registration statement filed pursuant to this Agreement, each such Holder
      agrees to be bound by the terms of this Section 10 and to indemnify and hold
      harmless, to the fullest extent permitted by law, the Company, its directors
      and
      officers, and each other person, if any, who controls the Company within the
      meaning of Section 15 of the Securities Act, legal counsel and accountants
      for
      the Company, any underwriter, any other Holder selling securities in such
      registration statement, and any controlling person within the meaning of the
      Securities Act of any such underwriter or other Holder, against any losses,
      claims, damages, or liabilities, joint or several, to which the Company or
      any
      such director or officer or controlling person may become subject under the
      Securities Act or otherwise, insofar as such losses, claims, damages, or
      liabilities (or actions or proceedings, whether commenced or threatened, in
      respect thereof) arise out of or are based upon (i) an untrue statement or
      alleged untrue statement in or omission or alleged omission from such
      registration statement, any preliminary prospectus (but only preliminary
      prospectuses approved for distribution by the Holder), final prospectus, or
      summary prospectus contained therein, or any amendment or supplement thereto,
      if
      such statement or alleged statement or omission or alleged omission was made
      in
      reliance upon and in conformity with written information about such Holder
      as a
      Holder of the Company furnished to the Company, (ii) provided that the Company
      has complied with its obligations hereunder to furnish such Holder with copies
      of the applicable prospectus, if the person asserting any such loss, claim,
      damage, or liability (or action or proceeding in respect thereof) who purchased
      the Registrable Securities that are the subject thereof did not receive a copy
      of an amended preliminary prospectus or the final prospectus (or the final
      prospectus as amended or supplemented) at or prior to the written confirmation
      of the sale of such Registrable Securities to such person because of the failure
      of such Holder or underwriter to so provide such amended preliminary or final
      prospectus and the untrue statement or alleged untrue statement or omission
      or
      alleged omission of a material fact made in such preliminary prospectus was
      corrected in the amended preliminary or final prospectus (or the final
      prospectus as amended or supplemented), or (iii) provided that the plan of
      distribution mechanics described in the applicable prospectus are, in form
      and
      substance, reasonable and customary for transactions of this type, to the extent
      that the Holders failed to comply with the terms of such plan of distribution
      mechanics. Such indemnity shall remain in full force and effect regardless
      of
      any investigation made by or on behalf of the Holders, or any such director,
      officer, partner, underwriter, or controlling person and shall survive the
      transfer of such shares by the Holder, and such Holder shall reimburse the
      Company, and each such director, officer, legal counsel and accountants,
      underwriter, other Holder, and controlling person for any legal or other
      expenses reasonably incurred by them in connection with investigating,
      defending, or settling and such loss, claim, damage, liability, action, or
      proceeding; provided,
      however,
      that
      such indemnity agreement found in this Section 10(b) shall in no event exceed
      the gross proceeds from the offering received by such Holder. Such indemnity
      shall remain in full force and effect, regardless of any investigation made
      by
      or on behalf of the Company or any such director, officer, or controlling person
      and shall survive the transfer by any Holder of such shares.

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (c) Promptly
      after receipt by an indemnified party of notice of the commencement of any
      action or proceeding involving a claim referred to in Section 10(a) or (b)
      hereof (including any governmental action), such indemnified party shall, if
      a
      claim in respect thereof is to be made against an indemnifying party, give
      written notice to the indemnifying party of the commencement of such action;
      provided that the failure of any indemnified party to give notice as provided
      herein shall not relieve the indemnifying party of its obligations under Section
      10(a) or (b) hereof, except to the extent that the indemnifying party is
      actually prejudiced by such failure to give notice. In case any such action
      is
      brought against an indemnified party, unless in the reasonable judgment of
      counsel to such indemnified party a conflict of interest between such
      indemnified and indemnifying parties may exist or the indemnified party may
      have
      defenses not available to the indemnifying party in respect of such claim,
      the
      indemnifying party shall be entitled to participate in and to assume the defense
      thereof, with counsel reasonably satisfactory to such indemnified party and,
      after notice from the indemnifying party to such indemnified party of its
      election so to assume the defense thereof, the indemnifying party shall not
      be
      liable to such indemnified party for any legal or other expenses subsequently
      incurred by the latter in connection with the defense thereof, unless in such
      indemnified party's reasonable judgment a conflict of interest between such
      indemnified and indemnifying parties arises in respect of such claim after
      the
      assumption of the defenses thereof or the indemnifying party fails to defend
      such claim in a diligent manner, other than reasonable costs of investigation.
      Neither an indemnified nor an indemnifying party shall be liable for any
      settlement of any action or proceeding effected without its consent. No
      indemnifying party shall, without the consent of the indemnified party, consent
      to entry of any judgment or enter into any settlement, which does not include
      as
      an unconditional term thereof the giving by the claimant or plaintiff to such
      indemnified party of a release from all liability in respect of such claim
      or
      litigation. Notwithstanding anything to the contrary set forth herein, and
      without limiting any of the rights set forth above, in any event any party
      shall
      have the right to retain, at its own expense, counsel with respect to the
      defense of a claim.

    

    (d)  In
      the
      event that an indemnifying party does or is not permitted to assume the defense
      of an action pursuant to Section 10(c) or in the case of the expense
      reimbursement obligation set forth in Section 10(a) and (b), the indemnification
      required by Section 10(a) and (b) hereof shall be made by periodic payments
      of
      the amount thereof during the course of the investigation or defense, as and
      when bills received or expenses, losses, damages, or liabilities are
      incurred.

    

    (e) If
      the
      indemnification provided for in this Section 10 is held by a court of competent
      jurisdiction to be unavailable to an indemnified party with respect to any
      loss,
      liability, claim, damage, or expense referred to herein, the indemnifying party,
      in lieu of indemnifying such indemnified party hereunder, shall (i) contribute
      to the amount paid or payable by such indemnified party as a result of such
      loss, liability, claim, damage, or expense as is appropriate to reflect the
      proportionate relative fault of the indemnifying party on the one hand and
      the
      indemnified party on the other (determined by reference to, among other things,
      whether the untrue or alleged untrue statement of a material fact or omission
      relates to information supplied by the indemnifying party or the indemnified
      party and the parties' relative intent, knowledge, access to information, and
      opportunity to correct or prevent such untrue statement or omission), or (ii)
      if
      the allocation provided by clause (i) above is not permitted by applicable
      law
      or provides a lesser sum to the indemnified party than the amount hereinafter
      calculated, not only the proportionate relative fault of the indemnifying party
      and the indemnified party, but also the relative benefits received by the
      indemnifying party on the one hand and the indemnified party on the other,
      as
      well as any other relevant equitable considerations. No indemnified party guilty
      of fraudulent misrepresentation (within the meaning of Section 11(f) of the
      Securities Act) shall be entitled to contribution from any indemnifying party
      who was not guilty of such fraudulent misrepresentation.

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (f) Other
      Indemnification.
      Indemnification similar to that specified in the preceding subsections of this
      Section 10 (with appropriate modifications) shall be given by the Company and
      each Holder of Registrable Securities with respect to any required registration
      or other qualification of securities under any federal or state law or
      regulation or governmental authority other than the Securities Act.

    

    11. Miscellaneous.

    

    (a) Governing
      Law.
      This
      Agreement shall be governed by and construed in accordance with the laws of
      the
      State of Texas and the United States of America, both substantive and remedial.
      

    

    (b) Successors
      and Assigns.
      Except
      as otherwise provided herein, the provisions hereof shall inure to the benefit
      of, and be binding upon, the successors, Permitted Assigns, executors, and
      administrators of the parties hereto. In the event the Company merges with,
      or
      is otherwise acquired by, a direct or indirect subsidiary of a publicly traded
      company, the Company shall condition the merger or acquisition on the assumption
      by such parent company of the Company's obligations under this Agreement.

    

    (c) Entire
      Agreement.
      This
      Agreement constitutes the full and entire understanding and agreement between
      the parties with regard to the subjects hereof.

    

    (d) Notices,
      etc.
      All
      notices or other communications which are required or permitted under this
      Agreement shall be in writing and sufficient if delivered by hand, by facsimile
      transmission, by registered or certified mail, postage pre-paid, by electronic
      mail, or by courier or overnight carrier, to the persons at the addresses set
      forth below (or at such other address as may be provided hereunder), and shall
      be deemed to have been delivered as of the date so delivered: 

     

    
 

    
      	
              If
                to the Company:

            	 	United Fuel & Energy
              Corporation
	 	 	405 North Marienfeld
	 	 	
              Suite
                300

            
	 	 	
              Midland,
                Texas 79701

            
	 	 	Attention: Bobby Page
	 	 	
              Facsimile
                No.: (432) 571-8099 

            
	 	 	 
	
              If
                to the Purchasers:

            	 	To each Purchaser at the address set
              forth on
              Exhibit A
	 	 	 
	
                                                 
                with a copy to:

            	 	Sanders Morris Harris
              Inc.
	 	 	
              600
                Travis, Suite 3100

            
	 	 	Houston, Texas 77002
	 	 	
              Attention:
                Michael Chadwick

            
	 	 	Facsimile: (713)
              250-4094

    

     

    or
      at
      such other address as any party shall have furnished to the other parties in
      writing.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    

    (e) Delays
      or Omissions.
      No
      delay or omission to exercise any right, power, or remedy accruing to any Holder
      of any Registrable Securities, upon any breach or default of the Company under
      this Agreement, shall impair any such right, power, or remedy of such Holder
      nor
      shall it be construed to be a waiver of any such breach or default, or an
      acquiescence therein, or of or in any similar breach or default thereunder
      occurring; nor shall any waiver of any single breach or default be deemed a
      waiver of any other breach or default theretofore or thereafter occurring.
      Any
      waiver, permit, consent, or approval of any kind or character on the part of
      any
      Holder of any breach or default under this Agreement, or any waiver on the
      part
      of any Holder of any provisions or conditions of this Agreement, must be in
      writing and shall be effective only to the extent specifically set forth in
      such
      writing. All remedies, either under this Agreement, or by law or otherwise
      afforded to any holder, shall be cumulative and not alternative.

    

    (f) Titles
      and Subtitles.
      The
      titles and subtitles used in this Agreement are used for convenience only and
      are not to be considered in construing or interpreting this
      Agreement.

    

    (g) Counterparts.
      This
      Agreement may be executed in any number of counterparts, each of which shall
      be
      enforceable against the parties actually executing such counterparts, and all
      of
      which together shall constitute one instrument.

    

    (h) Severability.
      In the
      case any provision of this Agreement shall be invalid, illegal, or
      unenforceable, the validity, legality, and enforceability of the remaining
      provisions shall not in any way be affected or impaired thereby.

    

    (i) Amendments.
      The
      provisions of this Agreement may be amended at any time and from time to time,
      and particular provisions of this Agreement may be waived, with and only with
      an
      agreement or consent in writing signed by the Company and by the holders of
      a
      majority of the number of shares of Registrable Securities outstanding as of
      the
      date of such amendment or waiver. The Purchasers acknowledge that by the
      operation of this Section 12(i), the holders of a majority of the outstanding
      Registrable Securities may have the right and power to diminish or eliminate
      all
      rights of the Purchasers under this Agreement.

    

    (j) Limitation
      on Subsequent Registration Rights.
      After
      the date of this Agreement, the Company shall not, without the prior written
      consent of the Holders of at least a majority of the Registrable Share then
      outstanding, enter into any agreement with any holder or prospective holder
      of
      any securities of the Company that would grant such holder registration rights
      senior to those granted to the Holder hereunder.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    This
      Registration Rights Agreement is hereby executed as of the date first above
      written.

     

    
      	 	
              UNITED
                FUEL & ENERGY CORPORATION

            
	 	 
	 	By:
	 	
              

            
	 	Name:
	 	
              

            
	 	Title:
	 	
              

            
	 	 
	 	ENTITY
              PURCHASER
	 	 
	 	
              
Name
              of Purchaser, if entity (please print exact name of investor)
	 	
            
	 	 
	 	By:
	 	
              

            
	 	Name: 
	 	
              
 
	 	Title:
	 	
              
 
	 	 
	 	INDIVIDUAL
              PURCHASER
	 	 
	 	 
	 	
              
                
Name
                of Purchaser, if entity (please print exact name of
                investor)

            
	 	 
	 	 
	 	 
	 	
              
Signature
              of Individual Investor
	 	 
	 	 
	 	 
	 	 
	 	 
	 	 

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

      Exhibit
        A

    

    

    

    Purchaser
      InformationEXHIBIT 4.1

                                     WARRANT

THE SECURITIES  REPRESENTED BY THIS WARRANT HAVE NOT BEEN  REGISTERED  UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,  OR APPLICABLE  STATE  SECURITIES  LAWS. THE
SECURITIES  HAVE BEEN ACQUIRED FOR  INVESTMENT  AND MAY NOT BE OFFERED FOR SALE,
SOLD,  TRANSFERRED  OR  ASSIGNED  IN THE  ABSENCE OF AN  EFFECTIVE  REGISTRATION
STATEMENT FOR THE SECURITIES  UNDER THE  SECURITIES ACT OF 1933, AS AMENDED,  OR
APPLICABLE  STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY
SATISFACTORY  TO THE ISSUER THAT  REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE  STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.  NOTWITHSTANDING  THE FOREGOING,  THIS WARRANT MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT.

                            FALCON NATURAL GAS CORP.

                        Warrant To Purchase Common Stock

Warrant No.: _____                                  Number of Shares: __________

Date of Issuance: March 29, 2006

Falcon Natural Gas Corp., a Nevada corporation (the "Company"), hereby certifies
that, for good and valuable consideration,  the receipt and sufficiency of which
are hereby  acknowledged,  Cornell  Capital  Partners,  LP (the  "Holder"),  the
registered holder hereof or its permitted assigns,  is entitled,  subject to the
terms set forth  below,  to purchase  from the Company  upon  surrender  of this
Warrant,  at any time or times on or after the date hereof,  but not after 11:59
P.M.  Eastern Time on the Expiration Date (as defined herein)  __________  fully
paid and nonassessable shares of Common Stock (as defined herein) of the Company
(the "Warrant  Shares") at the exercise price per share provided in Section 1(b)
below or as subsequently adjusted; provided, however, that in no event shall the
holder be entitled to exercise  this  Warrant for a number of Warrant  Shares in
excess of that  number of  Warrant  Shares  which,  upon  giving  effect to such
exercise,   would  cause  the  aggregate   number  of  shares  of  Common  Stock
beneficially  owned by the  holder  and its  affiliates  to exceed  4.99% of the
outstanding  shares of the Common Stock  following such exercise,  except within
sixty (60) days of the Expiration Date (however,  such restriction may be waived
by Holder (but only as to itself and not to any other holder) upon not less than
65 days prior notice to the Company). For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock  beneficially owned by the holder and
its affiliates  shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such proviso
is being made,  but shall exclude shares of Common Stock which would be issuable
upon (i) exercise of the remaining,  unexercised Warrants  beneficially owned by
the holder and its affiliates and (ii) exercise or conversion of the unexercised
or unconverted portion of any other securities of the Company beneficially owned
by the holder and its affiliates (including, without limitation, any convertible
notes or preferred  stock)  subject to a limitation  on  conversion  or exercise
analogous  to the  limitation  contained  herein.  Except  as set  forth  in the
preceding sentence,  for purposes of this paragraph,  beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended.  For purposes of this Warrant,  in  determining  the number of
outstanding  shares  of  Common  Stock  a  holder  may  rely  on the  number  of
outstanding shares of Common Stock as reflected in (1) the Company's most recent
Form  10-QSB  or Form  10-KSB,  as the case  may be,  (2) a more  recent  public
announcement  by the  Company  or (3) any  other  notice by the  Company  or its
transfer  agent setting forth the number of shares of Common Stock  outstanding.
Upon the written request of any holder,  the Company shall  promptly,  but in no
event later than one (1)  Business  Day  following  the receipt of such  notice,
confirm in writing to any such holder the number of shares of Common  Stock then
outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the exercise of Warrants (as defined below)
by such  holder and its  affiliates  since the date as of which  such  number of
outstanding shares of Common Stock was reported.

                                       1
<PAGE>

      (a)

            (i)  This  Warrant  is  the  common  stock  purchase   warrant  (the
"Warrant")  issued pursuant to the  Forbearance  Agreement dated the date hereof
between the Company and the Holder.

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

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

                  (B)  "Closing Bid Price" means the closing bid price of Common
Stock as quoted on the  Principal  Market (as  reported by  Bloomberg  Financial
Markets ("Bloomberg") through its "Volume at Price" function).

                  (C) "Common Stock" means (i) the Company's  common stock,  par
value  $0.00001  per share,  and (ii) any  capital  stock into which such Common
Stock  shall  have  been  changed  or  any  capital  stock   resulting   from  a
reclassification of such Common Stock.

                  (D) "Event of  Default"  means an event of  default  under the
Convertible  Debentures  issued to the Holder on April 19,  2005 and October 17,
2005.

                                       2
<PAGE>

                  (E) "Excluded  Securities"  means,  (a) shares of Common Stock
issued in connection  with any employee  benefit plan which has been approved by
the  Board  of  Directors  of the  Company,  pursuant  to  which  the  Company's
securities  may be issued to any  employee,  officer or  director  for  services
provided to the Company,  (b) provided  such security is issued at a price which
is greater than or equal to the arithmetic  average of the Closing Bid Prices of
the Common Stock for the ten (10) consecutive trading days immediately preceding
the date of issuance,  any of the following:  (i) any issuance by the Company of
securities in connection  with a strategic  partnership  or a joint venture (the
primary purpose of which is not to raise equity  capital),  or (ii) any issuance
by the Company of securities as  consideration  for a merger or consolidation or
the  acquisition  of a business,  product,  license,  or other assets of another
person or entity, (c) those options and warrants of the Company issued prior to,
and outstanding on, the Issuance Date of this Warrant,  (d) the shares of Common
Stock  issuable on exercise of such options and warrants,  provided such options
and warrants are not amended after the Issuance Date of this Warrant and (e) the
shares of Common Stock issuable upon exercise of this Warrant or the Convertible
Debenture.

                  (F)  "Expiration  Date" means the date five (5) years from the
Issuance  Date of this  Warrant or, if such date falls on a Saturday,  Sunday or
other day on which banks are required or  authorized to be closed in the City of
New York or the State of New York or on which trading does not take place on the
Principal  Exchange or automated  quotation  system on which the Common Stock is
traded (a "Holiday"), the next date that is not a Holiday.

                  (G) "Issuance Date" means the date hereof.

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

                  (I) "Person" means an individual, a limited liability company,
a  partnership,  a joint  venture,  a corporation,  a trust,  an  unincorporated
organization and a government or any department or agency thereof.

                  (J) "Principal Market" means the New York Stock Exchange,  the
American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market,
whichever  is at the time the  principal  trading  exchange  or market  for such
security,  or the  over-the-counter  market on the electronic bulletin board for
such  security as reported by  Bloomberg  or, if no bid or sale  information  is
reported for such security by  Bloomberg,  then the average of the bid prices of
each of the market  makers for such security as reported in the "pink sheets" by
the National Quotation Bureau, Inc.

                  (K)  "Securities  Act" means the  Securities  Act of 1933,  as
amended.

                  (L)  "Warrant"  means this Warrant and all Warrants  issued in
exchange, transfer or replacement thereof.

                  (M) "Warrant Exercise Price" shall be $____ or as subsequently
adjusted as provided in Section 8 hereof. ----------------------

                  (N) "Warrant Shares" means the shares of Common Stock issuable
at any time upon exercise of this Warrant.

            (iii) Other Definitional Provisions.

                  (A)  Except as  otherwise  specified  herein,  all  references
herein (A) to the Company  shall be deemed to include the  Company's  successors
and (B) to any  applicable  law defined or  referred  to herein  shall be deemed
references to such applicable law as the same may have been or may be amended or
supplemented from time to time.

                                       3
<PAGE>

                  (B) When used in this Warrant,  the words "herein",  "hereof",
and "hereunder"  and words of similar  import,  shall refer to this Warrant as a
whole  and not to any  provision  of this  Warrant,  and  the  words  "Section",
"Schedule", and "Exhibit" shall refer to Sections of, and Schedules and Exhibits
to, this Warrant unless otherwise specified.

                  (C)  Whenever  the  context so  requires,  the  neuter  gender
includes the masculine or feminine, and the singular number includes the plural,
and vice versa.

      (b) Exercise of Warrant.

            (i) Subject to the terms and conditions hereof,  this Warrant may be
exercised by the holder hereof then registered on the books of the Company,  pro
rata as  hereinafter  provided,  at any time on any Business Day on or after the
opening of business on such  Business Day,  commencing  with the first day after
the date hereof, and prior to 11:59 P.M. Eastern Time on the Expiration Date (i)
by delivery of a written notice, in the form of the subscription notice attached
as Exhibit A hereto  (the  "Exercise  Notice"),  of such  holder's  election  to
exercise this Warrant,  which notice shall specify the number of Warrant  Shares
to be  purchased,  payment  to the  Company  of an amount  equal to the  Warrant
Exercise Price(s)  applicable to the Warrant Shares being purchased,  multiplied
by the number of Warrant Shares (at the applicable Warrant Exercise Price) as to
which this Warrant is being  exercised  (plus any  applicable  issue or transfer
taxes) (the "Aggregate  Exercise Price") in cash or wire transfer of immediately
available  funds  and the  surrender  of  this  Warrant  (or an  indemnification
undertaking  with  respect  to this  Warrant  in the case of its loss,  theft or
destruction)  to a common carrier for overnight  delivery to the Company as soon
as  practicable  following  such date  ("Cash  Basis") or (ii) if at the time of
exercise,  the  Warrant  Shares  are not  subject to an  effective  registration
statement  or if an Event of Default has  occurred,  by  delivering  an Exercise
Notice and in lieu of making payment of the Aggregate  Exercise Price in cash or
wire  transfer,  elect instead to receive upon such exercise the "Net Number" of
shares of Common  Stock  determined  according  to the  following  formula  (the
"Cashless Exercise"):

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

            For purposes of the foregoing formula:

            A = the total  number of Warrant  Shares with  respect to which this
            Warrant is then being exercised.

            B = the  Closing  Bid  Price  of the  Common  Stock  on the  date of
            exercise of the Warrant.

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

                                       4
<PAGE>

      In the event of any exercise of the rights  represented by this Warrant in
compliance  with this Section 2, the Company  shall on or before the fifth (5th)
Business Day following the date of receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or an indemnification  undertaking with respect
to this Warrant in the case of its loss,  theft or destruction)  and the receipt
of the representations of the holder specified in Section 6 hereof, if requested
by the Company (the "Exercise Delivery  Documents"),  and if the Common Stock is
DTC eligible,  credit such  aggregate  number of shares of Common Stock to which
the holder shall be entitled to the holder's or its designee's  balance  account
with  The  Depository  Trust  Company;  provided,  however,  if the  holder  who
submitted the Exercise Notice requested  physical  delivery of any or all of the
Warrant  Shares,  or, if the Common Stock is not DTC  eligible  then the Company
shall,  on or before  the fifth  (5th)  Business  Day  following  receipt of the
Exercise  Delivery  Documents,  issue  and  surrender  to a common  carrier  for
overnight   delivery  to  the  address  specified  in  the  Exercise  Notice,  a
certificate,  registered in the name of the holder,  for the number of shares of
Common  Stock to which the holder  shall be entitled  pursuant to such  request.
Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in
clause  (i) or (ii)  above the  holder of this  Warrant  shall be deemed for all
corporate  purposes to have  become the holder of record of the  Warrant  Shares
with respect to which this Warrant has been exercised.  In the case of a dispute
as to the  determination of the Warrant Exercise Price, the Closing Bid Price or
the  arithmetic  calculation of the Warrant  Shares,  the Company shall promptly
issue to the holder the number of Warrant  Shares that is not disputed and shall
submit the disputed  determinations or arithmetic calculations to the holder via
facsimile  within  one (1)  Business  Day of receipt  of the  holder's  Exercise
Notice.

            (ii) If the  holder  and the  Company  are  unable to agree upon the
determination  of the Warrant  Exercise  Price or arithmetic  calculation of the
Warrant Shares within one (1) day of such disputed  determination  or arithmetic
calculation  being submitted to the holder,  then the Company shall  immediately
submit via  facsimile  (i) the disputed  determination  of the Warrant  Exercise
Price or the Closing Bid Price to an independent,  reputable  investment banking
firm or (ii) the disputed  arithmetic  calculation  of the Warrant Shares to its
independent,  outside accountant. The Company shall cause the investment banking
firm or the  accountant,  as the case may be, to perform the  determinations  or
calculations  and notify the Company and the holder of the results no later than
forty-eight (48) hours from the time it receives the disputed  determinations or
calculations.  Such investment  banking firm's or accountant's  determination or
calculation,  as the case may be,  shall be deemed  conclusive  absent  manifest
error.

            (iii)  Unless  the rights  represented  by this  Warrant  shall have
expired  or shall have been  fully  exercised,  the  Company  shall,  as soon as
practicable and in no event later than five (5) Business Days after any exercise
and at its own  expense,  issue a new Warrant  identical in all respects to this
Warrant  exercised  except it shall  represent  rights to purchase the number of
Warrant Shares purchasable immediately prior to such exercise under this Warrant
exercised,  less the number of Warrant Shares with respect to which such Warrant
is exercised.

            (iv) No fractional Warrant Shares are to be issued upon any pro rata
exercise of this  Warrant,  but rather the number of Warrant  Shares issued upon
such  exercise of this Warrant  shall be rounded up or down to the nearest whole
number.

            (v) If the Company or its  Transfer  Agent shall fail for any reason
or for no reason to issue to the  holder  within ten (10) days of receipt of the
Exercise Delivery  Documents,  a certificate for the number of Warrant Shares to
which the holder is entitled or to credit the holder's  balance account with The
Depository  Trust Company for such number of Warrant  Shares to which the holder
is entitled upon the holder's  exercise of this Warrant,  the Company shall,  in
addition  to any other  remedies  under  this  Warrant  or the  Placement  Agent
Agreement or otherwise  available to such holder,  pay as additional  damages in
cash to such  holder on each day the  issuance of such  certificate  for Warrant
Shares is not timely  effected  an amount  equal to 0.025% of the product of (A)
the sum of the  number of  Warrant  Shares  not issued to the holder on a timely
basis and to which the holder is entitled,  and (B) the Closing Bid Price of the
Common Stock for the trading day  immediately  preceding  the last possible date
which the Company  could have issued  such  Common  Stock to the holder  without
violating this Section 2.

                                       5
<PAGE>

            (vi) If within  ten (10) days  after the  Company's  receipt  of the
Exercise Delivery  Documents,  the Company fails to deliver a new Warrant to the
holder  for the  number of  Warrant  Shares  to which  such  holder is  entitled
pursuant to Section 2 hereof,  then, in addition to any other available remedies
under this Warrant, or otherwise available to such holder, the Company shall pay
as additional damages in cash to such holder on each day after such tenth (10th)
day that such  delivery of such new Warrant is not timely  effected in an amount
equal to 0.25% of the product of (A) the number of Warrant Shares represented by
the portion of this Warrant which is not being exercised and (B) the Closing Bid
Price of the Common  Stock for the trading day  immediately  preceding  the last
possible  date which the Company  could have  issued such  Warrant to the holder
without violating this Section 2.

      (c) Covenants as to Common Stock.  The Company hereby covenants and agrees
as follows:

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

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

            (iii) During the period within which the rights  represented by this
Warrant may be  exercised,  the Company  will at all times have  authorized  and
reserved at least one hundred  percent  (100%) of the number of shares of Common
Stock needed to provide for the exercise of the rights then  represented by this
Warrant and the par value of said shares will at all times be less than or equal
to the applicable  Warrant  Exercise  Price. If at any time the Company does not
have a sufficient  number of shares of Common Stock  authorized  and  available,
then the  Company  shall  call and hold a special  meeting  of its  stockholders
within  sixty  (60) days of that time for the sole  purpose  of  increasing  the
number of authorized shares of Common Stock.

            (iv) If at any time after the date hereof the  Company  shall file a
registration statement, the Company shall include the Warrant Shares issuable to
the holder, pursuant to the terms of this Warrant and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all Warrant
Shares from time to time  issuable  upon the exercise of this  Warrant;  and the
Company  shall  so  list on  each  national  securities  exchange  or  automated
quotation  system,  as the case may be, and shall  maintain such listing of, any
other shares of capital stock of the Company  issuable upon the exercise of this
Warrant if and so long as any  shares of the same class  shall be listed on such
national securities exchange or automated quotation system.

                                       6
<PAGE>

            (v)  The  Company   will  not,  by  amendment  of  its  Articles  of
Incorporation or through any reorganization,  transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the  observance or  performance of any of the terms to be
observed  or  performed  by it  hereunder,  but will at all times in good  faith
assist in the  carrying  out of all the  provisions  of this  Warrant and in the
taking of all such action as may  reasonably  be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other  impairment,  consistent with the tenor and purpose of
this  Warrant.  The  Company  will not  increase  the par value of any shares of
Common Stock  receivable  upon the  exercise of this  Warrant  above the Warrant
Exercise  Price  then in effect,  and (ii) will take all such  actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and  nonassessable  shares of Common  Stock upon the exercise of this
Warrant.

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

      (d) Taxes. The Company shall pay any and all taxes,  except any applicable
withholding,  which may be payable  with respect to the issuance and delivery of
Warrant Shares upon exercise of this Warrant.

      (e)  Warrant  Holder  Not  Deemed  a  Stockholder.   Except  as  otherwise
specifically  provided  herein,  no holder,  as such,  of this Warrant  shall be
entitled  to vote or  receive  dividends  or be deemed  the  holder of shares of
capital stock of the Company for any purpose,  nor shall  anything  contained in
this Warrant be construed to confer upon the holder hereof,  as such, any of the
rights of a  stockholder  of the Company or any right to vote,  give or withhold
consent to any corporate  action  (whether any  reorganization,  issue of stock,
reclassification  of stock,  consolidation,  merger,  conveyance or  otherwise),
receive  notice of  meetings,  receive  dividends  or  subscription  rights,  or
otherwise,  prior to the  issuance to the holder of this  Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of this
Warrant.  In addition,  nothing  contained in this Warrant shall be construed as
imposing  any  liabilities  on such  holder to  purchase  any  securities  (upon
exercise of this  Warrant or  otherwise)  or as a  stockholder  of the  Company,
whether  such  liabilities  are  asserted by the Company or by  creditors of the
Company.  Notwithstanding this Section 5, the Company will provide the holder of
this Warrant with copies of the same notices and other  information given to the
stockholders of the Company generally, contemporaneously with the giving thereof
to the stockholders.

      (f)  Representations  of  Holder.  The  holder  of  this  Warrant,  by the
acceptance hereof,  represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment  only and not with a view towards,  or
for resale in connection  with, the public sale or  distribution of this Warrant
or the Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided,  however,  that by making the representations  herein,
the holder does not agree to hold this Warrant or any of the Warrant  Shares for
any minimum or other  specific  term and  reserves  the right to dispose of this
Warrant and the Warrant  Shares at any time in accordance  with or pursuant to a
registration  statement or an exemption  under the Securities Act. The holder of
this Warrant further  represents,  by acceptance hereof,  that, as of this date,
such  holder  is an  "accredited  investor"  as  such  term is  defined  in Rule
501(a)(1) of Regulation D promulgated by the Securities and Exchange  Commission
under the  Securities  Act (an  "Accredited  Investor").  Upon  exercise of this
Warrant the holder shall, if requested by the Company,  confirm in writing, in a
form satisfactory to the Company, that the Warrant Shares so purchased are being
acquired  solely for the holder's own account and not as a nominee for any other
party,  for  investment,  and not with a view toward  distribution or resale and
that such holder is an  Accredited  Investor.  If such  holder  cannot make such
representations  because  they  would  be  factually  incorrect,  it  shall be a
condition to such  holder's  exercise of this  Warrant that the Company  receive
such other  representations  as the Company  considers  reasonably  necessary to
assure the Company that the  issuance of its  securities  upon  exercise of this
Warrant shall not violate any United States or state securities laws.

                                       7
<PAGE>

      (g) Ownership and Transfer.

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

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

            (i)  Adjustment of Warrant  Exercise Price and Number of Shares upon
Issuance of Common Stock.  If and whenever on or after the Issuance Date of this
Warrant,  the Company issues or sells,  or is deemed to have issued or sold, any
shares of Common Stock (other than Excluded  Securities) for a consideration per
share less than a price (the  "Applicable  Price") equal to the Warrant Exercise
Price in effect  immediately  prior to such issuance or sale,  then  immediately
after  such issue or sale the  Warrant  Exercise  Price then in effect  shall be
reduced  to an amount  equal to such  consideration  per  share.  Upon each such
adjustment of the Warrant Exercise Price hereunder, the number of Warrant Shares
issuable upon exercise of this Warrant shall be adjusted to the number of shares
determined by multiplying the Warrant Exercise Price in effect immediately prior
to such  adjustment  by the number of Warrant  Shares  issuable upon exercise of
this  Warrant  immediately  prior to such  adjustment  and  dividing the product
thereof by the Warrant Exercise Price resulting from such adjustment.

            (ii)  Effect  on  Warrant  Exercise  Price of  Certain  Events.  For
purposes of determining the adjusted  Warrant  Exercise Price under Section 8(a)
above, the following shall be applicable:

                                       8
<PAGE>

                  (A) Issuance of Options. If after the date hereof, the Company
in any manner  grants any Options  and the lowest  price per share for which one
share of Common  Stock is issuable  upon the exercise of any such Option or upon
conversion or exchange of any convertible  securities  issuable upon exercise of
any such  Option is less than the  Applicable  Price,  then such share of Common
Stock shall be deemed to be outstanding  and to have been issued and sold by the
Company at the time of the  granting  or sale of such  Option for such price per
share.  For  purposes of this  Section  8(b)(i),  the lowest price per share for
which one share of Common  Stock is issuable  upon  exercise of such  Options or
upon conversion or exchange of such Convertible Securities shall be equal to the
sum of the lowest  amounts of  consideration  (if any) received or receivable by
the Company  with  respect to any one share of Common Stock upon the granting or
sale of the Option,  upon exercise of the Option or upon  conversion or exchange
of any convertible  security  issuable upon exercise of such Option.  No further
adjustment of the Warrant  Exercise Price shall be made upon the actual issuance
of such Common Stock or of such convertible securities upon the exercise of such
Options or upon the actual  issuance of such  Common  Stock upon  conversion  or
exchange of such convertible securities.

                  (B) Issuance of Convertible Securities.  If the Company in any
manner issues or sells any convertible securities and the lowest price per share
for which one share of Common Stock is issuable upon the  conversion or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be  outstanding  and to have been issued and sold by the Company at
the time of the issuance or sale of such  convertible  securities for such price
per share. For the purposes of this Section 8(b)(ii), the lowest price per share
for which one share of Common Stock is issuable upon such conversion or exchange
shall  be equal  to the sum of the  lowest  amounts  of  consideration  (if any)
received or  receivable by the Company with respect to one share of Common Stock
upon the issuance or sale of the  convertible  security and upon  conversion  or
exchange of such  convertible  security.  No further  adjustment  of the Warrant
Exercise Price shall be made upon the actual  issuance of such Common Stock upon
conversion or exchange of such convertible securities,  and if any such issue or
sale of such  convertible  securities  is made upon  exercise of any Options for
which  adjustment  of the  Warrant  Exercise  Price  had  been or are to be made
pursuant to other provisions of this Section 8(b), no further  adjustment of the
Warrant Exercise Price shall be made by reason of such issue or sale.

                  (C)  Change  in  Option  Price or Rate of  Conversion.  If the
purchase price provided for in any Options,  the  additional  consideration,  if
any,  payable  upon  the  issue,  conversion  or  exchange  of  any  convertible
securities, or the rate at which any convertible securities are convertible into
or exchangeable for Common Stock changes at any time, the Warrant Exercise Price
in effect at the time of such change  shall be adjusted to the Warrant  Exercise
Price  which  would  have  been in  effect  at such  time  had such  Options  or
convertible  securities  provided for such changed  purchase  price,  additional
consideration  or  changed  conversion  rate,  as the case  may be,  at the time
initially granted, issued or sold and the number of Warrant Shares issuable upon
exercise of this Warrant shall be  correspondingly  readjusted.  For purposes of
this Section 8(b)(iii),  if the terms of any Option or convertible security that
was  outstanding  as of the  Issuance  Date of this  Warrant  are changed in the
manner  described in the  immediately  preceding  sentence,  then such Option or
convertible  security  and the  Common  Stock  deemed  issuable  upon  exercise,
conversion  or  exchange  thereof  shall be deemed to have been issued as of the
date of such change.  No adjustment  pursuant to this Section 8(b) shall be made
if such  adjustment  would result in an increase of the Warrant  Exercise  Price
then in effect.

                                       9
<PAGE>

                  (D)  Calculation  of  Consideration  Received.  If any  Common
Stock,  Options or  convertible  securities are issued or sold or deemed to have
been  issued or sold for cash,  the  consideration  received  therefore  will be
deemed to be the net amount  received  by the Company  therefore.  If any Common
Stock, Options or convertible  securities are issued or sold for a consideration
other than cash, the amount of such  consideration  received by the Company will
be the  fair  value  of such  consideration,  except  where  such  consideration
consists of  marketable  securities,  in which case the amount of  consideration
received by the Company will be the market price of such  securities on the date
of  receipt of such  securities.  If any Common  Stock,  Options or  convertible
securities  are issued to the owners of the  non-surviving  entity in connection
with any merger in which the  Company  is the  surviving  entity,  the amount of
consideration  therefore  will be deemed to be the fair value of such portion of
the net assets and business of the  non-surviving  entity as is  attributable to
such Common Stock,  Options or convertible  securities,  as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly  by the  Company  and the  holders  of  Warrants  representing  at least
two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then
outstanding.  If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring  valuation (the  "Valuation  Event"),
the fair value of such consideration will be determined within five (5) Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable  appraiser jointly selected by the Company and the holders of Warrants
representing  at  least  two-thirds  (b) of the  Warrant  Shares  issuable  upon
exercise of the Warrants then  outstanding.  The determination of such appraiser
shall be final and binding  upon all  parties and the fees and  expenses of such
appraiser shall be borne jointly by the Company and the holders of Warrants.

                  (E) Integrated  Transactions.  In case any Option is issued in
connection with the issue or sale of other  securities of the Company,  together
comprising one  integrated  transaction  in which no specific  consideration  is
allocated to such Options by the parties thereto,  the Options will be deemed to
have been issued for a consideration of $.01.

                  (F)  Treasury  Shares.  The  number of shares of Common  Stock
outstanding  at any given time does not include  shares  owned or held by or for
the account of the Company,  and the  disposition of any shares so owned or held
will be considered an issue or sale of Common Stock.

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

            (iii)  Adjustment  of Warrant  Exercise  Price upon  Subdivision  or
Combination  of  Common  Stock.  If the  Company  at any time  after the date of
issuance  of this  Warrant  subdivides  (by any  stock  split,  stock  dividend,
recapitalization  or otherwise) one or more classes of its outstanding shares of
Common  Stock into a greater  number of shares,  any Warrant  Exercise  Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock  obtainable  upon  exercise of this Warrant
will be proportionately  increased. If the Company at any time after the date of
issuance  of this  Warrant  combines  (by  combination,  reverse  stock split or
otherwise) one or more classes of its outstanding  shares of Common Stock into a
smaller number of shares, any Warrant Exercise Price in effect immediately prior
to such combination will be proportionately  increased and the number of Warrant
Shares issuable upon exercise of this Warrant will be proportionately decreased.
Any  adjustment  under this Section 8(c) shall become  effective at the close of
business on the date the subdivision or combination becomes effective.

                                       10
<PAGE>

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

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

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

            (v) Certain Events.  If any event occurs of the type contemplated by
the  provisions  of  this  Section  8 but  not  expressly  provided  for by such
provisions  (including,  without limitation,  the granting of stock appreciation
rights,  phantom  stock rights or other rights with equity  features),  then the
Company's Board of Directors will make an appropriate  adjustment in the Warrant
Exercise Price and the number of shares of Common Stock obtainable upon exercise
of this  Warrant so as to protect  the  rights of the  holders of the  Warrants;
provided,  except as set forth in section 8(c),that no such adjustment  pursuant
to this Section 8(e) will  increase the Warrant  Exercise  Price or decrease the
number of shares of Common Stock obtainable as otherwise  determined pursuant to
this Section 8.

                                       11
<PAGE>

            (vi) Notices.

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

                  (B) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with  respect to any dividend or  distribution  upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of  Common  Stock or (C) for  determining  rights to vote  with  respect  to any
Organic Change (as defined  below),  dissolution or  liquidation,  provided that
such  information  shall be made known to the public prior to or in  conjunction
with such notice being provided to such holder.

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

      (i)  Purchase  Rights;  Reorganization,  Reclassification,  Consolidation,
Merger or Sale.

            (i) In addition to any  adjustments  pursuant to Section 8 above, if
at any  time the  Company  grants,  issues  or sells  any  Options,  Convertible
Securities or rights to purchase stock,  warrants,  securities or other property
pro rata to the  record  holders  of any class of Common  Stock  (the  "Purchase
Rights"),  then the holder of this Warrant will be entitled to acquire, upon the
terms  applicable to such Purchase Rights,  the aggregate  Purchase Rights which
such holder could have  acquired if such holder had held the number of shares of
Common Stock  acquirable  upon  complete  exercise of this  Warrant  immediately
before  the date on which a record is taken for the grant,  issuance  or sale of
such Purchase  Rights,  or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.

            (ii)   Any   recapitalization,   reorganization,   reclassification,
consolidation,  merger, sale of all or substantially all of the Company's assets
to another Person or other  transaction in each case which is effected in such a
way that  holders of Common Stock are  entitled to receive  (either  directly or
upon subsequent  liquidation) stock,  securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "Organic Change." Prior to
the  consummation of any (i) sale of all or  substantially  all of the Company's
assets to an acquiring  Person or (ii) other Organic Change  following which the
Company is not a  surviving  entity,  the  Company  will  secure from the Person
purchasing  such assets or the successor  resulting from such Organic Change (in
each case,  the "Acquiring  Entity") a written  agreement (in form and substance
satisfactory to the holders of Warrants  representing at least  two-thirds (iii)

                                       12
<PAGE>

of the Warrant Shares  issuable upon exercise of the Warrants then  outstanding)
to deliver to each holder of Warrants in exchange for such Warrants,  a security
of the Acquiring Entity evidenced by a written instrument  substantially similar
in form and  substance  to this Warrant and  satisfactory  to the holders of the
Warrants  (including an adjusted  warrant  exercise price equal to the value for
the Common Stock reflected by the terms of such  consolidation,  merger or sale,
and exercisable for a corresponding  number of shares of Common Stock acquirable
and receivable  upon exercise of the Warrants  without regard to any limitations
on  exercise,  if the value so  reflected  is less than any  Applicable  Warrant
Exercise Price immediately prior to such  consolidation,  merger or sale). Prior
to the  consummation  of any  other  Organic  Change,  the  Company  shall  make
appropriate  provision  (in form and  substance  satisfactory  to the holders of
Warrants representing a majority of the Warrant Shares issuable upon exercise of
the  Warrants  then  outstanding)  to  insure  that each of the  holders  of the
Warrants will  thereafter have the right to acquire and receive in lieu of or in
addition  to (as the case may be) the  Warrant  Shares  immediately  theretofore
issuable and  receivable  upon the exercise of such holder's  Warrants  (without
regard to any  limitations  on  exercise),  such shares of stock,  securities or
assets  that would  have been  issued or payable  in such  Organic  Change  with
respect to or in exchange for the number of Warrant Shares which would have been
issuable and  receivable  upon the exercise of such  holder's  Warrant as of the
date of such Organic  Change  (without  taking into account any  limitations  or
restrictions on the exercisability of this Warrant).

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

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

If to Holder:                       Cornell Capital Partners, LP
                                    101 Hudson Street - Suite 3700
                                    Jersey City, NJ  07302
                                    Attention:        Mark A. Angelo
                                    Telephone:        (201) 985-8300
                                    Facsimile:        (201) 985-8266

With Copy to:                       David Gonzalez, Esq.
                                    101 Hudson Street - Suite 3700
                                    Jersey City, NJ 07302
                                    Telephone:        (201) 985-8300
                                    Facsimile:        (201) 985-8266

                                       13
<PAGE>

If to the Company, to:              Falcon Natural Gas Corp.
                                    Westchase Center
                                    2500 City West Boulevard, Suite 300
                                    Houston, Texas 77042
                                    Attention:        Chief Executive Officer
                                    Telephone:        (713) 267-2240

With a copy to:                     Kirkpatrick & Lockhart Nicholson Graham, LLP
                                    201 South Biscayne Boulevard, Suite 2000
                                    Miami, Florida 33131
                                    Attention:        Clayton E. Parker, Esquire
                                    Telephone:        (305) 539-3306
                                    Facsimile:        (305) 358-7095

If to a holder of this Warrant,  to it at the address and  facsimile  number set
forth on Exhibit C hereto,  with copies to such holder's  representatives as set
forth on Exhibit C, or at such other address and facsimile as shall be delivered
to the Company upon the issuance or transfer of this  Warrant.  Each party shall
provide  five days'  prior  written  notice to the other  party of any change in
address or facsimile  number.  Written  confirmation of receipt (A) given by the
recipient of such notice, consent, facsimile, waiver or other communication, (or
(B) provided by a nationally  recognized  overnight  delivery  service  shall be
rebuttable evidence of personal service,  receipt by facsimile or receipt from a
nationally  recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.

      (l) Date.  The date of this  Warrant  is set forth on page 1 hereof.  This
Warrant, in all events, shall be wholly void and of no effect after the close of
business  on  the  Expiration  Date,  except  that   notwithstanding  any  other
provisions  hereof,  the provisions of Section 8(b) shall continue in full force
and effect after such date as to any Warrant Shares or other  securities  issued
upon the exercise of this Warrant.

      (m)  Amendment  and  Waiver.  Except as  otherwise  provided  herein,  the
provisions  of the  Warrants  may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it,  only if the  Company has  obtained  the  written  consent of the holders of
Warrants  representing  at least  two-thirds of the Warrant Shares issuable upon
exercise of the Warrants then  outstanding;  provided  that,  except for Section
8(d),  no such action may  increase the Warrant  Exercise  Price or decrease the
number of shares  or class of stock  obtainable  upon  exercise  of any  Warrant
without the written consent of the holder of such Warrant.

                                       14
<PAGE>

      (n) Descriptive  Headings;  Governing Law. The descriptive headings of the
several  sections and  paragraphs  of this Warrant are inserted for  convenience
only and do not  constitute a part of this Warrant.  The  corporate  laws of the
State of Nevada shall govern all issues  concerning  the relative  rights of the
Company and its stockholders.  All other questions  concerning the construction,
validity,  enforcement and interpretation of this Agreement shall be governed by
the  internal  laws of the State of New  Jersey,  without  giving  effect to any
choice of law or conflict of law  provision or rule (whether of the State of New
Jersey or any other  jurisdictions) that would cause the application of the laws
of any  jurisdictions  other than the State of New  Jersey.  Each  party  hereby
irrevocably  submits  to the  exclusive  jurisdiction  of the state and  federal
courts  sitting in Hudson  County and the United States  District  Court for the
District of New Jersey,  for the  adjudication  of any dispute  hereunder  or in
connection herewith or therewith, or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding,  any claim that it is not personally  subject to the
jurisdiction of any such court,  that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper.  Each party hereby  irrevocably waives personal service of process and
consents  to process  being  served in any such suit,  action or  proceeding  by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.

      (o) Waiver of Jury Trial.  AS A MATERIAL  INDUCEMENT FOR EACH PARTY HERETO
TO ENTER INTO THIS WARRANT,  THE PARTIES  HERETO HEREBY WAIVE ANY RIGHT TO TRIAL
BY JURY IN ANY LEGAL  PROCEEDING  RELATED IN ANY WAY TO THIS WARRANT  AND/OR ANY
AND ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.

                   REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

                                       15
<PAGE>

IN WITNESS  WHEREOF,  the Company has caused this Warrant to be signed as of the
date first set forth above.

                                              FALCON NATURAL GAS CORP.

                                              By:
                                                  ------------------------------
                                              Name:    Massimiliano Pozzoni
                                              Title: Chief Executive Officer

                                       16
<PAGE>

                              EXHIBIT A TO WARRANT

                                 EXERCISE NOTICE

                                 TO BE EXECUTED
                BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT

                            FALCON NATURAL GAS CORP.

The undersigned holder hereby exercises the right to purchase ______________ of
the shares of Common Stock ("Warrant Shares") of Falcon Natural Gas Corp. (the
"Company"), evidenced by the attached Warrant (the "Warrant"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings set
forth in the Warrant.

Specify Method of exercise by check mark:

1.  ___  Cash Exercise

                (a) Payment of Warrant Exercise Price. The holder shall pay the
                Aggregate Exercise Price of $______________ to the Company in
                accordance with the terms of the Warrant.

                (b) Delivery of Warrant Shares. The Company shall deliver to the
                holder _________ Warrant Shares in accordance with the terms of
                the Warrant.

         2.  ___  Cashless Exercise

                (a) Payment of Warrant Exercise Price. In lieu of making payment
                of the Aggregate Exercise Price, the holder elects to receive
                upon such exercise the Net Number of shares of Common Stock
                determined in accordance with the terms of the Warrant.

                (b) Delivery of Warrant Shares. The Company shall deliver to the
                holder _________ Warrant Shares in accordance with the terms of
                the Warrant.

Date: _______________ __, ______

Name of Registered Holder

By:
   -----------------------------------------
Name:
     ---------------------------------------
Title:
      --------------------------------------

<PAGE>

                              EXHIBIT B TO WARRANT

                              FORM OF WARRANT POWER

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

Dated:
      --------------------

                                                  By:
                                                     ---------------------------
                                                  Name:
                                                       -------------------------
                                                  Title:
                                                        ------------------------

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