Exhibit 10.2

                                                                       EXHIBIT A

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE  BEEN  REGISTERED  WITH  THE  SECURITIES  AND  EXCHANGE  COMMISSION  OR THE
SECURITIES   COMMISSION  OF  ANY  STATE  IN  RELIANCE  UPON  AN  EXEMPTION  FROM
REGISTRATION  UNDER THE  SECURITIES  ACT OF 1933,  AS AMENDED  (THE  "SECURITIES
ACT"),  AND,  ACCORDINGLY,  MAY NOT BE OFFERED  OR SOLD  EXCEPT  PURSUANT  TO AN
EFFECTIVE  REGISTRATION  STATEMENT  UNDER THE  SECURITIES  ACT OR PURSUANT TO AN
AVAILABLE  EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE  REGISTRATION
REQUIREMENTS  OF THE  SECURITIES  ACT AND IN ACCORDANCE  WITH  APPLICABLE  STATE
SECURITIES  LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH  EFFECT,  THE  SUBSTANCE  OF WHICH SHALL BE  REASONABLY  ACCEPTABLE  TO THE
COMPANY.  THIS  SECURITY AND THE  SECURITIES  ISSUABLE  UPON  CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION  WITH A BONA FIDE MARGIN  ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

Original Issue Date:  January ___, 2006
Original Conversion Price (subject to adjustment herein): $0.87

                                                                  $_____________


                             ORIGINAL ISSUE DISCOUNT
                              CONVERTIBLE DEBENTURE


     THIS  ORIGINAL  ISSUE  DISCOUNT  DEBENTURE  is  one  of a  series  of  duly
authorized and issued  Debentures of Tidelands Oil & Gas  Corporation,  a Nevada
corporation, having a principal place of business at 1862 West Bitters Road, San
Antonio, Texas 78248 (the "Company"),  designated as its Original Issue Discount
Convertible Debenture,  due January ____, 2008 (this debenture,  the "Debenture"
and collectively with the other such series of debentures, the "Debentures").

     FOR VALUE RECEIVED, the Company promises to pay to ________________________
or its  registered  assigns (the  "Holder"),  or shall have paid pursuant to the
terms hereunder, the principal sum of $_______________ by January ____ , 2008 or
such  earlier  date as this  Debenture  is required or permitted to be repaid as
provided  hereunder (the "Maturity Date"),  and to pay interest to the Holder on
the  aggregate  unconverted  and  then  outstanding  principal  amount  of  this
Debenture in accordance with the provisions hereof. This Debenture is subject to
the following additional provisions:

     Section 1.  Definitions.  For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined
herein have the meanings given to such terms in the Purchase Agreement,  and (b)
the following terms shall have the following meanings:



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<PAGE>

          "Alternate  Consideration" shall have the meaning set forth in Section
     5(d).

          "Bankruptcy  Event"  means  any  of  the  following  events:  (a)  the
     Corporation or any Significant  Subsidiary (as such term is defined in Rule
     1-02(w) of  Regulation  S-X) thereof  commences a case or other  proceeding
     under any  bankruptcy,  reorganization,  arrangement,  adjustment  of debt,
     relief of debtors, dissolution, insolvency or liquidation or similar law of
     any jurisdiction relating to the Corporation or any Significant  Subsidiary
     thereof;  (b) there is commenced against the Corporation or any Significant
     Subsidiary thereof any such case or proceeding that is not dismissed within
     60  days  after  commencement;  (c)  the  Corporation  or  any  Significant
     Subsidiary  thereof is  adjudicated  insolvent  or bankrupt or any order of
     relief or other order approving any such case or proceeding is entered; (d)
     the  Corporation  or  any  Significant   Subsidiary   thereof  suffers  any
     appointment of any custodian or the like for it or any substantial  part of
     its  property  that is not  discharged  or stayed  within 60 days;  (e) the
     Corporation  or  any  Significant   Subsidiary   thereof  makes  a  general
     assignment  for  the  benefit  of  creditors;  (f) the  Corporation  or any
     Significant Subsidiary thereof calls a meeting of its creditors with a view
     to arranging a composition,  adjustment or  restructuring  of its debts; or
     (g) the Corporation or any Significant  Subsidiary  thereof,  by any act or
     failure  to  act,  expressly  indicates  its  consent  to,  approval  of or
     acquiescence in any of the foregoing or takes any corporate or other action
     for the purpose of effecting any of the foregoing.

          "Business Day" means any day except Saturday, Sunday and any day which
     shall be a federal  legal  holiday in the  United  States or a day on which
     banking institutions in the State of New York are authorized or required by
     law or other government action to close.

          "Buy-In" shall have the meaning set forth in Section 4(d)(v).

          "Change of Control  Transaction"  means the occurrence  after the date
     hereof of any of (i) an acquisition  after the date hereof by an individual
     or legal entity or "group" (as  described in Rule  13d-5(b)(1)  promulgated
     under the Exchange  Act) of effective  control  (whether  through  legal or
     beneficial  ownership  of capital  stock of the  Company,  by  contract  or
     otherwise)  of in excess of 33% of the  voting  securities  of the  Company
     (other than by means of  conversion or exercise of the  Debentures  and the
     Securities issued together with the Debentures), or (ii) the Company merges
     into or  consolidates  with any other Person,  or any Person merges into or
     consolidates with the Company and, after giving effect to such transaction,
     the stockholders of the Company  immediately  prior to such transaction own
     less than 66% of the aggregate voting power of the Company or the successor
     entity of such  transaction,  or (iii) the Company  sells or transfers  its
     assets,  as an entirety or substantially as an entirety,  to another Person
     and the stockholders of the Company  immediately  prior to such transaction
     own less than 66% of the  aggregate  voting power of the  acquiring  entity
     immediately after the transaction, (iv) a replacement at one time or within
     a three year period of more than  one-half of the members of the  Company's


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<PAGE>

     board of directors which is not approved by a majority of those individuals
     who are members of the board of  directors  on the date hereof (or by those
     individuals  who are  serving as members of the board of  directors  on any
     date whose  nomination to the board of directors was approved by a majority
     of the  members  of the  board of  directors  who are  members  on the date
     hereof),  or (v) the  execution by the Company of an agreement to which the
     Company is a party or by which it is bound, providing for any of the events
     set forth above in (i) through (iv).

          "Common Stock" means the common stock,  par value $.001 per share,  of
     the  Company  and stock of any other  class of  securities  into which such
     securities may hereafter have been reclassified or changed into.

          "Conversion Date" shall have the meaning set forth in Section 4(a).

          "Conversion Price" shall have the meaning set forth in Section 4(b).

          "Conversion  Shares"  means the shares of Common Stock  issuable  upon
     conversion of this  Debenture or as payment of interest in accordance  with
     the terms.

          "Debenture Register" shall have the meaning set forth in Section 2(c).

          "Effectiveness  Period"  shall have the meaning  given to such term in
     the Registration Rights Agreement.

          "Equity Conditions" shall mean, during the period in question, (i) the
     Company shall have duly honored all conversions  and redemptions  scheduled
     to occur or occurring by virtue of one or more Notices of Conversion of the
     Holder, if any, (ii) all liquidated  damages and other amounts owing to the
     Holder in respect of this Debenture shall have been paid, (iii) there is an
     effective  Registration Statement pursuant to which the Holder is permitted
     to utilize the prospectus  thereunder to resell all of the shares  issuable
     pursuant to the Transaction  Documents (and the Company  believes,  in good
     faith,  that  such  effectiveness  will  continue   uninterrupted  for  the
     foreseeable  future),  (iv) the Common Stock is trading on a Trading Market
     and all of the shares issuable  pursuant to the  Transaction  Documents are
     listed for trading on a Trading Market (and the Company  believes,  in good
     faith,  that trading of the Common Stock on a Trading  Market will continue
     uninterrupted for the foreseeable future), (v) there is a sufficient number
     of authorized but unissued and otherwise  unreserved shares of Common Stock
     for the issuance of all of the shares issuable  pursuant to the Transaction
     Documents,  (vi) there is then existing no Event of Default or event which,
     with the passage of time or the giving of notice, would constitute an Event
     of  Default,  (vii) the  issuance  of the shares in  question to the Holder
     would not violate the  limitations  set forth in Section 4(c) and (viii) no
     public  announcement  of a pending or proposed  Fundamental  Transaction or
     Change of Control Transaction has occurred that has not been consummated.

          "Event of Default" shall have the meaning set forth in Section 8.


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<PAGE>

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

          "Forced Conversion" shall have the meaning set forth in Section 6(a).

          "Forced  Conversion  Date" shall have the meaning set forth in Section
     6(a).

          "Forced Conversion Notice" shall have the meaning set forth in Section
     6(a).

          "Forced  Conversion  Notice  Date" shall have the meaning set forth in
     Section 6(a).

          "Fundamental  Transaction" shall have the meaning set forth in Section
     5(d).

          "Mandatory  Default Amount" shall equal the sum of (i) the greater of:
     (A) 130% of the outstanding  principal  amount of this Debenture or (B) the
     outstanding  principal  amount of this Debenture  divided by the Conversion
     Price on (x) the date the Mandatory  Default  Amount is demanded (if demand
     or notice is required to create an Event of  Default) or  otherwise  due or
     (y) the date the  Mandatory  Default  Amount is paid in full,  whichever is
     less,  multiplied by the VWAP on (x) the date the Mandatory  Default Amount
     is demanded or otherwise due or (y) the date the Mandatory  Default  Amount
     is paid in full, whichever is greater,  and (ii) all other amounts,  costs,
     expenses and liquidated damages due in respect of this Debenture.

          "New York Courts" shall have the meaning set forth in Section 9(d).

          "Notice of  Conversion"  shall have the  meaning  set forth in Section
     4(a).

          "Original Issue Date" shall mean the date of the first issuance of the
     Debentures  regardless  of the number of  transfers  of any  Debenture  and
     regardless  of the number of  instruments  which may be issued to  evidence
     such Debenture.

          "Permitted  Indebtedness" shall mean (a) the Indebtedness  existing on
     the Original Issue Date and set forth on Schedule  3.1(gg)  attached to the
     Purchase  Agreement,  (b) lease obligations and purchase money Indebtedness
     of up to  $2,000,000,  in the  aggregate,  incurred in connection  with the
     acquisition of capital assets and lease  obligations  with respect to newly
     acquired or leased assets, (c) Indebtedness incurred in connection with the
     Mexican Project Financing and (d) Indebtedness deemed to have been incurred
     in connection with a judgment in the Sheerin Litigation.

          "Permitted Lien" shall mean the individual and collective reference to
     the  following:  (a) Liens for taxes,  assessments  and other  governmental
     charges  or levies not yet due or Liens for  taxes,  assessments  and other
     governmental  charges  or  levies  being  contested  in good  faith  and by
     appropriate  proceedings  for which  adequate  reserves  (in the good faith
     judgment  of the  management  of the  Company)  have  been  established  in
     accordance  with GAAP,  (b) Liens imposed by law which were incurred in the
     ordinary  course  of  business,  such  as  carriers',   warehousemen's  and


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<PAGE>

     mechanics'  Liens,  statutory  landlords'  Liens,  and other  similar Liens
     arising  in  the  ordinary  course  of  business,  and  (x)  which  do  not
     individually or in the aggregate  materially detract from the value of such
     property or assets or materially impair the use thereof in the operation of
     the business of the Company and its consolidated  Subsidiaries or (y) which
     are  being  contested  in good  faith  by  appropriate  proceedings,  which
     proceedings  have the effect of  preventing  the  forfeiture or sale of the
     property or asset subject to such Lien and (c) Liens incurred in connection
     with Permitted  Indebtedness under clause (b) thereunder provided that such
     Liens are not  secured by assets of the Company or its  Subsidiaries  other
     than the assets so acquired or leased.

          "Person"  means  a  corporation,   an   association,   a  partnership,
     organization,   a  business,  an  individual,  a  government  or  political
     subdivision thereof or a governmental agency.

          "Purchase Agreement" means the Securities Purchase Agreement, dated as
     of  January  20,  2006 to which the  Company  and the  original  Holder are
     parties,  as  amended,  modified  or  supplemented  from  time  to  time in
     accordance with its terms.

          "Registration   Rights   Agreement"  means  the  Registration   Rights
     Agreement,  dated as of the date of the  Purchase  Agreement,  to which the
     Company  and the  original  Holder are  parties,  as  amended,  modified or
     supplemented from time to time in accordance with its terms.

          "Registration  Statement" means a registration  statement  meeting the
     requirements set forth in the Registration Rights Agreement, covering among
     other things the resale of the Conversion Shares and naming the Holder as a
     "selling stockholder" thereunder.

          "Securities Act" means the Securities Act of 1933, as amended, and the
     rules and regulations promulgated thereunder.

          "Subsidiary" shall have the meaning given to such term in the Purchase
     Agreement.

          "Trading  Day"  means a day on which the  Common  Stock is traded on a
     Trading Market.

          "Trading Market" means the following markets or exchanges on which the
     Common Stock is listed or quoted for trading on the date in  question:  the
     OTC Bulletin Board, the Nasdaq Capital Market, the American Stock Exchange,
     the New York Stock Exchange or the Nasdaq National Market.

          "Transaction  Documents"  shall  have  the  meaning  set  forth in the
     Purchase Agreement.

          "VWAP" means,  for any date, the price  determined by the first of the
     following  clauses that applies:  (a) if the Common Stock is then listed or
     quoted on a Trading Market,  the daily volume weighted average price of the
     Common Stock for such date (or the nearest  preceding  date) on the Trading


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<PAGE>

     Market on which the Common  Stock is then  listed or quoted as  reported by
     Bloomberg  Financial  L.P.  (based on a Trading Day from 9:30 a.m.  Eastern
     Time to 4:02 p.m.  Eastern  Time);  (b) if the OTC Bulletin  Board is not a
     Trading Market,  the volume weighted  average price of the Common Stock for
     such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if
     the Common Stock is not then listed or quoted on the OTC Bulletin Board and
     if prices  for the  Common  Stock are then  reported  in the "Pink  Sheets"
     published  by  Pink  Sheets,  LLC  (or a  similar  organization  or  agency
     succeeding to its functions of reporting prices), the most recent bid price
     per share of the Common Stock so reported;  or (d) in all other cases,  the
     fair  market  value  of a  share  of  Common  Stock  as  determined  by  an
     independent  appraiser  selected in good faith by the Holder and reasonably
     acceptable to the Company.

     Section  2.  Interest  and  Prepayment.  No  regularly  scheduled  interest
payments shall be made on this Debenture.  Except as otherwise set forth in this
Debenture,  the Company may not prepay any  portion of the  principal  amount of
this Debenture without the prior written consent of the Holder.

     Section 3. Registration of Transfers and Exchanges.

          a) Different  Denominations.  This  Debenture is  exchangeable  for an
     equal  aggregate  principal  amount of Debentures  of different  authorized
     denominations, as requested by the Holder surrendering the same. No service
     charge will be made for such registration of transfer or exchange.

          b) Investment Representations.  This Debenture has been issued subject
     to certain  investment  representations of the original Holder set forth in
     the  Purchase  Agreement  and  may be  transferred  or  exchanged  only  in
     compliance  with the Purchase  Agreement and  applicable  federal and state
     securities laws and regulations.

          c) Reliance on Debenture  Register.  Prior to due  presentment  to the
     Company for  transfer of this  Debenture,  the Company and any agent of the
     Company  may  treat  the  Person  in  whose  name  this  Debenture  is duly
     registered on the Debenture Register as the owner hereof for the purpose of
     receiving payment as herein provided and for all other purposes, whether or
     not this  Debenture is overdue,  and neither the Company nor any such agent
     shall be affected by notice to the contrary.

     Section 4. Conversion.

          a) Voluntary  Conversion.  At any time after the  Original  Issue Date
     until this  Debenture is no longer  outstanding,  this  Debenture  shall be
     convertible  into shares of Common  Stock at the option of the  Holder,  in
     whole  or in part at any  time  and  from  time  to  time  (subject  to the
     limitations  on conversion  set forth in Section 4(c)  hereof).  The Holder
     shall effect conversions by delivering to the Company the form of Notice of
     Conversion   attached  hereto  as  Annex  A  (a  "Notice  of  Conversion"),
     specifying  therein the principal  amount of this Debenture to be converted
     and the date on which such  conversion  is to be  effected  (a  "Conversion
     Date").  If no Conversion Date is specified in a Notice of Conversion,  the
     Conversion  Date shall be the date that such Notice of Conversion is deemed


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<PAGE>

     delivered hereunder. To effect conversions hereunder,  the Holder shall not
     be required to physically  surrender  this  Debenture to the Company unless
     the  entire  principal  amount  of this  Debenture  has been so  converted.
     Conversions  hereunder  shall have the effect of lowering  the  outstanding
     principal  amount of this  Debenture in an amount  equal to the  applicable
     conversion.  The Holder and the Company shall maintain  records showing the
     principal  amount converted and the date of such  conversions.  The Company
     shall deliver any  objection to any Notice of Conversion  within 1 Business
     Day of receipt of such notice.  In the event of any dispute or discrepancy,
     the records of the Holder shall be  controlling  and  determinative  in the
     absence of manifest  error.  The Holder and any assignee,  by acceptance of
     this Debenture,  acknowledge and agree that, by reason of the provisions of
     this paragraph,  following  conversion of a portion of this Debenture,  the
     unpaid and unconverted  principal amount of this Debenture may be less than
     the amount stated on the face hereof.

          b) Conversion  Price. The conversion price in effect on any Conversion
     Date  shall  be  equal  to  $0.87  (subject  to  adjustment   herein)  (the
     "Conversion Price").

          c) Conversion Limitations.

               (i)  Holder's  Restriction on  Conversion.  The Company shall not
                    effect any conversion of this Debenture,  and a Holder shall
                    not have the right to convert any portion of this  Debenture
                    to the extent that after giving effect to such conversion as
                    set  forth on the  applicable  Notice  of  Conversion,  such
                    Holder  (together  with such  Holder's  Affiliates,  and any
                    other person or entity acting as a group  together with such
                    Holder   or  any  of   such   Holder's   Affiliates)   would
                    beneficially  own  in  excess  of the  Beneficial  Ownership
                    Limitation (as defined below). For purposes of the foregoing
                    sentence,  the number of shares of Common Stock beneficially
                    owned by such Holder and its  Affiliates  shall  include the
                    number of shares of Common Stock issuable upon conversion of
                    this Debenture with respect to which such  determination  is
                    being made, but shall exclude the number of shares of Common
                    Stock  which would be issuable  upon (A)  conversion  of the
                    remaining,  nonconverted  principal amount of this Debenture
                    beneficially  owned by such Holder or any of its  Affiliates
                    and  (B)  exercise  or  conversion  of  the  unexercised  or
                    nonconverted  portion of any other securities of the Company
                    (including,  without limitation, any other Debentures or the
                    Warrants)  subject to a limitation on conversion or exercise
                    analogous to the limitation  contained  herein  beneficially
                    owned by such Holder or any of its Affiliates. Except as set
                    forth  in the  preceding  sentence,  for  purposes  of  this
                    Section 4(c)(ii),  beneficial  ownership shall be calculated
                    in accordance with Section 13(d) of the Exchange Act and the
                    rules and regulations promulgated thereunder.  To the extent


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<PAGE>

                    that  the  limitation  contained  in this  Section  4(c)(ii)
                    applies,  the  determination  of whether  this  Debenture is
                    convertible (in relation to other  securities  owned by such
                    Holder together with any Affiliates) and of which amounts of
                    this  Debenture  are  convertible   shall  be  in  the  sole
                    discretion of such Holder, and the submission of a Notice of
                    Conversion shall be deemed to be such Holder's determination
                    of whether this  Debenture  may be converted (in relation to
                    other  securities owned by such Holder) and which amounts of
                    this Debenture are convertible, in each case subject to such
                    aggregate percentage limitations.  To ensure compliance with
                    this restriction, each Holder will be deemed to represent to
                    the  Company  each time it  delivers a Notice of  Conversion
                    that  such  Notice  of  Conversion   has  not  violated  the
                    restrictions  set forth in this  paragraph  and the  Company
                    shall have no  obligation  to verify or confirm the accuracy
                    of such  determination.  In addition,  a determination as to
                    any group status as  contemplated  above shall be determined
                    in accordance with Section 13(d) of the Exchange Act and the
                    rules and regulations promulgated  thereunder.  For purposes
                    of this  Section  4(c)(ii),  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
                    the most recent of the  following:  (A) the  Company's  most
                    recent Form 10-QSB or Form 10-KSB, as the case may be, (B) a
                    more recent  public  announcement  by the Company or (C) any
                    other notice by the Company or the Company's  transfer agent
                    setting   forth  the  number  of  shares  of  Common   Stock
                    outstanding.  Upon the  written  request  of a  Holder,  the
                    Company  shall within two Trading Days confirm in writing to
                    such  Holder  the  number of shares  of  Common  Stock  then
                    outstanding.  In any case, the number of outstanding  shares
                    of Common Stock shall be  determined  after giving effect to
                    the  conversion  or exercise of  securities  of the Company,
                    including this  Debenture,  by such Holder or its Affiliates
                    since the date as of which such number of outstanding shares
                    of Common  Stock was  reported.  The  "Beneficial  Ownership
                    Limitation"  shall be 4.99% of the  number  of shares of the
                    Common Stock outstanding  immediately after giving effect to
                    the  issuance  of  shares  of  Common  Stock  issuable  upon
                    conversion  of  this  Debenture  held  by  the  Holder.  The
                    Beneficial Ownership  Limitation  provisions of this Section
                    4(c)(ii)  may be waived by such  Holder,  at the election of
                    such Holder, upon not less than 61 days' prior notice to the
                    Company to change the  Beneficial  Ownership  Limitation  to
                    9.99%  of  the  number  of  shares  of  the   Common   Stock
                    outstanding  immediately after giving effect to the issuance
                    of shares of Common Stock upon  conversion of this Debenture
                    held by the  Holder,  and  the  provisions  of this  Section
                    4(c)(ii)  shall  continue to apply.  Upon such a change by a
                    Holder  of the  Beneficial  Ownership  Limitation  from such
                    4.99%  limitation to such 9.99%  limitation,  the Beneficial
                    Ownership  Limitation  may  not be  further  waived  by such


                                       8
<PAGE>

                    Holder.  The provisions of this paragraph shall be construed
                    and  implemented  in  a  manner  otherwise  than  in  strict
                    conformity  with  the  terms  of this  Section  4(c)(ii)  to
                    correct this paragraph (or any portion  hereof) which may be
                    defective  or  inconsistent  with  the  intended  Beneficial
                    Ownership  Limitation herein contained or to make changes or
                    supplements  necessary or desirable to properly  give effect
                    to  such  limitation.  The  limitations  contained  in  this
                    paragraph  shall  apply  to  a  successor   holder  of  this
                    Debenture.

               (ii) Authorized  Share  Limitations.   Notwithstanding   anything
                    herein to the  contrary,  if the  Company  has not  obtained
                    Authorized  Share Approval,  then the Company may not issue,
                    upon  conversion  of this  Debenture,  a number of shares of
                    Common  Stock  which,  when  aggregated  with any  shares of
                    Common Stock issued on or after the Original  Issue Date and
                    prior to such  Conversion  Date (A) in  connection  with any
                    Debentures issued pursuant to the Purchase Agreement, (B) in
                    connection with any Warrants issued pursuant to the Purchase
                    Agreement and (C) in connection  with any warrants issued to
                    any registered broker-dealer as a fee in connection with the
                    issuance  of  the   Securities   pursuant  to  the  Purchase
                    Agreement, would exceed 9,000,000 (subject to adjustment for
                    reverse and forward  stock splits and the like) (such number
                    of shares,  the  "Issuable  Maximum").  Each Holder shall be
                    entitled to a portion of the Issuable  Maximum  equal to the
                    quotient  obtained by dividing (x) the  aggregate  principal
                    amount of the Debenture(s) issued and sold to such Holder on
                    the  Original  Issue  Date  by (y) the  aggregate  principal
                    amount of all  Debentures  issued and sold by the Company on
                    the Original  Issue Date. If any Holder shall no longer hold
                    the  Debenture(s),  then such Holder's  remaining portion of
                    the Issuable  Maximum,  if any, shall be allocated  pro-rata
                    among the remaining Holders. If, on any Conversion Date, (1)
                    the  applicable  Conversion  Price is such  that the  shares
                    issuable  under  this  Debenture  on such  Conversion  Date,
                    together with the aggregate number of shares of Common Stock
                    that would then be issuable  upon  conversion in full of all
                    then  outstanding  Debentures,  would  exceed  the  Issuable
                    Maximum  and (2)  the  Company  shall  not  have  previously
                    obtained  Authorized Share Approval,  then the Company shall
                    issue to the  Holder  requesting  a  conversion  a number of
                    shares  of  Common  Stock  equal to such  Holder's  pro-rata
                    portion  (which  shall be  calculated  pursuant to the terms
                    hereof) of the  Issuable  Maximum  and,  with respect to the
                    remainder  of  the   aggregate   principal   amount  of  the
                    Debentures  (including  any accrued  interest)  then held by


                                       9
<PAGE>

                    such Holder for which a conversion  in  accordance  with the
                    applicable  Conversion  Price would result in an issuance of
                    shares of Common Stock in excess of such  Holder's  pro-rata
                    portion  (which  shall be  calculated  pursuant to the terms
                    hereof) of the Issuable  Maximum  (the "Excess  Principal"),
                    the Company shall be prohibited  from converting such Excess
                    Principal and shall promptly notify the Holder of the reason
                    therefor.  This Debenture shall  thereafter be unconvertible
                    to such extent until and unless Authorized Share Approval is
                    subsequently  obtained,  but this Debenture  shall otherwise
                    remain in full force and effect.

          d) Mechanics of Conversion

               i.  Conversion  Shares  Issuable  Upon  Conversion  of  Principal
          Amount.  The  number  of  shares  of  Common  Stock  issuable  upon  a
          conversion  hereunder shall be determined by the quotient  obtained by
          dividing (x) the outstanding  principal amount of this Debenture to be
          converted by (y) the Conversion Price.

               ii. Delivery of Certificate Upon Conversion. Not later than three
          Trading Days after any  Conversion  Date,  the Company will deliver or
          cause to be  delivered  to the Holder a  certificate  or  certificates
          representing the Conversion  Shares which shall be free of restrictive
          legends and trading  restrictions  (other than those which may then be
          required by the Purchase Agreement)  representing the number of shares
          of Common Stock being acquired upon the conversion of this  Debenture.
          The  Company  shall,  if  available  and if allowed  under  applicable
          securities  laws,  use its best efforts to deliver any  certificate or
          certificates  required  to be  delivered  by the  Company  under  this
          Section electronically through the Depository Trust Company or another
          established clearing corporation performing similar functions.

               iii.  Failure  to  Deliver  Certificates.  If in the  case of any
          Notice  of  Conversion  such   certificate  or  certificates  are  not
          delivered  to or as  directed  by the  applicable  Holder by the third
          Trading Day after a Conversion  Date,  the Holder shall be entitled by
          written  notice to the Company at any time on or before its receipt of
          such   certificate  or  certificates   thereafter,   to  rescind  such
          conversion, in which event the Company shall immediately return to the
          Holder any original Debenture delivered to the Company, and the Holder
          shall promptly return the Common Stock  certificates  representing the
          principal  amount of this  Debenture  tendered for  conversion  to the
          Company.

               iv.  Obligation  Absolute;  Partial  Liquidated  Damages.  If the
          Company fails for any reason to deliver to the Holder such certificate
          or certificates  pursuant to Section 4(d)(ii) by the third Trading Day
          after the Conversion  Date,  the Company shall pay to such Holder,  in
          cash,  as liquidated  damages and not as a penalty,  for each $1000 of
          principal  amount being  converted,  $5 per Trading Day (increasing to


                                       10
<PAGE>

          $10 per Trading Day after 5 Trading Days after such  damages  begin to
          accrue) for each  Trading Day after the second  Trading Day after such
          third Trading Day until such certificates are delivered. The Company's
          obligations to issue and deliver the Conversion Shares upon conversion
          of this Debenture in accordance with the terms hereof are absolute and
          unconditional, irrespective of any action or inaction by the Holder to
          enforce the same,  any waiver or consent with respect to any provision
          hereof,  the recovery of any judgment against any Person or any action
          to  enforce  the  same,  or  any  setoff,  counterclaim,   recoupment,
          limitation  or  termination,  or any breach or  alleged  breach by the
          Holder or any other  Person of any  obligation  to the  Company or any
          violation  or  alleged  violation  of law by the  Holder  or any other
          person,  and  irrespective  of  any  other  circumstance  which  might
          otherwise  limit  such  obligation  of the  Company  to the  Holder in
          connection  with the  issuance of such  Conversion  Shares;  provided,
          however, such delivery shall not operate as a waiver by the Company of
          any such action the Company may have against the Holder.  In the event
          the Holder of this Debenture  shall elect to convert any or all of the
          outstanding  principal  amount  hereof,  the  Company  may not  refuse
          conversion based on any claim that the Holder or any one associated or
          affiliated  with the Holder has been engaged in any  violation of law,
          agreement or for any other reason,  unless an injunction from a court,
          on notice to Holder, restraining and or enjoining conversion of all or
          part of this  Debenture  shall have been sought and obtained,  and the
          Company  posts a surety  bond for the  benefit  of the  Holder  in the
          amount of 150% of the outstanding  principal amount of this Debenture,
          which is subject to the injunction,  which bond shall remain in effect
          until  the  completion  of  arbitration/litigation  of the  underlying
          dispute  and the  proceeds of which shall be payable to such Holder to
          the  extent it  obtains  judgment.  In the  absence  of an  injunction
          precluding the same, the Company shall issue Conversion  Shares or, if
          applicable,  cash, upon a properly noticed conversion.  Nothing herein
          shall limit a Holder's  right to pursue  actual  damages or declare an
          Event of  Default  pursuant  to  Section  8 hereof  for the  Company's
          failure  to deliver  Conversion  Shares  within  the period  specified
          herein and such  Holder  shall  have the right to pursue all  remedies
          available to it at law or in equity including,  without limitation,  a
          decree of specific  performance and/or injunctive relief. The exercise
          of any such  rights  shall not  prohibit  the Holder  from  seeking to
          enforce  damages  pursuant  to  any  other  Section  hereof  or  under
          applicable law.

               v.   Compensation   for  Buy-In  on  Failure  to  Timely  Deliver
          Certificates  Upon  Conversion.   In  addition  to  any  other  rights
          available  to the  Holder,  if the  Company  fails  for any  reason to
          deliver to the Holder such  certificate  or  certificates  pursuant to
          Section  4(d)(ii) by the third Trading Day after the Conversion  Date,
          and if after such third  Trading  Day the  Holder is  required  by its
          brokerage  firm  to  purchase  (in  an  open  market   transaction  or
          otherwise)  Common Stock to deliver in  satisfaction of a sale by such
          Holder of the Conversion Shares which the Holder anticipated receiving
          upon such  conversion (a "Buy-In"),  then the Company shall (A) pay in


                                       11
<PAGE>

          cash to the Holder (in addition to any other remedies  available to or
          elected  by the  Holder)  the amount by which (x) the  Holder's  total
          purchase  price  (including  brokerage  commissions,  if any)  for the
          Common Stock so purchased exceeds (y) the product of (1) the aggregate
          number  of  shares  of  Common  Stock  that  such  Holder  anticipated
          receiving  from the  conversion at issue  multiplied by (2) the actual
          sale  price of the  Common  Stock  at the time of the sale  (including
          brokerage commissions, if any) giving rise to such purchase obligation
          and (B) at the option of the Holder,  either reissue (if  surrendered)
          this Debenture in a principal  amount equal to the principal amount of
          the attempted conversion or deliver to the Holder the number of shares
          of Common  Stock that would have been  issued had the  Company  timely
          complied with its delivery  requirements  under Section 4(d)(ii).  For
          example,  if the Holder purchases Common Stock having a total purchase
          price of  $11,000  to  cover a Buy-In  with  respect  to an  attempted
          conversion  of this  Debenture  with  respect to which the actual sale
          price of the  Conversion  Shares  at the  time of the sale  (including
          brokerage commissions, if any) giving rise to such purchase obligation
          was a total of $10,000 under clause (A) of the  immediately  preceding
          sentence,  the Company shall be required to pay the Holder $1,000. The
          Holder shall provide the Company written notice indicating the amounts
          payable to the Holder in respect of the Buy-In  and,  upon  request of
          the Company, evidence of the amount of such loss.

               vi.  Reservation of Shares Issuable Upon  Conversion.  Subject to
          Authorized Share Approval,  the Company  covenants that it will at all
          times reserve and keep  available out of its  authorized  and unissued
          shares of  Common  Stock  solely  for the  purpose  of  issuance  upon
          conversion of this Debenture free from preemptive  rights or any other
          actual  contingent  purchase  rights of persons  other than the Holder
          (and the other holders of the  Debentures),  not less than such number
          of  shares  of the  Common  Stock as shall  (subject  to the terms and
          conditions  set forth in the Purchase  Agreement) be issuable  (taking
          into account the adjustments  and  restrictions of Section 5) upon the
          conversion of the outstanding principal amount of this Debenture.  The
          Company  covenants  that all  shares of Common  Stock that shall be so
          issuable shall, upon issue, be duly authorized,  validly issued, fully
          paid and  nonassessable  and, if the  Registration  Statement  is then
          effective  under the  Securities  Act,  registered  for public sale in
          accordance with such Registration Statement.

               vii. Fractional Shares.  Upon a conversion  hereunder the Company
          shall  not  be  required  to  issue  stock  certificates  representing
          fractions of shares of Common Stock,  but may if otherwise  permitted,
          make a cash payment in respect of any final  fraction of a share based
          on the VWAP at such time. If the Company elects not, or is unable,  to
          make such cash  payment,  the Holder shall be entitled to receive,  in
          lieu of the  final  fraction  of a share,  one  whole  share of Common
          Stock.


                                       12
<PAGE>

               viii.  Transfer Taxes. The issuance of certificates for shares of
          the Common Stock on conversion of this Debenture shall be made without
          charge to the Holder hereof for any documentary stamp or similar taxes
          that may be  payable  in  respect  of the  issue or  delivery  of such
          certificate,  provided  that the Company  shall not be required to pay
          any tax that may be payable in respect of any transfer involved in the
          issuance and delivery of any such  certificate  upon  conversion  in a
          name other than that of the Holder of this  Debenture so converted and
          the  Company   shall  not  be  required  to  issue  or  deliver   such
          certificates  unless or until the  person or  persons  requesting  the
          issuance thereof shall have paid to the Company the amount of such tax
          or shall have established to the satisfaction of the Company that such
          tax has been paid.

     Section 5. Certain Adjustments.

          a) Stock Dividends and Stock Splits. If the Company, at any time while
     this Debenture is outstanding: (A) pays a stock dividend or otherwise makes
     a distribution or  distributions on shares of its Common Stock or any other
     equity or equity  equivalent  securities  payable in shares of Common Stock
     (which,  for  avoidance  of doubt,  shall not  include any shares of Common
     Stock  issued  by the  Company  upon  conversion  of this  Debenture),  (B)
     subdivides  outstanding  shares of  Common  Stock  into a larger  number of
     shares, (C) combines  (including by way of reverse stock split) outstanding
     shares of Common  Stock into a smaller  number of shares,  or (D) issues by
     reclassification  of shares of the Common Stock any shares of capital stock
     of the Company, then the Conversion Price shall be multiplied by a fraction
     of which the  numerator  shall be the  number  of  shares  of Common  Stock
     (excluding  treasury shares,  if any) outstanding  immediately  before such
     event and of which the denominator  shall be the number of shares of Common
     Stock  outstanding  immediately  after  such  event.  Any  adjustment  made
     pursuant to this  Section  shall  become  effective  immediately  after the
     record date for the determination of stockholders  entitled to receive such
     dividend or distribution and shall become effective  immediately  after the
     effective   date   in  the   case   of  a   subdivision,   combination   or
     re-classification.

          b) [RESERVED].

          c) Subsequent Rights Offerings.  If the Company, at any time while the
     Preferred Stock is outstanding,  shall issue rights, options or warrants to
     all  holders  of  Common  Stock  (and  not to  Holders)  entitling  them to
     subscribe for or purchase  shares of Common Stock at a price per share less
     than the VWAP at the record date mentioned below, then the Conversion Price
     shall be multiplied by a fraction,  of which the  denominator  shall be the
     number of shares of the Common Stock outstanding on the date of issuance of
     such  rights or  warrants  plus the number of  additional  shares of Common
     Stock  offered for  subscription  or purchase,  and of which the  numerator
     shall be the number of shares of the Common Stock  outstanding  on the date
     of issuance of such rights or warrants  plus the number of shares which the
     aggregate offering price of the total number of shares so offered (assuming


                                       13
<PAGE>

     receipt by the Company in full of all  consideration  payable upon exercise
     of such rights,  options or  warrants)  would  purchase at such VWAP.  Such
     adjustment  shall be made whenever such rights or warrants are issued,  and
     shall  become  effective   immediately   after  the  record  date  for  the
     determination of stockholders  entitled to receive such rights,  options or
     warrants.

          d) Pro Rata  Distributions.  If the  Company,  at any time  while this
     Debenture is outstanding,  shall  distribute to all holders of Common Stock
     (and not to the holders of the Debenture)  evidences of its indebtedness or
     assets  (including  cash and cash  dividends)  or  rights  or  warrants  to
     subscribe  for or  purchase  any  security,  then in  each  such  case  the
     Conversion  Price shall be adjusted by multiplying such Conversion Price in
     effect  immediately  prior to the record  date fixed for  determination  of
     stockholders  entitled to receive such  distribution by a fraction of which
     the  denominator  shall  be  the  VWAP  determined  as of the  record  date
     mentioned  above,  and of which  the  numerator  shall be such VWAP on such
     record  date less the then fair  market  value at such  record  date of the
     portion  of  such  assets  or  evidence  of   indebtedness  so  distributed
     applicable  to one  outstanding  share of the Common Stock as determined by
     the Board of Directors in good faith. In either case the adjustments  shall
     be described in a statement provided to the Holder of the portion of assets
     or evidences of  indebtedness  so distributed or such  subscription  rights
     applicable  to one share of Common  Stock.  Such  adjustment  shall be made
     whenever  any  such   distribution  is  made  and  shall  become  effective
     immediately after the record date mentioned above.

          e)  Fundamental  Transaction.  If, at any time while this Debenture is
     outstanding,  (A) the Company  effects any merger or  consolidation  of the
     Company with or into another  Person,  (B) the Company  effects any sale of
     all or  substantially  all of its  assets  in one or a  series  of  related
     transactions,  (C) any  tender  offer or  exchange  offer  (whether  by the
     Company or another Person) is completed pursuant to which holders of Common
     Stock  are  permitted  to  tender  or  exchange   their  shares  for  other
     securities,   cash  or   property,   or  (D)  the   Company   effects   any
     reclassification  of the  Common  Stock or any  compulsory  share  exchange
     pursuant  to which  the  Common  Stock  is  effectively  converted  into or
     exchanged  for other  securities,  cash or  property  (in any such case,  a
     "Fundamental  Transaction"),  then upon any  subsequent  conversion of this
     Debenture,  the Holder shall have the right to receive, for each Conversion
     Share that would have been issuable upon such conversion  immediately prior
     to the occurrence of such Fundamental Transaction, the same kind and amount
     of  securities,  cash or property as it would have been entitled to receive
     upon  the  occurrence  of  such  Fundamental  Transaction  if it had  been,
     immediately prior to such Fundamental Transaction,  the holder of one share
     of Common Stock (the "Alternate  Consideration").  For purposes of any such
     conversion,   the   determination   of  the   Conversion   Price  shall  be
     appropriately  adjusted to apply to such Alternate  Consideration  based on
     the amount of Alternate  Consideration  issuable in respect of one share of
     Common  Stock  in  such  Fundamental  Transaction,  and the  Company  shall
     apportion  the  Conversion  Price among the  Alternate  Consideration  in a
     reasonable manner reflecting the relative value of any different components
     of the  Alternate  Consideration.  If holders of Common Stock are given any
     choice  as  to  the  securities,  cash  or  property  to be  received  in a
     Fundamental Transaction,  then the Holder shall be given the same choice as


                                       14
<PAGE>

     to the  Alternate  Consideration  it receives  upon any  conversion of this
     Debenture following such Fundamental  Transaction.  To the extent necessary
     to  effectuate  the foregoing  provisions,  any successor to the Company or
     surviving entity in such Fundamental  Transaction shall issue to the Holder
     a new debenture consistent with the foregoing provisions and evidencing the
     Holder's right to convert such debenture into Alternate Consideration.  The
     terms of any  agreement  pursuant  to which a  Fundamental  Transaction  is
     effected  shall  include terms  requiring  any such  successor or surviving
     entity to comply with the  provisions  of this  paragraph  (d) and insuring
     that this  Debenture (or any such  replacement  security) will be similarly
     adjusted  upon  any  subsequent  transaction  analogous  to  a  Fundamental
     Transaction.

          f) Calculations.  All calculations  under this Section 5 shall be made
     to the nearest cent or the nearest  1/100th of a share, as the case may be.
     For purposes of this Section 5, the number of shares of Common Stock deemed
     to be issued  and  outstanding  as of a given  date shall be the sum of the
     number of shares of Common Stock (excluding treasury shares, if any) issued
     and outstanding.

          g) Notice to the Holder.

               i. Adjustment to Conversion Price.  Whenever the Conversion Price
          is adjusted  pursuant to any  provision of this Section 5, the Company
          shall  promptly  mail  to each  Holder  a  notice  setting  forth  the
          Conversion  Price  after such  adjustment  and  setting  forth a brief
          statement  of the facts  requiring  such  adjustment.  If the  Company
          issues a variable rate security,  despite the  prohibition  thereon in
          the  Purchase  Agreement,  the Company  shall be deemed to have issued
          Common  Stock or  Common  Stock  Equivalents  at the  lowest  possible
          conversion or exercise price at which such securities may be converted
          or exercised in the case of a Variable Rate Transaction (as defined in
          the Purchase Agreement).

               ii.  Notice to Allow  Conversion  by Holder.  If (A) the  Company
          shall declare a dividend (or any other  distribution in whatever form)
          on  the  Common  Stock;  (B)  the  Company  shall  declare  a  special
          nonrecurring cash dividend on or a redemption of the Common Stock; (C)
          the Company shall  authorize the granting to all holders of the Common
          Stock  rights or warrants to  subscribe  for or purchase any shares of
          capital  stock of any class or of any rights;  (D) the approval of any
          stockholders  of the Company shall be required in connection  with any
          reclassification  of the Common Stock, any  consolidation or merger to
          which  the  Company  is a  party,  any  sale  or  transfer  of  all or
          substantially  all of the  assets of the  Company,  of any  compulsory
          share  exchange  whereby  the  Common  Stock is  converted  into other
          securities,  cash or property;  (E) the Company  shall  authorize  the
          voluntary or involuntary dissolution, liquidation or winding up of the
          affairs of the Company; then, in each case, the Company shall cause to
          be filed at each  office  or  agency  maintained  for the  purpose  of
          conversion  of this  Debenture,  and  shall  cause to be mailed to the
          Holder at its last  addresses  as it shall appear upon the stock books
          of the  Company,  at least 20  calendar  days prior to the  applicable


                                       15
<PAGE>

          record or effective date hereinafter  specified,  a notice stating (x)
          the date on which a record  is to be  taken  for the  purpose  of such
          dividend, distribution, redemption, rights or warrants, or if a record
          is not to be taken,  the date as of which the  holders  of the  Common
          Stock  of  record  to be  entitled  to such  dividend,  distributions,
          redemption, rights or warrants are to be determined or (y) the date on
          which such reclassification,  consolidation, merger, sale, transfer or
          share exchange is expected to become  effective or close, and the date
          as of which it is expected  that holders of the Common Stock of record
          shall be  entitled to exchange  their  shares of the Common  Stock for
          securities,   cash   or   other   property   deliverable   upon   such
          reclassification,  consolidation,  merger,  sale,  transfer  or  share
          exchange; provided, that the failure to mail such notice or any defect
          therein or in the mailing thereof shall not affect the validity of the
          corporate  action required to be specified in such notice.  The Holder
          is  entitled  to convert  this  Debenture  during  the  20-day  period
          commencing  the date of such notice to the effective date of the event
          triggering such notice.

     Section 6. Forced Conversion.

          a) Forced Conversion. Notwithstanding anything herein to the contrary,
     if after the  Effective  Date,  each of the  VWAPs  for any 20  consecutive
     Trading Days (such period  commencing  only after the Effective  Date, such
     period  the  "Threshold  Period"))  exceeds  250%  of  the  then  effective
     Conversion  Price  (subject to  adjustment  for  reverse and forward  stock
     splits, stock dividends,  stock combinations and other similar transactions
     of the Common Stock that occur after the Original Issue Date),  the Company
     may,  within 1 Trading Day of the end of any such period,  deliver a notice
     to the Holder (a "Forced  Conversion  Notice"  and the date such  notice is
     received by the Holder,  the "Forced  Conversion Notice Date") to cause the
     Holder to convert all or part of the then  outstanding  principal amount of
     Debentures  pursuant to Section 4, it being understood that the "Conversion
     Date"  for  purposes  of  Section  4 shall be  deemed to occur on the third
     Trading Day following the Forced Conversion Notice Date (such third Trading
     Day being referred to as the "Forced Conversion Date"). The Company may not
     deliver  a Forced  Conversion  Notice,  and any  Forced  Conversion  Notice
     delivered  by the  Corporation  shall not be  effective,  unless all of the
     Equity  Conditions  are  met on  each  Trading  Day  occurring  during  the
     applicable  Threshold  Period through and including the later of the Forced
     Conversion Date and the Trading Day after the date such  Conversion  Shares
     pursuant  to such  conversion  are  delivered  to the  Holder.  Any  Forced
     Conversion  shall be applied  ratably to all Holders based on their initial
     purchases of Debentures pursuant to the Purchase Agreement. For purposes of
     clarification,  a  Forced  Conversion  shall  be  subject  to  all  of  the
     provisions  of Section 4,  including,  without  limitation,  the  provision
     requiring payment of liquidated damages and limitations on conversions.

     Section 7. Negative Covenants.  So long as any portion of this Debenture is
outstanding, the Company will not and will not permit any of its Subsidiaries to
directly  or  indirectly:



                                       16
<PAGE>

          a) other than  Permitted  Indebtedness,  enter  into,  create,  incur,
     assume, guarantee or suffer to exist any indebtedness for borrowed money of
     any kind, including but not limited to, a guarantee,  on or with respect to
     any of its  property  or assets  now  owned or  hereafter  acquired  or any
     interest therein or any income or profits therefrom;

          b) other than Permitted Liens,  enter into, create,  incur,  assume or
     suffer to exist any liens of any  kind,  on or with  respect  to any of its
     property or assets now owned or hereafter  acquired or any interest therein
     or any income or profits therefrom;

          c) other than  Authorized  Shares  Approval,  amend its certificate of
     incorporation,  bylaws or other charter  documents so as to materially  and
     adversely affect any rights of the Holder;

          d)  repay,  repurchase  or offer to  repay,  repurchase  or  otherwise
     acquire  more than a de  minimis  number of shares of its  Common  Stock or
     Common Stock  Equivalents other than as to the Conversion Shares or Warrant
     Shares to the extent permitted or required under the Transaction  Documents
     or as otherwise permitted by the Transaction Documents and other than as to
     repurchases  of  Common  Stock or Common  Stock  Equivalents  of  departing
     officers and directors of the Company, provided that such repurchases shall
     not exceed $100,000 in the aggregate for all officers and directors  during
     the term of this Debenture;

          e) enter into any agreement with respect to any of the foregoing; or

          f) pay cash dividends or distributions on any equity securities of the
     Company.

     Section 8. Events of Default.

          a) "Event of  Default",  wherever  used  herein,  means any one of the
     following  events (whatever the reason and whether it shall be voluntary or
     involuntary  or effected by operation  of law or pursuant to any  judgment,
     decree or order of any  court,  or any  order,  rule or  regulation  of any
     administrative or governmental body):

               i. any default in the payment of (A) the principal  amount of any
          Debenture,  or (B) liquidated damages in respect of, any Debenture, as
          and  when  the  same  shall  become  due  and  payable  (whether  on a
          Conversion  Date or the Maturity Date or by acceleration or otherwise)
          which default, solely in the case of a default under clause (B) above,
          is not cured, within 3 Trading Days;

               ii. the Company shall fail to  materially  observe or perform any
          other  covenant or agreement  contained in this Debenture or any other
          Debenture  (other than a breach by the Company of its  obligations  to
          deliver  shares of Common  Stock to the Holder upon  conversion  which
          breach is addressed in clause (xi) below) which  failure is not cured,


                                       17
<PAGE>

          if possible to cure, within the earlier to occur of (A) 5 Trading Days
          after notice of such default sent by the Holder or by any other Holder
          and (B)10  Trading Days after the Company  shall become or should have
          become aware of such failure;

               iii. on or before the 90th day  following  the date  hereof,  the
          Company shall have failed to obtain Authorized Share Approval;

               iv. a default or event of default  (subject  to any grace or cure
          period  provided  for  in  the  applicable   agreement,   document  or
          instrument) shall occur under (A) any of the Transaction Documents, or
          (B) any other  material  agreement,  lease,  document or instrument to
          which the  Company  or any  Subsidiary  is bound  (and not  covered by
          clause (vi) below);

               v. any  representation  or  warranty  made  herein,  in any other
          Transaction  Documents,  in any written  statement  pursuant hereto or
          thereto,  or in any other report,  financial  statement or certificate
          made or  delivered  to the  Holder or any other  holder of  Debentures
          shall be untrue or incorrect  in any  material  respect as of the date
          when made or deemed made;

               vi. the Company or any Significant Subsidiary shall be subject to
          a Bankruptcy Event;

               vii. the Company or any  Subsidiary  shall  default in any of its
          obligations  under any mortgage,  credit  agreement or other facility,
          indenture  agreement,  factoring  agreement or other  instrument under
          which  there  may be  issued,  or by which  there  may be  secured  or
          evidenced any  indebtedness  for borrowed money or money due under any
          long term leasing or factoring arrangement of the Company in an amount
          exceeding  $500,000,  whether  such  indebtedness  now exists or shall
          hereafter   be  created  and  such   default   shall  result  in  such
          indebtedness  becoming or being  declared due and payable prior to the
          date on which it would otherwise become due and payable;

               viii.  the Common Stock shall not be eligible for quotation on or
          quoted for trading on a Trading Market and shall not again be eligible
          for and quoted or listed for trading thereon within five Trading Days;

               ix.  the  Company  shall  be a party  to any  Change  of  Control
          Transaction or Fundamental Transaction, shall agree to sell or dispose
          of all or in excess of 33% of its  assets in one or more  transactions
          (whether  or not  such  sale  would  constitute  a Change  of  Control
          Transaction);

               x.  a  Registration   Statement  shall  not  have  been  declared
          effective  by the  Commission  on or prior to the 240th  calendar  day
          after the Closing Date;


                                       18
<PAGE>

               xi.  if,  during  the  Effectiveness  Period  (as  defined in the
          Registration Rights Agreement),  the effectiveness of the Registration
          Statement  lapses for any reason or the Holder  shall not be permitted
          to resell  Registrable  Securities  (as  defined  in the  Registration
          Rights  Agreement) under the Registration  Statement,  in either case,
          for  more  than 60  consecutive  Trading  Days  or 90  non-consecutive
          Trading Days during any 12 month period;

               xii.   the   Company   shall  fail  for  any  reason  to  deliver
          certificates  to a Holder  prior to the  seventh  Trading  Day after a
          Conversion  Date or any  Forced  Conversion  Date  pursuant  to and in
          accordance  with Section 4(d) or the Company shall  provide  notice to
          the Holder,  including by way of public announcement,  at any time, of
          its  intention  not to comply with  requests  for  conversions  of any
          Debentures in accordance with the terms hereof; or

               xiii. any monetary judgment,  writ or similar final process shall
          be entered or filed  against the  Company,  any  Subsidiary  or any of
          their respective  property or other assets for more than $50,000,  and
          shall  remain  unvacated,  unbonded  or  unstayed  for a period  of 45
          calendar days.

          b) Remedies Upon Event of Default. If any Event of Default occurs, the
     full principal amount of this Debenture,  together with other amounts owing
     in  respect  thereof,  to the date of  acceleration  shall  become,  at the
     Holder's  election,  immediately  due and payable in cash at the  Mandatory
     Default  Amount.  Commencing  5 days after the  occurrence  of any Event of
     Default that results in the eventual  acceleration of this  Debenture,  the
     interest rate on this Debenture  shall accrue at the rate of 18% per annum,
     or such lower  maximum  amount of interest  permitted  to be charged  under
     applicable law. Upon the payment in full of the Mandatory Default Amount on
     this entire Debenture the Holder shall promptly surrender this Debenture to
     or as directed by the Company.  The Holder need not provide and the Company
     hereby waives any presentment, demand, protest or other notice of any kind,
     and the Holder may immediately  and without  expiration of any grace period
     enforce  any and all of its rights  and  remedies  hereunder  and all other
     remedies available to it under applicable law. Such Event of Default may be
     rescinded and annulled by Holder at any time prior to payment hereunder and
     the Holder shall have all rights as a Debenture  holder until such time, if
     any, as the full payment under this Section shall have been received by it.
     No such  rescission  or  annulment  shall  affect any  subsequent  Event of
     Default or impair any right consequent thereon.


     Section 9. Miscellaneous.

          a) Notices.  Any and all notices or other communications or deliveries
     to be provided by the Holder hereunder,  including, without limitation, any
     Notice of  Conversion,  shall be in writing and  delivered  personally,  by
     facsimile,  or sent by a nationally  recognized  overnight courier service,
     addressed to the Company, at the address set forth above,  facsimile number
     (210)  764-2930/2809,  Attn:  Michael Ward, Chief Executive Officer or such
     other  address or  facsimile  number as the  Company  may  specify for such
     purposes by notice to the Holder delivered in accordance with this Section.
     Any and all notices or other communications or deliveries to be provided by

                                       19
<PAGE>

     the Company  hereunder  shall be in writing and  delivered  personally,  by
     facsimile,  or sent by a nationally  recognized  overnight  courier service
     addressed to each Holder at the  facsimile  telephone  number or address of
     such Holder appearing on the books of the Company,  or if no such facsimile
     telephone number or address appears,  at the principal place of business of
     the Holder. Any notice or other communication or deliveries hereunder shall
     be  deemed  given  and  effective  on the  earliest  of  (i)  the  date  of
     transmission, if such notice or communication is delivered via facsimile at
     the facsimile telephone number specified in this Section prior to 5:30 p.m.
     (New York City time), (ii) the date after the date of transmission, if such
     notice  or  communication  is  delivered  via  facsimile  at the  facsimile
     telephone  number  specified in this Section later than 5:30 p.m. (New York
     City time) on any date and earlier than 11:59 p.m.  (New York City time) on
     such date, (iii) the second Business Day following the date of mailing,  if
     sent by  nationally  recognized  overnight  courier  service,  or (iv) upon
     actual receipt by the party to whom such notice is required to be given.

          b)  Absolute  Obligation.  Except as  expressly  provided  herein,  no
     provision of this  Debenture  shall alter or impair the  obligation  of the
     Company,  which is absolute and  unconditional,  to pay the  principal  of,
     interest and  liquidated  damages (if any) on, this  Debenture at the time,
     place,  and rate,  and in the coin or  currency,  herein  prescribed.  This
     Debenture is a direct debt obligation of the Company.  This Debenture ranks
     pari passu with all other  Debentures  now or  hereafter  issued  under the
     terms set forth herein.

          c) Lost or Mutilated Debenture.  If this Debenture shall be mutilated,
     lost,  stolen or  destroyed,  the Company  shall  execute and  deliver,  in
     exchange  and  substitution  for  and  upon  cancellation  of  a  mutilated
     Debenture, or in lieu of or in substitution for a lost, stolen or destroyed
     Debenture,  a new Debenture for the then  outstanding  principal  amount of
     this  Debenture so  mutilated,  lost,  stolen or  destroyed,  but only upon
     receipt of evidence of such loss,  theft or destruction of such  Debenture,
     and of the ownership hereof, reasonably satisfactory to the Company.

          d) Governing Law. All questions concerning the construction, validity,
     enforcement and  interpretation  of this Debenture shall be governed by and
     construed and enforced in accordance with the internal laws of the State of
     New York,  without  regard to the  principles  of conflicts of law thereof.
     Each party agrees that all legal proceedings concerning the interpretation,
     enforcement  and  defense of the  transactions  contemplated  by any of the
     Transaction  Documents  (whether  brought  against  a party  hereto  or its
     respective  affiliates,  directors,  officers,  shareholders,  employees or
     agents) shall be commenced in the state and federal  courts  sitting in the
     City of New York, Borough of Manhattan (the "New York Courts").  Each party
     hereto hereby irrevocably submits to the exclusive  jurisdiction of the New
     York Courts for the adjudication of any dispute  hereunder or in connection
     herewith or with any transaction  contemplated  hereby or discussed  herein
     (including  with  respect  to the  enforcement  of  any of the  Transaction
     Documents),  and hereby irrevocably waives, and agrees not to assert in any


                                       20
<PAGE>

     suit, action or proceeding,  any claim that it is not personally subject to
     the jurisdiction of any such court, or such New York Courts are improper or
     inconvenient  venue for such  proceeding.  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  via
     registered  or  certified  mail or  overnight  delivery  (with  evidence of
     delivery)  to such party at the  address in effect for  notices to it under
     this  Debenture  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 other
     manner permitted by law. Each party hereto hereby  irrevocably  waives,  to
     the fullest extent  permitted by applicable law, any and all right to trial
     by  jury  in any  legal  proceeding  arising  out of or  relating  to  this
     Debenture or the transactions  contemplated  hereby.  If either party shall
     commence  an  action  or  proceeding  to  enforce  any  provisions  of this
     Debenture,  then the prevailing party in such action or proceeding shall be
     reimbursed by the other party for its  attorneys'  fees and other costs and
     expenses  incurred with the  investigation,  preparation and prosecution of
     such action or proceeding.

          e) Waiver.  Any waiver by the Company or the Holder of a breach of any
     provision  of this  Debenture  shall not operate as or be construed to be a
     waiver of any other breach of such  provision or of any breach of any other
     provision  of this  Debenture.  The failure of the Company or the Holder to
     insist upon strict  adherence to any term of this  Debenture on one or more
     occasions  shall not be  considered  a waiver or deprive  that party of the
     right  thereafter to insist upon strict adherence to that term or any other
     term of this Debenture. Any waiver must be in writing.

          f)  Severability.  If any  provision  of this  Debenture  is  invalid,
     illegal or  unenforceable,  the balance of this  Debenture  shall remain in
     effect, and if any provision is inapplicable to any person or circumstance,
     it  shall   nevertheless   remain  applicable  to  all  other  persons  and
     circumstances.  If it shall be found  that  any  interest  or other  amount
     deemed interest due hereunder violates applicable laws governing usury, the
     applicable rate of interest due hereunder shall automatically be lowered to
     equal the maximum permitted rate of interest. The Company covenants (to the
     extent  that it may  lawfully  do so) that it shall not at any time  insist
     upon,  plead,  or in any  manner  whatsoever  claim or take the  benefit or
     advantage  of, any stay,  extension  or usury law or other law which  would
     prohibit  or forgive  the  Company  from  paying all or any  portion of the
     principal of or interest on this Debenture as contemplated herein, wherever
     enacted,  now or at any time  hereafter  in force,  or which may affect the
     covenants or the  performance  of this  indenture,  and the Company (to the
     extent it may  lawfully  do so) hereby  expressly  waives all  benefits  or
     advantage of any such law, and covenants that it will not, by resort to any
     such law,  hinder,  delay or  impeded  the  execution  of any power  herein
     granted to the Holder,  but will suffer and permit the  execution  of every
     such as though no such law has been enacted.

          g) Next  Business  Day.  Whenever  any  payment  or  other  obligation
     hereunder  shall be due on a day other than a Business  Day,  such  payment
     shall be made on the next succeeding Business Day.


                                       21
<PAGE>

          h) Headings.  The headings  contained herein are for convenience only,
     do not constitute a part of this Debenture and shall not be deemed to limit
     or affect any of the provisions hereof.

          i) Assumption.  Any successor to the Company or surviving  entity in a
     Fundamental  Transaction shall (i) assume in writing all of the obligations
     of the Company  under this  Debenture and the other  Transaction  Documents
     pursuant to written  agreements in form and substance  satisfactory  to the
     Holder (such approval not to be unreasonably  withheld or delayed) prior to
     such  Fundamental  Transaction and (ii) issue to the Holder a new debenture
     of such successor  entity evidenced by a written  instrument  substantially
     similar  in form  and  substance  to  this  Debenture,  including,  without
     limitation,  having a  principal  amount  and  interest  rate  equal to the
     principal  amounts and the  interest  rates of the  Debentures  held by the
     Holder and having similar  ranking to this Debenture,  and  satisfactory to
     the Holder (any such approval not to be unreasonably  withheld or delayed).
     The  provisions  of this Section 9(i) shall apply  similarly and equally to
     successive Fundamental  Transactions and shall be applied without regard to
     any limitations of this Debenture.  Any assignee or successor to the Holder
     agrees to assume in writing all of the obligations of the Holder under this
     Debenture and the other Transaction Documents.  The Holder or assignee will
     be responsible for the preparation of such documents.

                              *********************










                                       22
<PAGE>

     IN WITNESS  WHEREOF,  the  Company  has caused  this  Debenture  to be duly
executed by a duly authorized officer as of the date first above indicated.


                                                 TIDELANDS OIL & GAS CORPORATION


                                                 By:____________________________
                                                    Name:
                                                    Title:
















                                       23
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION


     The undersigned hereby elects to convert principal under the Original Issue
Discount  Convertible  Debenture of Tidelands  Oil & Gas  Corporation,  a Nevada
corporation  (the  "Company"),  due on January __,  2008,  into shares of common
stock, par value $.001 per share (the "Common Stock"),  of the Company according
to the  conditions  hereof,  as of the date written  below.  If shares are to be
issued in the name of a person other than the undersigned,  the undersigned will
pay all transfer taxes payable with respect  thereto and is delivering  herewith
such  certificates  and  opinions  as  reasonably  requested  by the  Company in
accordance  therewith.  No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

     By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company  that its  ownership of the Common Stock does not exceed
the amounts  determined  in  accordance  with Section 13(d) of the Exchange Act,
specified under Section 4 of this Debenture.

     The undersigned agrees to comply with the prospectus delivery  requirements
under the  applicable  securities  laws in  connection  with any transfer of the
aforesaid shares of Common Stock.

Conversion calculations:
                                  Date to Effect Conversion:

                                  Principal Amount of Debenture to be Converted:

                                  Number of shares of Common Stock to be issued:


                                  Signature:

                                  Name:

                                  Address:




                                       24
<PAGE>

                                   Schedule 1

                               CONVERSION SCHEDULE

The Original  Issue Discount  Convertible  Debentures due on January __, 2008 in
the aggregate  principal amount of  $____________  issued by Tidelands Oil & Gas
Corporation.  This Conversion Schedule reflects conversions made under Section 4
of the above referenced Debenture.

                                     Dated:


======================== ================== =================== ================
                                                 Aggregate
                                                 Principal
                                                  Amount
                                                 Remaining
                                               Subsequent to
    Date of Conversion                           Conversion
  (or for first entry,                          (or original
  Original Issue Date)        Amount of           Principal      Company Attest
                             Conversion            Amount)
------------------------ ------------------ ------------------- ----------------


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