Document:

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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          "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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     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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          "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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     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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     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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     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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                    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

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                    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

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                    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)
------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

------------------------ ------------------ ------------------- ----------------

======================== ================== =================== ================Exhibit 10.3

                                                                       EXHIBIT B

                          REGISTRATION RIGHTS AGREEMENT

     This Registration  Rights Agreement (this  "Agreement") is made and entered
into as of January 20, 2006,  among  Tidelands Oil & Gas  Corporation,  a Nevada
corporation  (the  "Company"),  and the purchasers  signatory  hereto (each such
purchaser is a "Purchaser" and collectively, the "Purchasers").

     This Agreement is made pursuant to the Securities Purchase Agreement, dated
as of the date  hereof  among the  Company  and the  Purchasers  (the  "Purchase
Agreement").

     The Company and the Purchasers hereby agree as follows:

     1. Definitions

     Capitalized terms used and not otherwise defined herein that are defined in
the Purchase  Agreement shall have the meanings given such terms in the Purchase
Agreement.  As used in this  Agreement,  the  following  terms  shall  have  the
following meanings:

          "Advice" shall have the meaning set forth in Section 6(d).

          "Effectiveness  Date" means, with respect to the initial  Registration
     Statement required to be filed hereunder,  the 150th calendar day following
     the date hereof and, with respect to any additional Registration Statements
     which may be  required  pursuant to Section  3(c),  the 60th  calendar  day
     following the date on which the Company first knows,  or reasonably  should
     have  known,  that  such  additional  Registration  Statement  is  required
     hereunder;  provided,  however, in the event the Company is notified by the
     Commission  that  one of the  above  Registration  Statements  will  not be
     reviewed  or is no longer  subject to  further  review  and  comments,  the
     Effectiveness  Date as to such  Registration  Statement  shall be the fifth
     Trading Day  following the date on which the Company is so notified if such
     date precedes the dates required above.

          "Effectiveness  Period"  shall have the  meaning  set forth in Section
     2(a).

          "Event" shall have the meaning set forth in Section 2(b).

          "Event Date" shall have the meaning set forth in Section 2(b).

          "Filing  Date"  means,  with  respect  to  the  initial   Registration
     Statement required hereunder,  as soon as reasonably  practicable following
     the date hereof, but in any event not later than 20 calendar days following
     the clearance of the  Commission's  comments on the Company's Annual Report
     on Form 10-KSB for the fiscal year ended  December 31, 2004 as disclosed in
     the Disclosure Schedules.

                                       1
<PAGE>

          "Holder" or "Holders" means the holder or holders, as the case may be,
     from time to time of Registrable Securities.

          "Indemnified Party" shall have the meaning set forth in Section 5(c).

          "Indemnifying Party" shall have the meaning set forth in Section 5(c).

          "Losses" shall have the meaning set forth in Section 5(a).

          "Plan of  Distribution"  shall have the  meaning  set forth in Section
     2(a).

          "Proceeding" means an action, claim, suit, investigation or proceeding
     (including,  without  limitation,  an investigation or partial  proceeding,
     such as a deposition), whether commenced or threatened.

          "Prospectus" means the prospectus included in a Registration Statement
     (including,  without limitation, a prospectus that includes any information
     previously  omitted  from  a  prospectus  filed  as  part  of an  effective
     registration  statement in reliance  upon Rule 430A  promulgated  under the
     Securities  Act), as amended or supplemented by any prospectus  supplement,
     with respect to the terms of the offering of any portion of the Registrable
     Securities  covered by a Registration  Statement,  and all other amendments
     and supplements to the Prospectus, including post-effective amendments, and
     all material  incorporated  by reference  or deemed to be  incorporated  by
     reference in such Prospectus.

          "Registrable  Securities"  means (i) all of the shares of Common Stock
     issuable  upon  conversion  in full of the  Debentures,  (ii)  all  Warrant
     Shares,  (iii)  any  additional  shares  issuable  in  connection  with any
     anti-dilution  provisions in the  Debentures or the Warrants (in each case,
     without  giving effect to any  limitations  on conversion  set forth in the
     Debenture or limitations on exercise set forth in the Warrant), (iv) shares
     of Common Stock  underlying  warrants issued to the placement agent (or its
     designees) and (v) any securities  issued or issuable upon any stock split,
     dividend  or other  distribution,  recapitalization  or similar  event with
     respect to the foregoing.

          "Registration Statement" means the registration statements required to
     be filed hereunder and any additional  registration statements contemplated
     by Section 3(c),  including (in each case) the  Prospectus,  amendments and
     supplements to such  registration  statement or Prospectus,  including pre-
     and  post-effective  amendments,  all  exhibits  thereto,  and all material
     incorporated by reference or deemed to be incorporated by reference in such
     registration statement.

          "Rule 415" means Rule 415  promulgated by the  Commission  pursuant to
     the  Securities  Act, as such Rule may be amended from time to time, or any
     similar  rule or  regulation  hereafter  adopted by the  Commission  having
     substantially the same purpose and effect as such Rule.

                                       2
<PAGE>

          "Rule 424" means Rule 424  promulgated by the  Commission  pursuant to
     the  Securities  Act, as such Rule may be amended from time to time, or any
     similar  rule or  regulation  hereafter  adopted by the  Commission  having
     substantially the same purpose and effect as such Rule.

          "Selling  Shareholder  Questionnaire" shall have the meaning set forth
     in Section 3(a).

     2. Shelf Registration

          (a) On or prior to each Filing  Date,  the Company  shall  prepare and
     file with the  Commission  a "Shelf"  Registration  Statement  covering the
     resale of 130% of the  Registrable  Securities  on such  Filing Date for an
     offering  to be made on a  continuous  basis  pursuant  to  Rule  415.  The
     Registration  Statement shall be on Form SB-2 (except if the Company is not
     then  eligible to register for resale the  Registrable  Securities  on Form
     SB-2, in which case such registration shall be on another  appropriate form
     in accordance herewith) and shall contain (unless otherwise directed by the
     Holders)  substantially the "Plan of Distribution" attached hereto as Annex
     A. Subject to the terms of this  Agreement,  the Company shall use its best
     efforts to cause a Registration  Statement to be declared  effective  under
     the Securities Act as promptly as possible after the filing thereof, but in
     any event prior to the  applicable  Effectiveness  Date,  and shall use its
     best efforts to keep such  Registration  Statement  continuously  effective
     under the Securities Act until all Registrable  Securities  covered by such
     Registration  Statement  have  been  sold  or may be  sold  without  volume
     restrictions  pursuant to Rule 144(k) as  determined  by the counsel to the
     Company pursuant to a written opinion letter to such effect,  addressed and
     acceptable to the Company's  transfer  agent and the affected  Holders (the
     "Effectiveness   Period").   The  Company  shall   telephonically   request
     effectiveness  of a Registration  Statement as of 5:00 pm Eastern Time on a
     Trading Day. The Company shall immediately notify the Holders via e-mail of
     the effectiveness of a Registration  Statement on the same Trading Day that
     the Company  telephonically  confirms  effectiveness  with the  Commission,
     which  shall be the date  requested  for  effectiveness  of a  Registration
     Statement.  The Company  shall,  by 9:30 am Eastern Time on the Trading Day
     after the  Effective  Date (as defined in the Purchase  Agreement),  file a
     Form 424(b)(3) with the Commission.  Failure to so notify the Holder within
     1 Trading Day of such  notification  shall be deemed an Event under Section
     2(b).

          (b) If: (i) a  Registration  Statement is not filed on or prior to its
     Filing  Date  (if  the  Company  files  a  Registration  Statement  without
     affording the Holders the  opportunity to review and comment on the same as
     required by Section 3(a), the Company shall not be deemed to have satisfied
     this clause (i)), or (ii) the Company  fails to file with the  Commission a
     request for acceleration in accordance with Rule 461 promulgated  under the
     Securities  Act,  within five  Trading Days of the date that the Company is
     notified  (orally or in writing,  whichever  is earlier) by the  Commission
     that a  Registration  Statement  will not be  "reviewed," or not subject to
     further review, or (iii) prior to its Effectiveness Date, the Company fails
     to file a  pre-effective  amendment  and  otherwise  respond  in writing to
     comments made by the Commission in respect of such  Registration  Statement

                                       3
<PAGE>

     within 15 calendar days after the receipt of comments by or notice from the
     Commission  that such  amendment  is required  in order for a  Registration
     Statement  to be declared  effective,  or (iv) the Company  fails to obtain
     Authorized  Share Approval on or before the Authorized Share Approval Date,
     or (v) a Registration  Statement filed or required to be filed hereunder is
     not declared effective by the Commission by its Effectiveness Date, or (vi)
     after the  Effectiveness  Date,  a  Registration  Statement  ceases for any
     reason to remain  continuously  effective as to all Registrable  Securities
     for which it is required to be effective,  or the Holders are not permitted
     to utilize the Prospectus therein to resell such Registrable Securities for
     10  consecutive  calendar days but no more than an aggregate of 25 calendar
     days during any  12-month  period  (which need not be  consecutive  Trading
     Days) (any such failure or breach being referred to as an "Event",  and for
     purposes of clause (i), (iv) or (v) the date on which such Event occurs, or
     for  purposes of clause (ii) the date on which such five Trading Day period
     is  exceeded,  or for  purposes  of  clause  (iii) the date  which  such 10
     calendar day period is exceeded, or for purposes of clause (vi) the date on
     which such 10 or 15 calendar day period,  as applicable,  is exceeded being
     referred to as "Event  Date"),  then in  addition  to any other  rights the
     Holders may have hereunder or under applicable law, on each such Event Date
     and on each monthly  anniversary of each such Event Date (if the applicable
     Event shall not have been cured by such date) until the applicable Event is
     cured,  the Company  shall pay to each Holder an amount in cash, as partial
     liquidated  damages  and not as a penalty,  equal to 1.5% of the  aggregate
     purchase price paid by such Holder  pursuant to the Purchase  Agreement for
     any Registrable  Securities  then held by such Holder,  provided that, with
     reference  only to clause (v) above,  the amount  payable by the Company as
     partial  liquidated  damages  shall  increase  to 2% on the  first  monthly
     anniversary  of  such  Event  Date  and  to  2.5%  on  the  second  monthly
     anniversary of such Event Date and each succeeding  monthly  anniversary of
     such Event Date; provided,  however,  such partial liquidated damages shall
     not exceed,  in the  aggregate  for each such  Holder,  20% of the original
     Principal  Amount of the  Debenture  issued to such Holder (or the original
     holder of the Debenture  held by such Holder).  If the Company fails to pay
     any partial  liquidated  damages  pursuant  to this  Section in full within
     seven  calendar days after the date payable,  the Company will pay interest
     thereon at a rate of 18% per annum (or such lesser  maximum  amount that is
     permitted to be paid by applicable law) to the Holder,  accruing daily from
     the date such partial liquidated  damages are due until such amounts,  plus
     all such interest thereon, are paid in full. The partial liquidated damages
     pursuant to the terms hereof shall apply on a daily  pro-rata basis for any
     portion of a month prior to the cure of an Event.

     3. Registration Procedures.

     In connection with the Company's registration  obligations  hereunder,  the
Company shall:

          (a) Not less  than  five  Trading  Days  prior to the  filing  of each
     Registration  Statement  or any  related  Prospectus  or any  amendment  or
     supplement  thereto  (including any document that would be  incorporated or
     deemed to be  incorporated  therein by reference),  the Company shall,  (i)
     furnish via e-mail to each Holder copies of all such documents  proposed to
     be filed,  which documents  (other than those  incorporated or deemed to be

                                       4
<PAGE>

     incorporated  by reference)  will be subject to the review of such Holders,
     and  (ii)  cause  its  officers  and  directors,  counsel  and  independent
     certified  public  accountants  to  respond to such  inquiries  as shall be
     necessary,  in the  reasonable  opinion of respective  counsel to conduct a
     reasonable  investigation  within the meaning of the  Securities  Act.  The
     Company shall not file a Registration  Statement or any such  Prospectus or
     any amendments or supplements thereto to which the Holders of a majority of
     the Registrable  Securities shall reasonably object in good faith, provided
     that,  the Company is notified of such objection in writing no later than 5
     Trading  Days  after  the  Holders  have been so  furnished  copies of such
     documents.  Each  Holder  agrees to  furnish  to the  Company  a  completed
     Questionnaire in the form attached to this Agreement as Annex B (a "Selling
     Shareholder  Questionnaire")  not less than two  Trading  Days prior to the
     Filing Date or by the end of the fourth  Trading Day  following the date on
     which such Holder receives draft materials in accordance with this Section.

          (b)  (i)  Prepare  and  file  with  the  Commission  such  amendments,
     including  post-effective  amendments,  to a Registration Statement and the
     Prospectus  used in  connection  therewith  as may be  necessary  to keep a
     Registration   Statement   continuously  effective  as  to  the  applicable
     Registrable  Securities for the  Effectiveness  Period and prepare and file
     with the Commission  such  additional  Registration  Statements in order to
     register  for  resale  under  the  Securities  Act  all of the  Registrable
     Securities; (ii) cause the related Prospectus to be amended or supplemented
     by any  required  Prospectus  supplement  (subject  to the  terms  of  this
     Agreement),  and as so supplemented or amended to be filed pursuant to Rule
     424;  (iii)  respond as promptly  as  reasonably  possible to any  comments
     received from the Commission  with respect to a  Registration  Statement or
     any amendment  thereto and as promptly as reasonably  possible  provide the
     Holders  true and  complete  copies of all  correspondence  from and to the
     Commission  relating to a  Registration  Statement;  and (iv) comply in all
     material  respects  with  the  provisions  of the  Securities  Act  and the
     Exchange Act with respect to the disposition of all Registrable  Securities
     covered  by a  Registration  Statement  during  the  applicable  period  in
     accordance  (subject  to the  terms of this  Agreement)  with the  intended
     methods  of  disposition   by  the  Holders   thereof  set  forth  in  such
     Registration   Statement  as  so  amended  or  in  such  Prospectus  as  so
     supplemented.

          (c) If during the  Effectiveness  Period,  the  number of  Registrable
     Securities  at any time exceeds 90% of the number of shares of Common Stock
     then registered in a Registration Statement, then the Company shall file as
     soon as  reasonably  practicable  but in any case  prior to the  applicable
     Filing Date, an additional  Registration  Statement  covering the resale by
     the  Holders  of not  less  than  130% of the  number  of such  Registrable
     Securities.

          (d) Notify the  Holders of  Registrable  Securities  to be sold (which
     notice shall,  pursuant to clauses (ii) through (vi) hereof, be accompanied
     by an instruction to suspend the use of the Prospectus  until the requisite
     changes have been made) as promptly as  reasonably  possible  (and,  in the
     case of (i)(A) below, not less than five Trading Days prior to such filing)
     and (if  requested  by any such  Person)  confirm such notice in writing no

                                       5
<PAGE>

     later than one Trading Day  following  the day (i)(A) when a Prospectus  or
     any  Prospectus  supplement or  post-effective  amendment to a Registration
     Statement  is proposed to be filed;  (B) when the  Commission  notifies the
     Company whether there will be a "review" of such Registration Statement and
     whenever the Commission comments in writing on such Registration  Statement
     (the Company shall provide true and complete copies thereof and all written
     responses  thereto  to each of the  Holders);  and (C)  with  respect  to a
     Registration Statement or any post-effective  amendment,  when the same has
     become  effective;  (ii) of any  request  by the  Commission  or any  other
     Federal or state governmental  authority for amendments or supplements to a
     Registration Statement or Prospectus or for additional  information;  (iii)
     of  the  issuance  by  the   Commission  or  any  other  federal  or  state
     governmental  authority of any stop order suspending the effectiveness of a
     Registration Statement covering any or all of the Registrable Securities or
     the initiation of any Proceedings for that purpose;  (iv) of the receipt by
     the  Company of any  notification  with  respect to the  suspension  of the
     qualification  or exemption from  qualification  of any of the  Registrable
     Securities for sale in any  jurisdiction,  or the initiation or threatening
     of any Proceeding  for such purpose;  (v) of the occurrence of any event or
     passage  of  time  that  makes  the  financial  statements  included  in  a
     Registration  Statement  ineligible for inclusion  therein or any statement
     made in a Registration Statement or Prospectus or any document incorporated
     or deemed to be  incorporated  therein by reference  untrue in any material
     respect  or  that  requires  any  revisions  to a  Registration  Statement,
     Prospectus  or  other  documents  so that,  in the  case of a  Registration
     Statement  or the  Prospectus,  as the case may be, it will not contain any
     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,
     in light of the  circumstances  under which they were made, not misleading;
     and (vi) the occurrence or existence of any pending  corporate  development
     with respect to the Company  that the Company  believes may be material and
     that,  in  the  determination  of the  Company,  makes  it not in the  best
     interest of the Company to allow  continued  availability of a Registration
     Statement  or  Prospectus;  provided  that any and all of such  information
     shall remain  confidential to each Holder until such information  otherwise
     becomes public, unless disclosure by a Holder is required by law; provided,
     further,  notwithstanding  each Holder's agreement to keep such information
     confidential, the Holders make no acknowledgement that any such information
     is material, non-public information.

          (e) Use its best  efforts  to avoid the  issuance  of,  or, if issued,
     obtain the withdrawal of (i) any order  suspending the  effectiveness  of a
     Registration  Statement,  or (ii) any suspension of the  qualification  (or
     exemption from qualification) of any of the Registrable Securities for sale
     in any jurisdiction, at the earliest practicable moment.

          (f)  Furnish  via  e-mail  to  each   Holder,   without   charge,   an
     electronically  portable copy of each such Registration  Statement and each
     amendment  thereto,  including  financial  statements  and  schedules,  all
     documents incorporated or deemed to be incorporated therein by reference to
     the  extent  requested  by such  Person,  and all  exhibits  to the  extent
     requested  by  such  Person   (including  those  previously   furnished  or
     incorporated by reference) promptly after the filing of such documents with
     the  Commission,  provided  that the Company may  fulfill  this  obligation
     pursuant to Rule 172 of the Securities Act.

                                       6
<PAGE>

          (g) Promptly  deliver to a Holder,  upon request and at such  Holder's
     expense,  as many copies of the Prospectus or Prospectuses  (including each
     form of  prospectus)  and each  amendment  or  supplement  thereto  as such
     Persons may reasonably  request in connection with resales by the Holder of
     Registrable Securities. Subject to the terms of this Agreement, the Company
     hereby  consents  to the use of  such  Prospectus  and  each  amendment  or
     supplement  thereto by each of the selling  Holders in connection  with the
     offering and sale of the Registrable  Securities covered by such Prospectus
     and any  amendment or  supplement  thereto,  except after the giving on any
     notice pursuant to Section 3(d).

          (h) If NASDR Rule 2710  requires  any  broker-dealer  to make a filing
     prior to executing a sale by a Holder, the Company shall (i) make an Issuer
     Filing with the NASDR,  Inc.  Corporate  Financing  Department  pursuant to
     proposed  NASDR Rule  2710(b)(10)(A)(i),  (ii) respond  within five Trading
     Days to any comments received from NASDR in connection therewith, (iii) and
     pay the filing fee required in connection therewith.

          (i) Prior to any resale of Registrable Securities by a Holder, use its
     commercially  reasonable  efforts to register or qualify or cooperate  with
     the selling  Holders in connection with the  registration or  qualification
     (or exemption from the Registration or  qualification)  of such Registrable
     Securities  for the resale by the Holder under the  securities  or Blue Sky
     laws  of  such  jurisdictions  within  the  United  States  as  any  Holder
     reasonably  requests in writing, to keep each registration or qualification
     (or exemption  therefrom)  effective during the Effectiveness Period and to
     do any and all other  acts or things  reasonably  necessary  to enable  the
     disposition in such jurisdictions of the Registrable  Securities covered by
     each  Registration  Statement;  provided,  that the  Company  shall  not be
     required to qualify  generally to do business in any jurisdiction  where it
     is not then so  qualified,  subject the Company to any  material tax in any
     such jurisdiction where it is not then so subject or file a general consent
     to service of process in any such jurisdiction.

          (j) If  requested  by the  Holders,  cooperate  with  the  Holders  to
     facilitate the timely preparation and delivery of certificates representing
     Registrable  Securities  to be  delivered  to a  transferee  pursuant  to a
     Registration  Statement,  which  certificates  shall be free, to the extent
     permitted by the Purchase  Agreement,  of all restrictive  legends,  and to
     enable  such  Registrable  Securities  to  be  in  such  denominations  and
     registered in such names as any such Holders may request.

          (k) Upon the occurrence of any event  contemplated  by this Section 3,
     as promptly as  reasonably  possible  under the  circumstances  taking into
     account the Company's good faith assessment of any adverse  consequences to
     the Company and its stockholders of the premature disclosure of such event,
     prepare a supplement or amendment, including a post-effective amendment, to
     a Registration  Statement or a supplement to the related  Prospectus or any

                                       7
<PAGE>

     document  incorporated or deemed to be  incorporated  therein by reference,
     and file any other  required  document so that,  as  thereafter  delivered,
     neither a Registration Statement nor such Prospectus will contain an untrue
     statement of a material  fact or omit to state a material  fact required to
     be stated therein or necessary to make the statements  therein, in light of
     the  circumstances  under  which they were  made,  not  misleading.  If the
     Company  notifies the Holders in accordance  with clauses (ii) through (vi)
     of  Section  3(d)  above to  suspend  the use of any  Prospectus  until the
     requisite changes to such Prospectus have been made, then the Holders shall
     suspend use of such  Prospectus.  The Company  will use its best efforts to
     ensure  that the use of the  Prospectus  may be resumed as  promptly  as is
     practicable. The Company shall be entitled to exercise its right under this
     Section 3(k) to suspend the  availability  of a Registration  Statement and
     Prospectus,  subject to the payment of partial  liquidated damages pursuant
     to  Section  2(b),  for a period not to exceed 60 days  (which  need not be
     consecutive days) in any 12 month period.

          (l)  Comply  with  all  applicable   rules  and   regulations  of  the
     Commission.

          (m) The Company  may,  prior to filing a  Registration  Statement  (or
     amendment thereto), require each selling Holder to furnish to the Company a
     certified statement as to the number of shares of Common Stock beneficially
     owned by such Holder and the person thereof that has voting and dispositive
     control  over the Shares.  During any periods that the Company is unable to
     meet its  obligations  hereunder  with respect to the  registration  of the
     Registrable  Securities  solely  because any Holder  fails to furnish  such
     information  within  three  Trading  Days  of the  Company's  request,  any
     liquidated  damages  that are  accruing at such time as to such Holder only
     shall be tolled and any Event that may  otherwise  occur solely  because of
     such  delay  shall  be  suspended  as  to  such  Holder  only,  until  such
     information is delivered to the Company.

     4. Registration Expenses. All fees and expenses incident to the performance
of or  compliance  with  this  Agreement  by the  Company  shall be borne by the
Company  whether  or not any  Registrable  Securities  are  sold  pursuant  to a
Registration  Statement.  The fees and  expenses  referred  to in the  foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including,  without  limitation,  fees and expenses (A) with respect to filings
required  to be made with the Trading  Market on which the Common  Stock is then
listed for trading,  (B) in compliance with applicable  state securities or Blue
Sky laws  reasonably  agreed to by the  Company in writing  (including,  without
limitation, fees and disbursements of counsel for the Company in connection with
Blue  Sky  qualifications  or  exemptions  of  the  Registrable  Securities  and
determination  of the eligibility of the  Registrable  Securities for investment
under the laws of such jurisdictions as requested by the Holders) and (C) if not
previously paid by the Company in connection with an Issuer Filing, with respect
to any filing  that may be  required  to be made by any broker  through  which a
Holder intends to make sales of  Registrable  Securities  with NASD  Regulation,
Inc.  pursuant to the NASD Rule 2710, so long as the broker is receiving no more
than a  customary  brokerage  commission  in  connection  with such  sale,  (ii)
printing  expenses   (including,   without  limitation,   expenses  of  printing
certificates  for  Registrable  Securities and of printing  prospectuses  if the
printing of prospectuses is reasonably requested by the holders of a majority of

                                       8
<PAGE>

the  Registrable  Securities  included  in  a  Registration  Statement),   (iii)
messenger,  telephone  and delivery  expenses,  (iv) fees and  disbursements  of
counsel for the Company, (v) Securities Act liability insurance,  if the Company
so desires  such  insurance,  and (vi) fees and  expenses  of all other  Persons
retained by the Company in connection with the  consummation of the transactions
contemplated  by this Agreement.  In addition,  the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation of
the transactions contemplated by this Agreement (including,  without limitation,
all salaries and expenses of its  officers  and  employees  performing  legal or
accounting  duties),  the expense of any annual  audit and the fees and expenses
incurred in  connection  with the listing of the  Registrable  Securities on any
securities  exchange  as  required  hereunder.  In no event shall the Company be
responsible  for any  broker or  similar  commissions  or,  except to the extent
provided for in the Transaction Documents,  any legal fees or other costs of the
Holders.

     5. Indemnification

          (a) Indemnification by the Company. The Company shall, notwithstanding
     any termination of this Agreement, indemnify and hold harmless each Holder,
     the officers,  directors,  members,  partners,  agents,  brokers (including
     brokers who offer and sell Registrable  Securities as principal as a result
     of a pledge or any failure to perform under a margin call of Common Stock),
     investment   advisors  and   employees   (and  any  other  Persons  with  a
     functionally   equivalent   role  of  a   Person   holding   such   titles,
     notwithstanding  a lack of such title or any other  title) of each of them,
     each Person who controls any such Holder  (within the meaning of Section 15
     of the  Securities Act or Section 20 of the Exchange Act) and the officers,
     directors,  members,  partners, agents and employees (and any other Persons
     with a  functionally  equivalent  role of a  Person  holding  such  titles,
     notwithstanding  a lack of such  title or any  other  title)  of each  such
     controlling Person, to the fullest extent permitted by applicable law, from
     and  against  any and  all  losses,  claims,  damages,  liabilities,  costs
     (including,  without limitation,  reasonable  attorneys' fees) and expenses
     (collectively,  "Losses"),  as incurred,  arising out of or relating to (1)
     any untrue or alleged  untrue  statement of a material fact  contained in a
     Registration Statement,  any Prospectus or any form of prospectus or in any
     amendment  or  supplement  thereto  or in any  preliminary  prospectus,  or
     arising  out of or  relating  to any  omission  or  alleged  omission  of a
     material  fact  required  to be stated  therein  or  necessary  to make the
     statements  therein (in the case of any Prospectus or form of prospectus or
     supplement  thereto,  in light of the  circumstances  under which they were
     made) not  misleading  or (2) any  violation  or alleged  violation  by the
     Company of the  Securities  Act, the  Exchange Act or any state  securities
     law,  or  any  rule  or  regulation  thereunder,  in  connection  with  the
     performance of its obligations under this Agreement,  except to the extent,
     but only to the extent,  that (i) such untrue  statements  or omissions are
     based solely upon information regarding such Holder furnished in writing to
     the Company by such Holder expressly for use therein, or to the extent that
     such information relates to such Holder or such Holder's proposed method of
     distribution  of  Registrable  Securities  and was reviewed  and  expressly
     approved  in writing by such  Holder  expressly  for use in a  Registration
     Statement,  such  Prospectus or such form of Prospectus or in any amendment
     or  supplement  thereto (it being  understood  that the Holder has approved
     Annex A hereto for this purpose) or (ii) in the case of an occurrence of an
     event of the  type  specified  in  Section  3(d)(ii)-(vi),  the use by such

                                       9
<PAGE>

     Holder  of an  outdated  or  defective  Prospectus  after the  Company  has
     notified  such  Holder  in  writing  that the  Prospectus  is  outdated  or
     defective   and  prior  to  the  receipt  by  such  Holder  of  the  Advice
     contemplated in Section 6(d). The Company shall notify the Holders promptly
     of the institution,  threat or assertion of any Proceeding  arising from or
     in connection with the transactions contemplated by this Agreement of which
     the Company is aware.

          (b) Indemnification by Holders.  Each Holder shall,  severally and not
     jointly, indemnify and hold harmless the Company, its directors,  officers,
     agents and  employees,  each Person who  controls  the Company  (within the
     meaning of Section 15 of the  Securities Act and Section 20 of the Exchange
     Act), and the directors,  officers, agents or employees of such controlling
     Persons,  to the fullest  extent  permitted  by  applicable  law,  from and
     against  all Losses,  as  incurred,  to the extent  arising out of or based
     solely  upon:  (x) such  Holder's  failure  to comply  with the  prospectus
     delivery  requirements  of the  Securities Act or (y) any untrue or alleged
     untrue   statement  of  a  material  fact  contained  in  any  Registration
     Statement, any Prospectus,  or any form of prospectus,  or in any amendment
     or supplement thereto or in any preliminary  prospectus,  or arising out of
     or relating to any omission or alleged omission of a material fact required
     to be stated  therein  or  necessary  to make the  statements  therein  not
     misleading  (i) to the  extent,  but only to the  extent,  that such untrue
     statement  or omission is  contained  in any  information  so  furnished in
     writing by such Holder to the Company  specifically  for  inclusion in such
     Registration  Statement or such  Prospectus  or (ii) to the extent that (1)
     such untrue  statements  or  omissions  are based  solely upon  information
     regarding  such Holder  furnished  in writing to the Company by such Holder
     expressly for use therein,  or to the extent that such information  relates
     to  such  Holder  or such  Holder's  proposed  method  of  distribution  of
     Registrable  Securities and was reviewed and expressly  approved in writing
     by such Holder  expressly  for use in a  Registration  Statement  (it being
     understood  that the Holder has approved  Annex A hereto for this purpose),
     such  Prospectus  or  such  form  of  Prospectus  or in  any  amendment  or
     supplement  thereto or (2) in the case of an  occurrence of an event of the
     type  specified  in  Section  3(d)(ii)-(vi),  the use by such  Holder of an
     outdated or defective Prospectus after the Company has notified such Holder
     in writing that the  Prospectus  is outdated or defective  and prior to the
     receipt by such Holder of the Advice  contemplated  in Section  6(d). In no
     event shall the  liability  of any selling  Holder  hereunder be greater in
     amount than the dollar  amount of the net proceeds  received by such Holder
     upon  the  sale  of  the  Registrable   Securities   giving  rise  to  such
     indemnification obligation.

          (c) Conduct of Indemnification Proceedings. If any Proceeding shall be
     brought or asserted against any Person entitled to indemnity  hereunder (an
     "Indemnified  Party"),  such  Indemnified  Party shall promptly  notify the
     Person from whom indemnity is sought (the "Indemnifying Party") in writing,
     and the  Indemnifying  Party  shall  have the right to assume  the  defense
     thereof, including the employment of counsel reasonably satisfactory to the
     Indemnified  Party and the  payment of all fees and  expenses  incurred  in
     connection  with  defense  thereof;  provided,  that  the  failure  of  any
     Indemnified  Party to give such notice  shall not relieve the  Indemnifying
     Party of its obligations or liabilities pursuant to this Agreement,  except

                                       10
<PAGE>

     (and only) to the extent that it shall be finally  determined by a court of
     competent  jurisdiction  (which  determination  is not subject to appeal or
     further  review) that such failure shall have  prejudiced the  Indemnifying
     Party.

          An Indemnified  Party shall have the right to employ separate  counsel
     in any such Proceeding and to participate in the defense  thereof,  but the
     fees  and  expenses  of  such  counsel  shall  be at the  expense  of  such
     Indemnified Party or Parties unless:  (1) the Indemnifying Party has agreed
     in writing to pay such fees and expenses;  (2) the Indemnifying Party shall
     have failed promptly to assume the defense of such Proceeding and to employ
     counsel  reasonably  satisfactory  to such  Indemnified  Party  in any such
     Proceeding;  or (3) the named parties to any such Proceeding (including any
     impleaded parties) include both such Indemnified Party and the Indemnifying
     Party, and such Indemnified Party shall reasonably  believe that a material
     conflict  of  interest  is  likely  to exist if the  same  counsel  were to
     represent such Indemnified Party and the Indemnifying Party (in which case,
     if such Indemnified  Party notifies the Indemnifying  Party in writing that
     it elects to employ  separate  counsel at the  expense of the  Indemnifying
     Party,  the  Indemnifying  Party  shall not have the  right to  assume  the
     defense  thereof  and the  reasonable  fees and  expenses  of one  separate
     counsel  shall  be  at  the  expense  of  the  Indemnifying   Party).   The
     Indemnifying  Party  shall not be  liable  for any  settlement  of any such
     Proceeding effected without its written consent, which consent shall not be
     unreasonably  withheld.  No  Indemnifying  Party  shall,  without the prior
     written  consent of the  Indemnified  Party,  effect any  settlement of any
     pending  Proceeding in respect of which any  Indemnified  Party is a party,
     unless  such  settlement   includes  an   unconditional   release  of  such
     Indemnified  Party from all liability on claims that are the subject matter
     of such Proceeding.

          Subject  to the  terms  of this  Agreement,  all  reasonable  fees and
     expenses of the Indemnified  Party (including  reasonable fees and expenses
     to the extent  incurred in connection  with  investigating  or preparing to
     defend such  Proceeding  in a manner not  inconsistent  with this  Section)
     shall be paid to the  Indemnified  Party,  as incurred,  within ten Trading
     Days of written notice thereof to the Indemnifying  Party;  provided,  that
     the Indemnified Party shall promptly  reimburse the Indemnifying  Party for
     that portion of such fees and expenses applicable to such actions for which
     such  Indemnified  Party  is not  entitled  to  indemnification  hereunder,
     determined based upon the relative faults of the parties.

          (d) Contribution. If the indemnification under Section 5(a) or 5(b) is
     unavailable to an Indemnified  Party or insufficient to hold an Indemnified
     Party  harmless  for  any  Losses,   then  each  Indemnifying  Party  shall
     contribute to the amount paid or payable by such Indemnified Party, in such
     proportion  as  is  appropriate  to  reflect  the  relative  fault  of  the
     Indemnifying  Party and  Indemnified  Party in connection with the actions,
     statements  or omissions  that resulted in such Losses as well as any other
     relevant equitable considerations.  The relative fault of such Indemnifying
     Party and  Indemnified  Party shall be  determined  by reference  to, among
     other  things,  whether  any action in  question,  including  any untrue or
     alleged untrue statement of a material fact or omission or alleged omission
     of a material  fact,  has been taken or made by, or relates to  information
     supplied by, such Indemnifying Party or Indemnified Party, and the parties'

                                       11
<PAGE>

     relative  intent,  knowledge,  access to  information  and  opportunity  to
     correct or prevent such action,  statement or omission.  The amount paid or
     payable  by a party as a result of any Losses  shall be deemed to  include,
     subject to the  limitations  set forth in this  Agreement,  any  reasonable
     attorneys' or other  reasonable fees or expenses  incurred by such party in
     connection  with any  Proceeding  to the extent  such party would have been
     indemnified for such fees or expenses if the  indemnification  provided for
     in this Section was available to such party in accordance with its terms.

          The parties  hereto  agree that it would not be just and  equitable if
     contribution  pursuant to this  Section  5(d) were  determined  by pro rata
     allocation  or by any other  method of  allocation  that does not take into
     account  the  equitable  considerations  referred  to  in  the  immediately
     preceding  paragraph.  Notwithstanding the provisions of this Section 5(d),
     no Holder shall be required to contribute,  in the aggregate, any amount in
     excess of the amount by which the proceeds actually received by such Holder
     from the  sale of the  Registrable  Securities  subject  to the  Proceeding
     exceeds  the amount of any  damages  that such  Holder has  otherwise  been
     required to pay by reason of such  untrue or alleged  untrue  statement  or
     omission or alleged omission, except in the case of fraud by such Holder.

          The indemnity and  contribution  agreements  contained in this Section
     are in addition to any liability that the Indemnifying  Parties may have to
     the Indemnified Parties.

     6. Miscellaneous

          (a) Remedies.  In the event of a breach by the Company or by a Holder,
     of any of their  obligations  under  this  Agreement,  each  Holder  or the
     Company,  as the case may be, in addition to being entitled to exercise all
     rights  granted  by law and under this  Agreement,  including  recovery  of
     damages,  will be entitled to specific performance of its rights under this
     Agreement.  The Company and each Holder agree that  monetary  damages would
     not provide  adequate  compensation  for any losses incurred by reason of a
     breach by it of any of the  provisions of this Agreement and hereby further
     agrees that, in the event of any action for specific performance in respect
     of such  breach,  it shall waive the defense  that a remedy at law would be
     adequate.

          (b) No  Piggyback  on  Registrations.  Except as set forth on Schedule
     6(b) attached  hereto,  neither the Company nor any of its security holders
     (other  than the  Holders in such  capacity  pursuant  hereto)  may include
     securities of the Company in the initial Registration  Statement other than
     the  Registrable  Securities.   Except  as  set  forth  on  the  Disclosure
     Schedules,  no  Person  has any right to cause the  Company  to effect  the
     registration under the Securities Act of any securities of the Company. The
     Company shall not file any other registration  statements until the initial
     Registration  Statement  required  hereunder  is declared  effective by the
     Commission,  provided that this Section 6(b) shall not prohibit the Company
     from filing amendments to registration statements already filed.

                                       12
<PAGE>

          (c) Compliance.  Each Holder  covenants and agrees that it will comply
     with  the  prospectus  delivery  requirements  of  the  Securities  Act  as
     applicable  to  it in  connection  with  sales  of  Registrable  Securities
     pursuant to a Registration Statement.

          (d) Discontinued Disposition. Each Holder agrees by its acquisition of
     such Registrable Securities that, upon receipt of a notice from the Company
     of the occurrence of any event of the kind described in Section 3(d),  such
     Holder  will  forthwith   discontinue   disposition  of  such   Registrable
     Securities  under a Registration  Statement until such Holder's  receipt of
     the  copies of the  supplemented  Prospectus  and/or  amended  Registration
     Statement,  or until it is advised in writing (the "Advice") by the Company
     that the use of the applicable  Prospectus  may be resumed,  and, in either
     case, has received  copies of any additional or  supplemental  filings that
     are  incorporated  or  deemed  to be  incorporated  by  reference  in  such
     Prospectus or Registration Statement. The Company will use its best efforts
     to ensure that the use of the  Prospectus  may be resumed as promptly as it
     practicable.  The Company agrees and  acknowledges  that any periods during
     which  the  Holder  is  required  to  discontinue  the  disposition  of the
     Registrable  Securities  hereunder  shall be subject to the  provisions  of
     Section 2(b).

          (e) Piggy-Back Registrations.  If at any time during the Effectiveness
     Period there is not an effective Registration Statement covering all of the
     Registrable  Securities and the Company shall determine to prepare and file
     with the  Commission a registration  statement  relating to an offering for
     its own account or the account of others under the Securities Act of any of
     its  equity  securities,  other  than on  Form  S-4 or Form  S-8  (each  as
     promulgated under the Securities Act) or their then equivalents relating to
     equity securities to be issued solely in connection with any acquisition of
     any entity or business or equity securities issuable in connection with the
     stock option or other employee  benefit plans,  then the Company shall send
     to each  Holder a  written  notice  of such  determination  and,  if within
     fifteen  days  after  the date of such  notice,  any such  Holder  shall so
     request  in  writing,  the  Company  shall  include  in  such  registration
     statement  all or any  part  of such  Registrable  Securities  such  Holder
     requests to be registered;  provided,  however, that, the Company shall not
     be required to register any Registrable Securities pursuant to this Section
     6(e) that are eligible for resale pursuant to Rule 144(k) promulgated under
     the Securities Act or that are the subject of a then effective Registration
     Statement.

          (f)  Amendments  and  Waivers.   The  provisions  of  this  Agreement,
     including the provisions of this sentence, may not be amended,  modified or
     supplemented,  and waivers or consents to  departures  from the  provisions
     hereof may not be given,  unless the same shall be in writing and signed by
     the Company and each Holder of the then outstanding Registrable Securities.
     Notwithstanding  the  foregoing,  a waiver or  consent  to depart  from the
     provisions hereof with respect to a matter that relates  exclusively to the
     rights of  Holders  and that does not  directly  or  indirectly  affect the
     rights of other  Holders may be given by Holders of all of the  Registrable
     Securities to which such waiver or consent relates; provided, however, that
     the  provisions  of  this  sentence  may  not  be  amended,   modified,  or
     supplemented  except in accordance  with the provisions of the  immediately
     preceding sentence.

          (g) Notices. Any and all notices or other communications or deliveries
     required or  permitted to be provided  hereunder  shall be delivered as set
     forth in the Purchase Agreement.

                                       13
<PAGE>

          (h) Successors and Assigns.  This Agreement shall inure to the benefit
     of and be binding upon the successors and permitted  assigns of each of the
     parties and shall inure to the benefit of each Holder.  The Company may not
     assign  its  rights or  obligations  hereunder  without  the prior  written
     consent  of  all  of  the  Holders  of  the  then-outstanding   Registrable
     Securities. Each Holder may assign their respective rights hereunder in the
     manner and to the Persons as permitted under the Purchase Agreement.

          (i) No  Inconsistent  Agreements.  Neither  the Company nor any of its
     subsidiaries has entered,  as of the date hereof,  nor shall the Company or
     any of its subsidiaries, on or after the date of this Agreement, enter into
     any agreement with respect to its securities, that would have the effect of
     impairing the rights  granted to the Holders in this Agreement or otherwise
     conflicts with the provisions hereof. Except as set forth on Schedule 6(i),
     neither the Company nor any of its subsidiaries has previously entered into
     any agreement  granting any registration  rights with respect to any of its
     securities to any Person that have not been satisfied in full.

          (j) Execution and Counterparts.  This Agreement may be executed in any
     number of  counterparts,  each of which when so executed shall be deemed to
     be an original and, all of which taken  together  shall  constitute one and
     the same  Agreement.  In the  event  that any  signature  is  delivered  by
     facsimile  transmission,  such  signature  shall  create  a  valid  binding
     obligation  of the party  executing  (or on whose behalf such  signature is
     executed)  the same  with the same  force and  effect as if such  facsimile
     signature were the original thereof.

          (k)  Governing  Law.  All  questions   concerning  the   construction,
     validity,  enforcement  and  interpretation  of  this  Agreement  shall  be
     determined with the provisions of the Purchase Agreement.

          (l) Cumulative  Remedies.  The remedies provided herein are cumulative
     and not exclusive of any remedies provided by law.

          (m) Severability.  If any term, provision,  covenant or restriction of
     this Agreement is held by a court of competent  jurisdiction to be invalid,
     illegal,  void or  unenforceable,  the remainder of the terms,  provisions,
     covenants and  restrictions set forth herein shall remain in full force and
     effect and shall in no way be affected,  impaired or  invalidated,  and the
     parties hereto shall use their commercially  reasonable efforts to find and
     employ an alternative  means to achieve the same or substantially  the same
     result  as  that  contemplated  by  such  term,   provision,   covenant  or
     restriction.  It is hereby  stipulated  and declared to be the intention of
     the parties that they would have executed the remaining terms,  provisions,
     covenants  and  restrictions  without  including  any of such  that  may be
     hereafter declared invalid, illegal, void or unenforceable.

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

          (o)  Independent  Nature  of  Holders'  Obligations  and  Rights.  The
     obligations  of each  Holder  hereunder  are several and not joint with the
     obligations  of  any  other  Holder  hereunder,  and  no  Holder  shall  be
     responsible in any way for the  performance of the obligations of any other

                                       14
<PAGE>

     Holder  hereunder.  Nothing  contained  herein or in any other agreement or
     document  delivered  at any  closing,  and no  action  taken by any  Holder
     pursuant hereto or thereto,  shall be deemed to constitute the Holders as a
     partnership,  an association,  a joint venture or any other kind of entity,
     or create a  presumption  that the Holders are in any way acting in concert
     with respect to such obligations or the  transactions  contemplated by this
     Agreement. Each Holder shall be entitled to protect and enforce its rights,
     including without limitation the rights arising out of this Agreement,  and
     it  shall  not be  necessary  for  any  other  Holder  to be  joined  as an
     additional party in any proceeding for such purpose.

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

                                       15
<PAGE>

     IN WITNESS  WHEREOF,  the parties have  executed this  Registration  Rights
Agreement as of the date first written above.

TIDELANDS OIL & GAS CORPORATION

By:__________________________________________
   Name:
   Title:

                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]

                                       16
<PAGE>

                     [SIGNATURE PAGE OF HOLDERS TO TIDE RRA]

Name of Holder: __________________________

Signature of Authorized Signatory of Holder: __________________________

Name of Authorized Signatory: ___________________________

Title of Authorized Signatory: __________________________

E-mail Address of Holder: _______________________________

                           [SIGNATURE PAGES CONTINUE]

                                       17
<PAGE>

                              Plan of Distribution

     Each Selling  Stockholder (the "Selling  Stockholders") of the common stock
("Common Stock") of Tidelands Oil & Gas Corporation,  a Nevada  corporation (the
"Company") and any of their pledgees,  assignees and successors-in-interest may,
from  time to time,  sell  any or all of their  shares  of  Common  Stock on the
Trading Market or any other stock exchange,  market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated  prices.  A  Selling  Stockholder  may  use  any  one or  more of the
following methods when selling shares:

          o    ordinary  brokerage  transactions  and  transactions in which the
               broker-dealer solicits purchasers;

          o    block trades in which the broker-dealer  will attempt to sell the
               shares  as agent but may  position  and  resell a portion  of the
               block as principal to facilitate the transaction;

          o    purchases  by a  broker-dealer  as  principal  and  resale by the
               broker-dealer for its account;

          o    an  exchange  distribution  in  accordance  with the rules of the
               applicable exchange;

          o    privately negotiated transactions;

          o    settlement of short sales  entered into after the effective  date
               of the registration statement of which this prospectus is a part;

          o    broker-dealers may agree with the Selling  Stockholders to sell a
               specified number of such shares at a stipulated price per share;

          o    through the  writing or  settlement  of options or other  hedging
               transactions, whether through an options exchange or otherwise;

          o    a combination of any such methods of sale; or

          o    any other method permitted pursuant to applicable law.

     The  Selling  Stockholders  may also sell  shares  under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available,  rather
than under this prospectus.

     Broker-dealers  engaged by the Selling  Stockholders  may arrange for other
brokers-dealers to participate in sales.  Broker-dealers may receive commissions
or discounts from the Selling  Stockholders  (or, if any  broker-dealer  acts as
agent  for the  purchaser  of  shares,  from the  purchaser)  in  amounts  to be
negotiated,  but, except as set forth in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage  commission
in compliance with NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.

                                       18
<PAGE>

     In connection with the sale of the Common Stock or interests  therein,  the
Selling  Stockholders may enter into hedging transactions with broker-dealers or
other  financial  institutions,  which may in turn  engage in short sales of the
Common Stock in the course of hedging the  positions  they  assume.  The Selling
Stockholders  may also sell shares of the Common  Stock short and deliver  these
securities  to close out their  short  positions,  or loan or pledge  the Common
Stock to  broker-dealers  that in turn may sell these  securities.  The  Selling
Stockholders   may  also  enter   into   option  or  other   transactions   with
broker-dealers  or other  financial  institutions or the creation of one or more
derivative  securities which require the delivery to such broker-dealer or other
financial  institution of shares offered by this  prospectus,  which shares such
broker-dealer  or  other  financial  institution  may  resell  pursuant  to this
prospectus (as supplemented or amended to reflect such transaction).

     The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be  "underwriters"  within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received  by such  broker-dealers  or agents and any profit on the resale of the
shares  purchased  by them  may be  deemed  to be  underwriting  commissions  or
discounts  under the Securities  Act. Each Selling  Stockholder has informed the
Company that it does not have any written or oral  agreement  or  understanding,
directly or indirectly,  with any person to distribute  the Common Stock.  In no
event shall any  broker-dealer  receive fees,  commissions and markups which, in
the aggregate, would exceed eight percent (8%).

     The Company is required to pay certain  fees and  expenses  incurred by the
Company  incident to the  registration of the shares.  The Company has agreed to
indemnify the Selling Stockholders against certain losses,  claims,  damages and
liabilities, including liabilities under the Securities Act.

     Because Selling Stockholders may be deemed to be "underwriters"  within the
meaning of the Securities  Act, they will be subject to the prospectus  delivery
requirements of the Securities Act. In addition,  any securities covered by this
prospectus  which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather  than  under  this  prospectus.  Each  Selling
Stockholder  has advised us that they have not entered  into any written or oral
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in  connection  with the proposed sale of the resale shares by the
Selling Stockholders.

     We agreed to keep this  prospectus  effective  until the earlier of (i) the
date on which  the  shares  may be resold by the  Selling  Stockholders  without
registration  and  without  regard to any volume  limitations  by reason of Rule
144(e) under the  Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold  pursuant to the  prospectus  or Rule 144 under the
Securities  Act or any other rule of similar  effect.  The resale shares will be
sold only through  registered or licensed  brokers or dealers if required  under
applicable  state securities  laws. In addition,  in certain states,  the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable  state or an exemption  from the  registration  or  qualification
requirement is available and is complied with.

                                       19
<PAGE>

     Under applicable  rules and regulations  under the Exchange Act, any person
engaged in the distribution of the resale shares may not  simultaneously  engage
in market making  activities with respect to the Common Stock for the applicable
restricted  period, as defined in Regulation M, prior to the commencement of the
distribution.   In  addition,  the  Selling  Stockholders  will  be  subject  to
applicable  provisions  of the  Exchange  Act  and  the  rules  and  regulations
thereunder,  including Regulation M, which may limit the timing of purchases and
sales of shares of the Common  Stock by the  Selling  Stockholders  or any other
person.  We  will  make  copies  of this  prospectus  available  to the  Selling
Stockholders  and  have  informed  them of the  need to  deliver  a copy of this
prospectus to each purchaser at or prior to the time of the sale.

                                       20
<PAGE>

                                                                         Annex B

                         TIDELANDS OIL & GAS CORPORATION

                 Selling Securityholder Notice and Questionnaire

     The undersigned beneficial owner of common stock, par value $.001 per share
(the "Common Stock"),  of Tidelands Oil & Gas Corporation,  a Nevada corporation
(the "Company"), (the "Registrable Securities") understands that the Company has
filed or  intends  to file with the  Securities  and  Exchange  Commission  (the
"Commission")  a  registration   statement  on  Form  SB-2  (the   "Registration
Statement") for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the "Securities  Act"), of the Registrable  Securities,  in
accordance  with the terms of the  Registration  Rights  Agreement,  dated as of
January 20, 2006 (the "Registration  Rights  Agreement"),  among the Company and
the Purchasers  named therein.  A copy of the  Registration  Rights Agreement is
available  from the Company  upon  request at the address set forth  below.  All
capitalized  terms not otherwise defined herein shall have the meanings ascribed
thereto in the Registration Rights Agreement.

     Certain   legal   consequences   arise  from  being   named  as  a  selling
securityholder  in  the  Registration  Statement  and  the  related  prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel  regarding the consequences of being
named  or not  being  named  as a  selling  securityholder  in the  Registration
Statement and the related prospectus.

                                     NOTICE

     The  undersigned   beneficial  owner  (the  "Selling   Securityholder")  of
Registrable Securities hereby elects to include the Registrable Securities owned
by it and listed below in Item 3 (unless otherwise  specified under such Item 3)
in the Registration Statement.

                                       21
<PAGE>

The  undersigned  hereby  provides the following  information to the Company and
represents and warrants that such information is accurate:

                                  QUESTIONNAIRE

1.   Name.

     (a)  Full Legal Name of Selling Securityholder

          ______________________________________________________________________

     (b)  Full  Legal Name of  Registered  Holder (if not the same as (a) above)
          through which Registrable Securities Listed in Item 3 below are held:

          ______________________________________________________________________

     (c)  Full Legal  Name of  Natural  Control  Person  (which  means a natural
          person who  directly or  indirectly  alone or with others has power to
          vote or dispose of the securities covered by the questionnaire):

          ______________________________________________________________________

2.   Address for Notices to Selling Securityholder:

          ______________________________________________________________________
          ______________________________________________________________________
          ______________________________________________________________________

Telephone:______________________________________________________________________
Fax:____________________________________________________________________________
Contact Person:_________________________________________________________________

3.   Beneficial Ownership of Registrable Securities:

     (a)  Type and Principal Amount of Registrable Securities beneficially owned
          (not including the Registrable  Securities that are issuable  pursuant
          to the Purchase Agreement):

          ______________________________________________________________________
          ______________________________________________________________________
          ______________________________________________________________________

                                       22
<PAGE>

4.   Broker-Dealer Status:

     (a)  Are you a broker-dealer?

                                 Yes [_]       No [_]

     (b)  If "yes" to Section 4(a), did you receive your Registrable  Securities
          as compensation for investment banking services to the Company.

                                 Yes [_]       No [_]

     Note: If no,  the  Commission's  staff  has  indicated  that you  should be
           identified as an underwriter in the Registration Statement.

     (c)  Are you an affiliate of a broker-dealer?

                                 Yes [_]       No [_]

     (d)  If you are an  affiliate of a  broker-dealer,  do you certify that you
          bought the Registrable  Securities in the ordinary course of business,
          and at the time of the purchase of the  Registrable  Securities  to be
          resold,  you  had  no  agreements  or   understandings,   directly  or
          indirectly, with any person to distribute the Registrable Securities?

                                 Yes [_]       No [_]

     Note: If no,  the  Commission's  staff  has  indicated  that you  should be
           identified as an underwriter in the Registration Statement.

5.   Beneficial  Ownership  of  Other  Securities  of the  Company  Owned by the
     Selling Securityholder.

     Except  as set  forth  below  in this  Item 5, the  undersigned  is not the
     beneficial or registered  owner of any securities of the Company other than
     the Registrable Securities listed above in Item 3.

     (a)  Type and Amount of Other Securities  beneficially owned by the Selling
          Securityholder:

          ______________________________________________________________________
          ______________________________________________________________________

                                       23
<PAGE>

6.   Relationships with the Company:

          Except as set forth  below,  neither  the  undersigned  nor any of its
          affiliates, officers, directors or principal equity holders (owners of
          5% of more of the equity  securities of the  undersigned) has held any
          position or office or has had any other material relationship with the
          Company  (or its  predecessors  or  affiliates)  during the past three
          years.

          State any exceptions here:

          ______________________________________________________________________
          ______________________________________________________________________

     The undersigned  agrees to promptly notify the Company of any  inaccuracies
or changes in the information  provided herein that may occur  subsequent to the
date hereof at any time while the Registration Statement remains effective.

     By  signing  below,  the  undersigned  consents  to the  disclosure  of the
information  contained  herein  in its  answers  to  Items 1  through  6 and the
inclusion of such  information  in the  Registration  Statement  and the related
prospectus  and  any  amendments  or  supplements   thereto.   The   undersigned
understands  that  such  information  will  be  relied  upon by the  Company  in
connection with the preparation or amendment of the  Registration  Statement and
the related prospectus.

     IN WITNESS  WHEREOF the  undersigned,  by authority duly given,  has caused
this Notice and  Questionnaire  to be executed and delivered either in person or
by its duly authorized agent.

Dated:_______________        Beneficial Owner:__________________________________

                             By:________________________________________________
                                Name:
                                Title:

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED  NOTICE AND  QUESTIONNAIRE,  AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

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