Exhibit 10.1

                              EMPLOYMENT AGREEMENT

This employment agreement ("Agreement") is made and entered into as of this date
by and between TIDELANDS OIL & GAS CORPORATION ("Employer"),  and JAMES B. SMITH
("Employee").

WHEREAS,  Employer and Employee  desire that the term of this Agreement begin on
October 1, 2004 ("Effective Date").

WHEREAS,  Employer desires to employ Employee as its Senior  Vice-President  and
Chief  Financial  Officer and Employee is willing to accept such  employment  by
Employer,  on the  terms  and  subject  to the  conditions  set  forth  in  this
Agreement.

NOW THEREFORE, IT IS AGREED AS FOLLOWS:

Section 1.  Duties.  During the term of this  Agreement,  Employee  agrees to be
employed  by and to  serve  Employer  as its  Senior  Vice-President  and  Chief
Financial  Officer,  and Employer  agrees to employ and retain  Employee in such
capacities.  Employee  shall devote a substantial  portion of his business time,
energy, and skill to the affairs of the Employer as Employee shall report to the
Employer's  Board of Directors and President and at all times during the term of
this  Agreement  shall have  powers and  duties at least  commensurate  with his
position as Senior Vice-President and Chief Financial Officer.

Section 2.     Term of Employment.

2.1      Definitions.  For the purposes of this  Agreement the  following  terms
         shall have the following meanings:


         1.       "Termination  For Cause" shall mean termination by Employer of
                  Employee's  employment  by  Employer  by reason of  Employee's
                  willful dishonesty  towards,  fraud upon, or deliberate injury
                  or attempted  injury to,  Employer or by reason of  Employee's
                  willful  material  breach of this Agreement which has resulted
                  in material injury to Employer.

         2.       "Termination  Other Than For Cause" shall mean  termination by
                  Employer of Employee's employment by Employer (other than in a
                  Termination   for  Cause)  and  shall   include   constructive
                  termination  of  Employee's  employment  by reason of material
                  breach  of  this  Agreement  by  Employer,  such  constructive
                  termination  to be  effective  upon  notice  from  Employee to
                  Employer of such constructive termination.




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         3.       "Voluntary  Termination" shall mean termination by Employee of
                  Employee's   employment   by   Employment   other   than   (i)
                  constrictive termination as described in subsection 2.1(b), or
                  (ii)  termination by reason of Employee's  death or disability
                  as described in Sections 2.5 and 2.6.

2.2      Initial Term.  The term of employment of Employee by Employer  shall be
         for a period of four (4) years  beginning with Effective Date ("Initial
         Term"), unless terminated earlier pursuant to this Section. At any time
         prior to the expiration of the Initial Term,  Employer and Employee may
         by mutual written  agreement  extend  Employee's  employment  under the
         terms of this Agreement for such additional periods as they may agree.

2.3      Termination  For  Cause.  Termination  For  Cause  may be  effected  by
         Employer  at any time  during the term of this  Agreement  and shall be
         effected by written  notification  to Employee.  Upon  Termination  For
         Cause,  Employee  shall  promptly  be paid all  accrued  salary,  bonus
         compensation to the extent earned,  vested deferred compensation (other
         than pension pay or profit  sharing plan benefits which will be paid in
         accordance with the applicable  plan),  any benefits under any plans of
         the Employer in which  Employee is a participant  to the full extent of
         Employee's  rights  under  such  plans,  accrued  vacation  pay and any
         appropriate  business  expenses incurred by Employee in connection with
         his duties  hereunder,  all to the date of  termination,  but  Employee
         shall not be paid any other  compensation or reimbursement of any kind,
         including without limitation, severance compensation.

2.4      Termination Other Than For Cause. Notwithstanding anything else in this
         Agreement,  Employer may effect a  Termination  Other Than For Cause at
         any time upon giving  written  notice to Employee of such  termination.
         Upon any Termination  Other Than For Cause,  Employee shall promptly be
         paid all  accrued  salary,  bonus  compensation  to the extent  earned,
         vested deferred compensation (other than pension plan or profit sharing
         plan  benefits  which will be paid in  accordance  with the  applicable
         plan),  any benefits  under any plans of the Employer in which Employee
         is a  participant  to the full extent of  Employee's  rights under such
         plans  (including  accelerated  vesting,  if any, of awards  granted to
         Employee under the Employer's stock option plan),  accrued vacation pay
         and  any  appropriate   business   expenses  incurred  by  Employee  in
         connection with his duties  hereunder,  all to the date of termination,
         and all  severance  compensation  provided in Section 4.1, but no other
         compensation or reimbursement of any kind.

2.5      Termination  by  Reason  of  Disability.  If,  during  the term of this
         Agreement,  Employee,  in  the  reasonable  judgment  of the  Board  of
         Director's  of  Employer,  has failed to perform his duties  under this
         Agreement on account of illness or physical or mental  incapacity,  and
         such illness or  incapacity  continues for a period of more than twelve
         (12)  consecutive  months,  Employer  shall have the right to terminate
         Employee's employment hereunder by written notification to Employee and
         payment to Employee of all accrued  salary,  bonus  compensation to the

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         extent earned, vested deferred compensation (other than pension plan or
         profit sharing plan benefits which will be paid in accordance  with the
         applicable plan), any benefits under any plans of the Employer in which
         Employee is a participant to the full extent of Employee's rights under
         such plans,  accrued vacation pay and any appropriate business expenses
         incurred by Employee in connection  with his duties  hereunder,  all to
         the date of  termination,  with the  exception  of  medical  and dental
         benefits which shall continue through the expiration of this Agreement,
         but Employee shall not be paid any other  compensation or reimbursement
         of any kind, including without limitation, severance compensation.

2.6      Death.  In the  event  of  Employee's  death  during  the  term of this
         Agreement,  Employee's employment shall be deemed to have terminated as
         of the last day of the month during which his death occurs and Employer
         shall promptly pay to his estate or such  beneficiaries as Employee may
         from time to time designate all accrued salary,  bonus  compensation to
         the extent earned,  vested  deferred  compensation  (other than pension
         plan or profit  sharing plan benefits  which will be paid in accordance
         with the applicable plan), any benefits under any plans of the Employer
         in which  Employee is a  participant  to the full extent of  Employee's
         rights  under such  plans,  accrued  vacation  pay and any  appropriate
         business  expenses  incurred by Employee in connection  with his duties
         hereunder, all to the date of termination,  but Employee's estate shall
         not be paid  any  other  compensation  or  reimbursement  of any  kind,
         including without limitation, severance compensation.

2.7      Voluntary  Termination.  In  the  event  of  a  Voluntary  Termination,
         Employer shall promptly pay all accrued salary,  bonus  compensation to
         the extent earned,  vested  deferred  compensation  (other than pension
         plan or profit  sharing plan benefits  which will be paid in accordance
         with the applicable plan), any benefits under any plans of the Employer
         in which  Employee is a  participant  to the full extent of  Employee's
         rights  under such  plans,  accrued  vacation  pay and any  appropriate
         business  expenses  incurred by Employee in connection  with his duties
         hereunder, all to the date of termination, but no other compensation or
         reimbursement  of any kind,  including  without  limitation,  severance
         compensation.

2.8      Notice  of  Termination.  Employer  may  effect a  termination  of this
         Agreement pursuant to the provisions of this Section upon giving thirty
         (30) days' written notice to Employee of such termination. Employee may
         effect a termination  of this  Agreement  pursuant to the provisions of
         this Section upon giving thirty (30) days'  written  notice to Employer
         of such termination.

Section 3. Salary, Benefits and Bonus Compensation.

3.1      Base Salary.  As payment for the services to be rendered by Employee as
         provided  in  Section 1 and  subject  to the terms  and  conditions  of
         Section 2,  Employer  agrees to pay to Employee a "Base Salary" for the
         twelve (12) calendar months beginning the Effective Date at the rate of
         $168,000  per annum  payable  in 24 equal  bi-monthly  installments  of
         $7,000.  Employee's  Base  Salary  shall be  reviewed  annually  by the

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         Compensation  Committee  of  the  Board  of  Directors   ("Compensation
         Committee"),  and the Base  Salary for each year (or  portion  thereof)
         beginning January 1, shall be determined by the Compensation  Committee
         which shall  authorize an increase in  Employee's  Base Salary for such
         year in an amount which, at a minimum, shall be equal to the cumulative
         cost-of-living  increment on the Base Salary as report in the "Consumer
         Price Index,  Seattle,  Washington,  All Items,"  published by the U.S.
         Department  of  Labor  (using  January  1,  2004 as the  base  date for
         computation).

3.2      Stock  Grant.  Employee  shall be  eligible  to receive a common  stock
         grant, at Employee's  option, for each year (or portion thereof) during
         the term of this Agreement and any extensions thereof, in the amount of
         Five Hundred Thousand  (500,000)  common shares  annually.  The initial
         stock grant date will be October 1, 2004 and each  successive  year for
         the four year term of the agreement.

3.3      Incentive  Compensation.  Employer  agrees to pay  Employee  additional
         compensation  based upon a percentage of  Employer's  net profits after
         income taxes and a percentage  of  Employer's  net profits after income
         taxes  and  a  percentage   of  increase  in  sales  (the   "Additional
         Compensation"),  which must be paid to  Employee  each year  within ten
         (10)  business  days after  Employer  files its  annual  report on Form
         10-KSB.

                  i. The amount of Additional  Compensation to which Employee is
entitled each year will be determined in accordance with the following formulas:

                           (1) Employee is entitled to a  distribution  equal to
One  percent  (1.0%) of the net profits of  Employer,  after all taxes have been
deducted; and

                           (2) Employee is also entitled to a distribution equal
to One percent (1%) of the increase in sales over the previous year.

                  ii.  Employee's  entitlement  to  Additional  Compensation  is
effective for the fiscal year ending 2004, and for each  subsequent  fiscal year
of Employer during the term of this Agreement.

         The  Additional  Compensation  will be  determined  by the  accountants
regularly auditing the books of Employer,  in accordance with generally accepted
accounting principles consistently applied in the same manner as in prior fiscal
periods.  The certificates of the firm of certified public accountants  selected
as the regular  auditors  of Employer  will be binding  upon  Employer  and upon
Employee as to the amount of Additional Compensation.

                  iii.  If,  by reason of any  change in  Employer's  accounting
principles or practices,  the  Additional  Compensation  to which Employee would
otherwise be entitled is adversely affected, appropriate adjustment will be made
so that the amount  determined is the  equivalent of the amount which would have
been determined prior to any change.


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                  iv. If this  Agreement is terminated for any reason during the
fiscal year of Employer,  Employee is entitled to payment of a pro rata share of
the  Additional  Compensation  to which  Employee  would have been  entitled had
Employee  remained  employed for the entire fiscal year. The pro rata share will
be  determined  by  computing  the amount of  Additional  Compensation  to which
Employee  would  have been  entitled  for that year if this  Agreement  were not
terminated, and multiplying that amount by a fraction, the numerator of which is
the number of months that Employee was employed, and the denominator of which is
12. This provision survives the termination of this Agreement.

                  v. These  compensation  provisions  do not affect the right of
Employee (1) to receive any employee benefits provided comparable employees,  or
(2) as a participant in the present or any future  incentive  profit-sharing  or
bonus plan of Employer or in any present or future  qualified  stock option plan
of Employer or in the present or any future pension plan of Employer, applicable
generally to salaried employees.  The Employee will continue as a participant or
beneficiary  in any plans which  continue in full force and effect and  Employee
will have the right at any time to become a participant  under or beneficiary of
any newly created plans according to their terms.

3.3 Additional  Benefits.  During the term of this Agreement,  Employee shall be
entitled to the following fringe benefits:

         A. Employee Benefits. Employee shall be eligible to participate in such
of  Employer's  benefits and deferred  compensation  plans as are now  generally
available  or later  made  generally  available  to  executive  officers  of the
Employer, including, without limitation, Employer's Stock Grant and Option Plan,
profit sharing plans,  annual physical  examinations,  dental and medical plans,
personal catastrophe and disability  insurance,  financial planning,  retirement
plans and  supplementary  executive  retirement  plans,  if any. For purposes of
establishing  the length of  service  under any  benefit  plans or  programs  of
Employer,  Employee's  employment  with  the  Employer  will be  deemed  to have
commenced on the Effective Date.

         B.  Vacation.  Employee shall be entitled to four (4) weeks of vacation
during each year during the term of this Agreement and any  extensions  thereof,
prorated for partial years.

         C.  Life  Insurance.  For  the  term  of  this  Agreement  any  and all
extensions  thereof,  Employer  shall at its expense  procure and keep in effect
term life insurance on the life of Employee payable to Employer in the aggregate
amount of $1,000,000.

         D.  Automobile  Allowance.  For  the  term of  this  Agreement  and any
extensions  thereof the  corporation  shall  provide  officer with an automobile
allowance  of $12,000  annually,  which  allowance  shall be payable  monthly in
increments of $1,000.


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         E.  Reimbursement  for  Expenses.  During  the term of this  Agreement,
Employer  shall  reimburse  Employee  for  reasonable  and  properly  documented
out-of-pocket  business and/or  entertainment  expenses  incurred by Employee in
connection with his duties under this Agreement.

Section 4. Severance Compensation.

4.1      Severance  Compensation  in the Event of a  Termination  Other Than For
         Cause.  In  the  event   Employee's   employment  is  terminated  in  a
         Termination  Other Than for Cause,  Employee shall be paid as severance
         compensation  his Base Salary (at the rate  payable at the time of such
         termination),  for a period of the lesser of the  remaining  portion of
         the Initial  Term of six (6) months from the date of such  termination,
         on the dates  specified  in Section  3.1;  provided,  however,  that if
         Employee  is  employed  by a  new  employer  during  such  period,  the
         severance  compensation  payable to Employee during such period will be
         reduced by the amount of  compensation  that Employee is receiving from
         the new employer, officer is under no obligation to mitigate the amount
         owed to the officer  pursuant to this Section by seeking  employment or
         other  Employee  shall be  entitled  to an  accelerated  vesting of any
         awards  granted to Employee under  Employer's  Stock Option Plan to the
         extent provided in the stock option agreement  entered into at the time
         of the grant.

4.2      No Severance  Compensation  Upon Other  Termination.  In the event of a
         Voluntary Termination,  Termination For Cause, termination by reason of
         Employee's  disability  pursuant to Section 2.5 or 2.6, Employee or his
         estate shall not be paid any severance compensation.

Section 5. Outside Activities of Employee.  Employer  acknowledges that Employee
has  commitments  and business  activities  not related to the Employer and that
certain of these commitments and business affairs involve activities in the oil,
gas and real estate  industries.  There shall be no  restriction  on  Employee's
ability to fulfill such commitments or engage in such business activities.

Section 6.  Payment  Obligations.  Employer's  obligation  to pay  Employee  the
compensation   and  to  make  the   arrangements   provided   herein   shall  be
unconditional,  and Employee  shall have no  obligation  whatsoever  to mitigate
damages  hereunder.  If litigation after a Change in Control shall be brought to
enforce or interpret any provision  contained  herein,  Employer,  to the extent
permitted by applicable law and the Employers' Articles shall reimburse Employee
for Employee's  reasonable  attorneys' fees and  disbursements  incurred in such
litigation.

Section  7.   Confidentiality.   Employee  agrees  that  all   confidential  and
proprietary  information  relating to the business of Employer shall be kept and
treated as confidential both during and after the term of this Agreement, except
as may be  permitted  in writing by  Employer's  Board of  Directors  or as such
information  is within the  public  domain or comes  within  the  public  domain
without any breach of this Agreement.

Section 8.  Withholdings.  All compensation  and benefits to Employee  hereunder
shall be reduced by all federal, state, local and other withholdings and similar
taxes and payments required by applicable law.


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Section 9.  Indemnification.  In  addition to any rights to  indemnification  to
which Employee is entitled to under the Employers' Articles of Incorporation and
Bylaws, Employer shall indemnify Employee at all times during and after the term
of this Agreement to the maximum extent  permitted under Nevada Revised Statutes
or any successor provision thereof and any other applicable state law, and shall
pay  Employee's  expenses in defending  any civil or criminal  action,  suit, or
proceeding  in  advance  of the  final  disposition  of  such  action,  suit  or
proceeding, to the maximum extent permitted under such applicable state laws.

Agreed and accepted this 1st day of October 2004.


Employer:

Tidelands Oil & Gas Corporation


by: _______________________
      Michael R. Ward
      President



Employee:


___________________________
James B. Smith