Document:

Exhibit 10.1

                          SECURITIES PURCHASE AGREEMENT

         SECURITIES PURCHASE AGREEMENT (this "Agreement"),  dated as of November
18, 2004, by and among Tidelands Oil & Gas Corporation,  a corporation organized
under the laws of the  State of Nevada  (the  "Company"),  on the one hand,  and
MERCATOR  MOMENTUM FUND, LP ("Momentum  Fund"),  MERCATOR  MOMENTUM FUND III, LP
("Momentum Fund III") , and MONARCH POINTE FUND, LP, ("Monarch")  (collectively,
the "Funds") and MERCATOR ADVISORY GROUP, LLC ("Mercator") on the other hand.

         WHEREAS:

         A.  The  Company  and the  Funds  are  executing  and  delivering  this
Agreement in reliance upon the exemption from securities  registration  afforded
by the  provisions  of  Section  4(2) and  Regulation  D  ("Regulation  D"),  as
promulgated by the United States Securities and Exchange  Commission (the "SEC")
under the Securities Act of 1933, as amended (the "Securities Act").

         B. The Company is issuing (i) 7.0%  Convertible  Debentures in the form
attached  hereto as  Exhibit A (the  "Debentures")  in the  aggregate  principal
amount of  $5,000,000,  pursuant to which shares of the  Company's  common stock
("Common  Stock")  may be issued  upon the  conversion  of the  Debentures  (the
"Debenture Shares");  and (ii) warrants in the form attached hereto as Exhibit B
(the "Warrants") to acquire shares of Common Stock ("Warrant Shares").

         C. The Funds are purchasing,  severally and not jointly, subject to the
terms and  conditions  in this  Agreement,  the  Debentures.  For no  additional
consideration, the Warrants are being issued to the Funds and Mercator.

         D.  Contemporaneous  with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration  Rights Agreement
in the form attached hereto as Exhibit C (the "Registration  Rights Agreement"),
pursuant to which the Company has agreed to provide certain  registration rights
under the Securities Act and the rules and regulations  promulgated  thereunder,
and applicable state securities laws.

         NOW, THEREFORE, the Company and the Funds hereby agree as follows:

         1. CERTAIN DEFINITIONS.

         For  purposes of this  Agreement,  the  following  terms shall have the
meanings ascribed to them as provided below:

         "Business Day" shall mean 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  are  authorized  or required  by law or other  government
action to close.

         "Investment  Amount"  shall  mean the dollar  amount of the  Debentures
purchased by Momentum Fund, Momentum Fund III or Monarch at the Closing pursuant
to this Agreement, as set forth in Section 2 hereto.

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         "Material Adverse Effect" shall mean any material adverse effect on (i)
the  Securities,  (ii) the  ability of the  Company to perform  its  obligations
hereunder (including the issuance of the Debentures and the Warrants), under the
Debentures  and Warrants  (including  the issuance of the  Debenture  Shares and
Warrant  Shares)  or under  the  Registration  Rights  Agreement  or  (iii)  the
business,  operations,  properties,  prospects  or  financial  condition  of the
Company and its subsidiaries taken as a whole.

         "Pro  Rata  Percentage"  shall  mean,  with  respect  to  any  Fund,  a
percentage  computed by dividing such Fund's  Investment Amount by the aggregate
Investment Amounts of all Funds.

         "Securities"  shall mean the  Debentures,  the Warrants,  the Debenture
Shares and the Warrant Shares.

         "Shares"  means  the  shares  of  Common  Stock to be  issued  upon the
conversion of the Debentures or exercise of the Warrants.

         2. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

         (a)  Generally.  Except as  otherwise  provided  in this  Section 2 and
subject to the satisfaction (or waiver) of the conditions set forth in Section 6
and Section 7 below,  each Fund shall  purchase the number of Debentures for the
Investment  Amountas  provided in this Section 2 and the Company  shall issue to
the Funds and Mercator the number of Debentures and Warrants as provided in this
Section 2.

         (b) Purchase of Debentures and Warrants; Form of Payment; Closing Date.

         (i) On the Closing Date (as defined below),  (A) the Company shall sell
and the Funds will  purchase  Debentures in the  aggregate  principal  amount of
$5,000,000,  and (B) the Company shall issue to the Funds and Mercator  Warrants
exercisable in the aggregate for Six Million Five Hundred Seventy-Eight Thousand
Nine Hundred  Forty-Seven  (6,578,947)  Shares. The allocation of the Debentures
and Warrants is set forth below.  On the Closing  Date,  each Fund shall pay the
Company an amount  equal to  sixty-five  (65%)  percent  such Fund's  Investment
Amount.  The  balance  of the  Investment  Amount  shall be paid  within two (2)
trading days after the Company files the Registration Statement (as that term is
defined in the Registration Rights Agreement).

----------------- ------------ ----------- ------------ ----------- ------------
                   Momentum     Momentum    Monarch      Mercator      Total
                     Fund       Fund III
----------------- ------------ ----------- ------------ ----------- ------------
Debentures         $1,270,000    $ 875,000   $2,855,000   $    --     $5,000,000
----------------- ------------ ----------- ------------ ----------- ------------

Warrants @ $0.80      417,763     287,829      939,145   1,644,737    3,289,474
----------------- ------------ ----------- ------------ ----------- ------------

Warrants @ $0.87      417,763     287,829      939,145   1,644,737    3,289,474
----------------- ------------ ----------- ------------ ----------- ------------

         (ii) On the Closing Date, each Fund shall pay sixty-five  (65%) percent
its  Investment  Amount to the Company  against  delivery by the Company of duly
executed  Debentures and Warrants being  purchased by such Fund,  Warrants being
issued to Mercator and all other items required to be delivered as conditions to
the closing under Section 7 below.

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         (iii) Subject to the satisfaction (or waiver) of the conditions thereto
set forth in Section 6 and Section 7 below, the date and time of the sale of the
Debentures and the Warrants  pursuant to this Agreement (the "Closing") shall be
no later than 5:00 p.m.10:00 a.m.  California  time on November 18, 2004 or such
other date or time as  Mercator  and the Company may  mutually  agree  ("Closing
Date").  The Closing shall occur at the Los Angeles  offices of Mercator,  or at
such other place as Mercator and the Company may otherwise mutually agree.

         3. THE FUNDS' REPRESENTATIONS AND WARRANTIES.

         Each Fund  severally  and not jointly  represents  and  warrants to the
Company as follows:

         (a) Organization, Good Standing and Qualification. Each of the Momentum
Fund and Momentum  Fund III is a limited  partnership  duly  organized,  validly
existing and in good standing  under the laws of the State of California and has
all the requisite  power and authority to carry on its business as now conducted
and as proposed to be conducted.  Monarch is a  international  business  company
organized under the laws of the British Virgin Islands and has all the requisite
power and authority to carry on its business as now conducted and as proposed to
be conducted.

         (b) Purchase for Own Account. The Fund is purchasing the Securities for
the Fund's own account  and not with a present  view  towards  the  distribution
thereof.  The Fund understands that the Fund must bear the economic risk of this
investment  indefinitely,  unless the Securities are registered  pursuant to the
Securities  Act and any  applicable  state  securities  or blue  sky  laws or an
exemption  from such  registration  is  available,  and that the  Company has no
present  intention of registering any such Securities other than as contemplated
by the Registration Rights Agreement.  Notwithstanding  anything in this Section
3(b) to the contrary, by making the foregoing representation,  the Fund does not
agree to hold the Securities for any minimum or other specific term and reserves
the  right  to  dispose  of the  Securities  at any time in  accordance  with or
pursuant to a registration statement or an exemption from registration under the
Securities Act and any applicable state securities laws.

         (c) Information.  The Fund has been furnished all materials relating to
the business,  finances and operations of the Company and its  subsidiaries  and
materials  relating  to the offer and sale of the  Securities,  which  have been
requested  by the  Fund.  The Fund  has been  afforded  the  opportunity  to ask
questions  of the  Company  and  has  received  what  the  Fund  believes  to be
satisfactory  answers  to any  such  inquiries.  The Fund  understands  that its
investment  in the  Securities  involves  a high  degree of risk.  Neither  such
inquiries nor any other due diligence investigation conducted by the Fund or its
counsel or any of its representatives  shall modify,  amend or affect the Fund's
right to rely on the  Company's  representations  and  warranties  contained  in
Section 4 below.

         (d)  Governmental  Review.  The Fund  understands that no United States
federal  or state  agency or any other  government  or  governmental  agency has
passed upon or made any recommendation or endorsement of the Securities.

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         (e) Accredited Investor Status. The Fund is an "Accredited Investor" as
that term is defined in Rule 501(a) of Regulation D.

         (f)  Authorization;  Enforcement.  The Fund has the requisite power and
authority to enter into and perform its obligations  under this Agreement and to
purchase the  Debentures  and the Warrants in accordance  with the terms hereof.
This Agreement has been duly and validly  authorized,  executed and delivered on
behalf of the Fund and is a valid and binding  agreement of the Fund enforceable
against the Fund in accordance with its terms, subject to applicable bankruptcy,
insolvency,  reorganization,  moratorium,  fraudulent  transfer  and other  laws
affecting  creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity).

         (g) Restrictions on Transfer. The Funds understand and acknowledge that
neither the  Debentures,  the  Warrants,  the  Debenture  Shares nor the Warrant
Shares have been registered under the Securities Act. Unless and until otherwise
permitted,  the Debentures and Warrants and each  certificate and other document
evidencing any of the Debenture Shares and Warrant Shares shall be endorsed with
the legend substantially in the following form:

"THESE  SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED,  AND MAY NOT BE SOLD,  PLEDGED  OR  OTHERWISE  TRANSFERRED  UNLESS  (A)
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE
WITH RULE 144 UNDER SUCH ACT,  OR (C) THE  COMPANY  HAS BEEN  FURNISHED  WITH AN
OPINION OF COUNSEL  REASONABLY  ACCEPTABLE  TO THE COMPANY TO THE EFFECT THAT NO
REGISTRATION IS REQUIRED FOR SUCH TRANSFER."

         (h) Covenants of Funds Not to Short Stock; Volume Limitation. The Funds
and Mercator, on behalf of themselves and their affiliates,  hereby covenant and
agree not to, directly or indirectly,  offer to "short sell", contract to "short
sell" or  otherwise  "short  sell" the  securities  of the  Company,  including,
without limitation,  shares of Common Stock that will be received as a result of
the  conversion  of the  Debentures.  The  Funds  and  Mercator,  on  behalf  of
themselves and their  affiliates,  hereby covenant and agree not to, directly or
indirectly,  sell in the aggregate during any trading day shares of Common Stock
totaling more than 20% of the total shares of Common Stock traded on such day.

         4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY .

         The Company  represents and warrants to each Fund as follows and except
as set forth in the Company's  public  filings with the  Securities and Exchange
Commission:

         (a) Organization and  Qualification.  The Company is a corporation duly
organized  and  existing  under  the  laws of the  State of  Nevada  and has the
requisite  corporate power to own its properties and to carry on its business as
now being conducted.  The Company is duly qualified as a foreign  corporation to
do business and is in good standing in every jurisdiction in which the nature of
the business  conducted by it makes such  qualification  necessary and where the
failure so to qualify would have a Material  Adverse Effect.  Schedule 4(a) sets
forth  the  name of each  subsidiary  of the  Company  and its  jurisdiction  of
incorporation. The Company is the sole record and beneficial owner of all of the
outstanding equity securities of each such subsidiary.

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<PAGE>

         (b) Authorization; Enforcement. The Company has the requisite corporate
power and  authority  to enter  into and  perform  its  obligations  under  this
Agreement,  the Debentures,  the Warrants and the Registration Rights Agreement;
to issue the Debenture  Shares upon  conversion of the  Debentures in accordance
with the terms of the Debentures;  and to issue and sell the Warrant Shares upon
exercise  of the  Warrants in  accordance  with the terms of the  Warrants,  and
receipt of the exercise price.  The execution,  delivery and performance of this
Agreement, the Debentures, the Warrants and the Registration Rights Agreement by
the Company and the consummation by it of the transactions  contemplated  hereby
and thereby  (including,  without  limitation,  the reservation for issuance and
issuance of the Debenture  Shares and the  reservation for issuance and issuance
of the Warrant  Shares)  have been duly  authorized  by the  Company's  Board of
Directors and no further consent or authorization  of the Company,  its Board of
Directors or its shareholders is required. This Agreement has been duly executed
and delivered by the Company.  This Agreement  constitutes,  and, upon execution
and  delivery by the  Company and the other  parties  thereto,  the  Debentures,
Registration  Rights  Agreement  and the  Warrants  will  constitute,  valid and
binding obligations of the Company enforceable against the Company in accordance
with their  respective  terms,  subject to  applicable  bankruptcy,  insolvency,
reorganization,   moratorium,  fraudulent  transfer  and  other  laws  affecting
creditors' rights and remedies generally and to general principles of equity.

         (c)  Capitalization.  The capitalization of the Company and each of its
subsidiaries as of the date hereof is set forth on Schedule 4(c),  including the
authorized  capital  stock,  the number of shares  issued and  outstanding,  the
number of shares  issuable and reserved for issuance  pursuant to the  Company's
stock  option  plans,  the number of shares  issuable  and reserved for issuance
pursuant to securities  exercisable for, or convertible into or exchangeable for
any shares of capital stock. All of such outstanding shares of the capital stock
of the Company have been, or upon issuance will be, validly  issued,  fully paid
and  nonassessable.  Except as set forth on Schedule  4(c), no shares of capital
stock of the Company  (including the Debenture Shares and the Warrant Shares) or
any of the  subsidiaries  are subject to preemptive  rights or any other similar
rights of the shareholders of the Company or any liens or  encumbrances.  Except
for the  Securities  and as disclosed in Schedule  4(c),  as of the date of this
Agreement,  there  are  no  outstanding  options,  warrants,  scrip,  rights  to
subscribe  to, calls or  commitments  of any  character  whatsoever to which the
Company or any of the  subsidiaries  is a party  relating to the issuance by the
Company or any of its  subsidiaries of securities or rights  convertible into or
exercisable or  exchangeable  for, any shares of capital stock of the Company or
any of its  subsidiaries,  or  arrangements  by which the  Company or any of its
subsidiaries is or may become bound to issue additional  shares of capital stock
of the Company or such subsidiaries.  Except for piggyback  registration  rights
granted  pursuant to transactions  with prior investors (which includes the Form
SB-2  being  filed  in  connection  with the  Company's  February  2004  private
placement),  there are no agreements or arrangements  under which the Company or
any of its subsidiaries is obligated to register the sale of any of its or their
securities under the Securities Act (except the Registration  Rights Agreement).
Except as set forth on Schedule  4(c),  there are no securities  or  instruments
containing  antidilution  or similar  provisions  that may be  triggered  by the
issuance of the Securities in accordance with the terms of this  Agreement,  the
Debentures,  the Warrants or the Registration Rights Agreement.  (d) Issuance of
Shares.  The Debenture Shares are duly authorized and upon the conversion of the

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Debentures in accordance with the terms thereof,  will be validly issued,  fully
paid and non-assessable, and free from all taxes, liens, claims and encumbrances
(other than those imposed through acts or omissions of the Funds),  and will not
be subject to preemptive  rights or other similar rights of  shareholders of the
Company and will not impose  personal  liability  upon the holder  thereof.  The
Warrant Shares are duly authorized and reserved for issuance, and, upon exercise
of the  Warrants  in  accordance  with the terms  thereof  and  receipts  of the
exercise price, will be validly issued,  fully paid and  non-assessable and free
from all taxes and liens,  claims and  encumbrances  (other  than those  imposed
through  acts or  omissions  of the Funds  thereof),  and will not be subject to
preemptive  rights or other similar  rights of  shareholders  of the Company and
will not impose personal liability upon the holder thereof.

         (e) No  Conflicts.  The  execution,  delivery and  performance  of this
Agreement, the Debentures, the Registration Rights Agreement and the Warrants by
the  Company,   and  the   consummation  by  the  Company  of  the  transactions
contemplated hereby and thereby (including,  without limitation, the reservation
for issuance and issuance of the Debenture Shares and the Warrant Shares and the
issuance of the Warrants) will not (i) conflict with or result in a violation of
the Articles of  Incorporation or By-laws or (ii) conflict with, or constitute a
default (or an event which, with notice or lapse of time or both, would become a
default)  under,  or  give to  others  any  rights  of  termination,  amendment,
acceleration or cancellation of any agreement,  indenture or instrument to which
the Company or any of its  subsidiaries  is a party, or result in a violation of
any law, rule,  regulation,  order,  judgment or decree (including (assuming the
accuracy of the  representations  and warranties of the Funds) the United States
federal and state securities laws and regulations)  applicable to the Company or
any of its  subsidiaries or by which any property or asset of the Company or any
of its subsidiaries is bound or affected  (except,  with respect to clause (ii),
for  such  conflicts,   defaults,   terminations,   amendments,   accelerations,
cancellations  and  violations as would not,  individually  or in the aggregate,
have a Material Adverse Effect). Neither the Company nor any of its subsidiaries
is  in  violation  of  its   Articles  of   Incorporation,   By-laws  and  other
organizational  documents and neither the Company nor any of its subsidiaries is
in default  (and no event has  occurred  which,  with notice or lapse of time or
both,  would put the Company or any of its  subsidiaries in default) under,  nor
has there  occurred  any event  giving  others  (with notice or lapse of time or
both) any rights of termination, amendment, acceleration or cancellation of, any
agreement,  indenture  or  instrument  to  which  the  Company  or  any  of  its
subsidiaries is a party, except for actual or possible  violations,  defaults or
rights as would not,  individually or in the aggregate,  have a Material Adverse
Effect.  The  businesses  of the  Company  and its  subsidiaries  are not  being
conducted in violation of any law,  ordinance or regulation of any  governmental
entity,  except for actual or possible  violations,  if any, the  sanctions  for
which  either  singly  or in the  aggregate  would not have a  Material  Adverse
Effect.  Except as  specifically  contemplated by this Agreement and as required
under the Securities Act and any applicable  state  securities laws, the Company
is not required to obtain any consent,  approval,  authorization or order of, or
make any filing or registration  with, any court or  governmental  agency or any
regulatory  or self  regulatory  agency in order for it to  execute,  deliver or
perform any of its obligations under this Agreement including without limitation
the  issuance  and  sale of the  Debentures  and  Warrants  as  provided  hereby
(including  without  limitation the issuance of the Debenture Shares and Warrant
Shares) or the Registration Rights Agreement.

         (f) SEC  Documents;  Financial  Statements.  Since January 1, 2001, the
Company has timely filed (subject to extensions permissible under Rule 12b-25 of
the Exchange Act) all reports,  schedules, forms, statements and other documents

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required to be filed by it with the SEC pursuant to the  Securities and Exchange
Act of 1934,  as  amended  ("Exchange  Act"),  and has  filed  all  registration
statements and other documents  required to be filed by it with the SEC pursuant
to the 1933 Act (all of the  foregoing  filed prior to the date hereof,  and all
exhibits  included  therein and financial  statements and schedules  thereto and
documents  incorporated  by reference  therein,  being  hereinafter  referred to
herein as the "SEC Documents"). The Company has made available to each Fund true
and complete copies of the SEC Documents,  except for the exhibits and schedules
thereto and the documents  incorporated  therein.  As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Exchange  Act or the  Securities  Act,  as the case may be,  and the  rules  and
regulations of the SEC promulgated  thereunder  applicable to the SEC Documents,
and  none of the SEC  Documents,  at the  time  they  were  filed  with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated  therein or necessary in order to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.  Any  statements  made in any  such SEC  Documents  that are or were
required to be updated or amended under  applicable  law have been so updated or
amended.  As of their respective dates, the financial  statements of the Company
included in the SEC Documents  complied in all material respects with applicable
accounting  requirements  and the  published  rules and  regulations  of the SEC
applicable with respect thereto. Such financial statements have been prepared in
accordance  with  United  States  generally  accepted   accounting   principles,
consistently  applied,  during  the  periods  involved  (except  (i)  as  may be
otherwise  indicated in such financial  statements or the notes thereto, or (ii)
in the case of unaudited interim statements,  to the extent they may not include
footnotes or may be condensed or summary  statements)  and fairly present in all
material  respects the  consolidated  financial  position of the Company and its
subsidiaries  as of the dates  thereof and the results of their  operations  and
cash  flows  for the  periods  then  ended  (subject,  in the case of  unaudited
statements,  to normal and recurring year-end audit adjustments).  Except as set
forth in the SEC  Documents,  the  Company  has no  liabilities,  contingent  or
otherwise,  other  than (i)  liabilities  incurred  in the  ordinary  course  of
business subsequent to the date of such SEC Documents and (ii) obligations under
contracts and  commitments  incurred in the ordinary  course of business and not
required under generally accepted accounting  principles to be reflected in such
SEC Documents,  which liabilities and obligations referred to in clauses (i) and
(ii),  individually  or in the  aggregate,  would  not have a  Material  Adverse
Effect.

         (g)  Absence  of  Certain  Changes.  Except  as  disclosed  in the  SEC
Documents,  there has been no change or development,  which,  individually or in
the aggregate, has had or could have a Material Adverse Effect on the Company.

         (h) Absence of  Litigation.  Except as disclosed in the SEC  Documents,
there is no action, suit, proceeding,  inquiry or investigation before or by any
court,  public board,  government agency,  self-regulatory  organization or body
pending or, to the knowledge of the Company, threatened against or affecting the
Company,  or any of its  subsidiaries,  or any of their directors or officers in
their capacities as such which would have a Material Adverse Effect.

         (i)  Intellectual  Property.  The Company and each of its  subsidiaries
owns  or is  licensed  to use  all  patents,  patent  applications,  trademarks,
trademark  applications,  trade  names,  service  marks,  copyrights,  copyright
applications,  licenses,  permits,  know-how  (including trade secrets and other

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unpatented and/or unpatentable proprietary or confidential information,  systems
or procedures) and other similar rights and proprietary knowledge (collectively,
"Intangibles")  necessary for the conduct of its business as now being conducted
and as proposed to be conducted. Neither the Company nor any of its subsidiaries
has received  written notice that it is infringing  upon or in conflict with any
third party  Intangibles.  Neither the Company nor any of its  subsidiaries  has
entered  into any consent,  indemnification,  forbearance  to sue or  settlement
agreements  with respect to the validity of the  Company's or such  subsidiary's
ownership  or  right to use its  Intangibles.  The  Intangibles  are  valid  and
enforceable,  and no registration  relating thereto has lapsed,  expired or been
abandoned  or canceled or is the subject of  cancellation  or other  adversarial
proceedings, and all applications therefor are pending and in good standing. The
Company and its subsidiaries  have complied with their  contractual  obligations
relating to the protection of the Intangibles used pursuant to licenses.  To the
knowledge  of  the  Company,  no  person  is  infringing  on  or  violating  the
Intangibles owned or used by the Company or any of its subsidiaries.

         (j) Environment.  Except as disclosed in the SEC Documents (i) there is
no environmental liability, nor factors likely to give rise to any environmental
liability,  affecting  any  of  the  properties  of  the  Company  or any of its
subsidiaries  that  individually  or in the  aggregate,  would  have a  Material
Adverse  Effect and (ii)  neither the Company  nor any of the  subsidiaries  has
violated any  environmental  law  applicable  to it now or previously in effect,
other  than  such  violations  or  infringements  that,  individually  or in the
aggregate, have not had and will not have a Material Adverse Effect.

         (k) Title.  The Company and each of its  subsidiaries has good title in
fee  simple  to any and all real  property  that it owns  and good  title to all
personal property owned by it which is material to its business,  free and clear
of all liens,  encumbrances  and defects  except for such defects in title that,
individually or in the aggregate,  would not have a Material Adverse Effect. Any
real  property  and  facilities  held under  lease by the  Company or any of its
subsidiaries are held by the Company or such subsidiary under valid,  subsisting
and  enforceable  leases with such  exceptions,  which have not had and will not
have a Material Adverse Effect.

         (l) Insurance. The Company and its subsidiaries maintain such insurance
relating to their business,  operations,  assets, key-employees and officers and
directors as is appropriate to their business,  assets and  operations,  in such
amounts and against such risks as are customarily carried and insured against by
owners of  comparable  businesses,  assets and  operations,  and such  insurance
coverages  will be  continued  in full  force and  effect to and  including  the
Closing  Date  other  than  those  insurance  coverages  in respect of which the
failure to continue in full force and effect could not reasonably be expected to
have a Material Adverse Effect.

         (m) Acknowledgment Regarding the Fund's Purchase of the Securities. The
Company  acknowledges  and agrees  that  neither  Fund is acting as a  financial
advisor or is acting as a fiduciary of the Company (or in any similar  capacity)
with respect to this Agreement or the transactions  contemplated hereby, and the
relationship  between the  Company  and the Funds is "arms  length" and that any
statement made by any Fund or any of its representatives or agents in connection
with this Agreement and the transactions  contemplated hereby is not advice or a
recommendation  and is merely  incidental to such Fund's  purchase of Securities
and has not been relied upon by the  Company,  its  officers or directors in any
way. The Company further represents to the Funds that its decision to enter into
this  Agreement  has been  based  solely  on an  independent  evaluation  by the
Company.

                                       8
<PAGE>

         (n)  Brokers.  Except for a broker fee equal to 5.0% of the  Investment
Amount  and  450,000  Warrants  owed to KMR  Capital,  LLC,  and as set forth on
Schedule  4(n),  the  Company  has not  engaged  any  person to which or to whom
brokerage  commissions,  finder's  fees,  financial  advisory  fees  or  similar
payments  are or will  become  due in  connection  with  this  Agreement  or the
transactions  contemplated hereby except for Mercator,  whose administrative fee
will be paid by the Company.

         (o) Tax Status.  The Company and each of its  subsidiaries  has made or
filed all  material  federal,  state and local income and all other tax returns,
reports and  declarations  required by any  jurisdiction  to which it is subject
(unless and only to the extent that the Company or the applicable subsidiary has
set aside on its books  provisions  adequate  for the  payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental  assessments and
charges  that are  material  in amount,  shown or  determined  to be due on such
returns,  reports and  declarations,  except those being contested in good faith
and has set aside on its books provisions  adequate for the payment of all taxes
for  periods  subsequent  to the  periods  to which  such  returns,  reports  or
declarations  apply. There are no material unpaid taxes claimed to be due by the
taxing authority of any jurisdiction. The Company has not executed a waiver with
respect to any statute of  limitations  relating to the assessment or collection
of any federal,  state or local tax. None of the tax returns of the Company have
been or is being audited by any taxing authority.

         (p) No  General  Solicitation.  Neither  the  Company  nor  any  person
participating  on  its  behalf  in  the  transactions  contemplated  hereby  has
conducted any "general  solicitation" or "general advertising" as such terms are
used in  Regulation  D, with  respect  to any of the  Securities  being  offered
hereby.

         (q) Securities Laws. Neither the Company nor any of its affiliates, nor
any person acting on their behalf, has, directly or indirectly,  made any offers
or sales of any  security  or  solicited  any offers to buy any  security  under
circumstances  that would require  registration of the Securities  being offered
hereby  under the  Securities  Act or cause this  offering of  Securities  to be
integrated  with any prior offering of securities of the Company for purposes of
the Securities Act or any applicable stockholder approval provisions, including,
without  limitation,  Rule 4350(i) of the  National  Association  of  Securities
Dealers ("NASD") or any similar rule. The offer,  sale and delivery of shares of
Common Stock upon the  conversion of the  Debentures or exercise of the Warrants
will be exempt from the registration requirements of Section 5 of the Securities
Act.

         (r) SB-2 Eligibility. The Company is currently eligible to register the
resale of its Common  Stock on a  registration  statement on Form SB-2 under the
Securities  Act.  There  exist  no  facts or  circumstances  (including  without
limitation any required approvals or waivers of any circumstances that may delay
or prevent the obtaining of accountant's  consents) that would prohibit or delay
the preparation and filing of a registration statement on Form SB-2 with respect
to the Registrable Securities (as defined in the Registration Rights Agreement).

         (s) Disclosure.  All information  relating to or concerning the Company
and its  subsidiaries  set forth in this Agreement or otherwise  provided to the
Funds  in  connection  with the  transactions  contemplated  hereby  is true and
correct in all  material  respects  and the  Company and  subsidiaries  have not
omitted to state any material  fact  necessary  in order to make the  statements
made  herein or  therein,  in light of the  circumstances  under which they were
made, not misleading.

                                       9
<PAGE>

         (t)  Except as set forth on  Schedule  4(t),  none of the  officers  or
directors of the Company (i) has been convicted of any crime (other than traffic
violations  or  misdemeanors   not  involving   fraud)  or  is  currently  under
investigation  or indictment for any such crime,  (ii) has been found by a court
or governmental  agency to have violated any securities or commodities law or to
have  committed  fraud or is currently a party to any legal  proceeding in which
either  is  alleged,  (iii)  has been the  subject  of a  proceeding  under  the
bankruptcy  laws or any  similar  state  laws,  or  (iv)  has  been an  officer,
director,  general  partner,  or managing member of an entity which has been the
subject of such a proceeding.

         5. COVENANTS.

         (a)  Satisfaction  of  Conditions.  The  parties  shall use their  best
efforts  to  satisfy  in a timely  manner  each of the  conditions  set forth in
Section 6 and Section 7 of this Agreement.

         (b) Form D; Blue Sky  Laws.  The  Company  agrees to file a Form D with
respect to the Securities as required  under  Regulation D and to provide a copy
thereof to Mercator promptly after such filing.  The Company shall, on or before
the Closing Date, take such action as the Company shall reasonably  determine is
necessary to qualify the Securities for sale to the Funds and Mercator  pursuant
to  this  Agreement  under  applicable  securities  or  "blue  sky"  laws of the
applicable states of the United States or obtain exemption therefrom,  and shall
provide  evidence  of any such  action so taken to  Mercator  on or prior to the
Closing Date.

         (c)  Reporting  Status.  So  long  as  a  Fund  beneficially  owns  any
Securities  or has  the  right  to  acquire  any  Securities  pursuant  to  this
Agreement,  the Company shall timely file all reports  required to be filed with
the SEC pursuant to the Exchange  Act, and shall not  terminate its status as an
issuer  required to file reports under the Exchange Act even if the Exchange Act
or the rules and regulations thereunder would permit such termination.

         (d) Use of Proceeds.  The Company  shall use the net proceeds  from the
sale of the  Debentures  and the Warrants for the purposes set forth on Schedule
5(d);  and no portion of the net proceeds  shall be used to repay any promissory
notes due to officers or directors of the Company.

         (e) Due Diligence Fee and Expenses.  At the Closing,  the Company shall
(i) pay to Mercator a due diligence fee of $200,000; and (ii) reimburse Mercator
for $15,000 in legal expenses reasonably incurred by Mercator and its affiliates
in connection with the negotiation,  preparation, execution and delivery of this
Agreement,  the Debenture,  the Registration Rights Agreement,  the Warrants and
the other agreements to be executed in connection herewith,  including,  without
limitation,   in  conducting   Mercator's  and  its  affiliates'  and  advisors'
reasonable  due  diligence  and  Mercator's  and  its   affiliates'   reasonable
attorneys' fees and expenses (the "Expenses").

         (f) Reserved.

         (g) Reservation of Shares.  The Company has and shall at all times have
authorized  and  reserved  for the  purpose of issuance a  sufficient  number of
shares of Common  Stock to provide for the issuance of the Shares as provided in
Section 2 hereof,  and the full conversion of the Debentures and the issuance of
the Warrant Shares in connection  therewith and as otherwise required hereby and

                                       10
<PAGE>

by the  Warrants in  accordance  with the  Registration  Rights  Agreement.  The
Company  shall not  reduce  the number of shares of Common  Stock  reserved  for
issuance under this Agreement, the Debentures,  the Warrants (except as a result
of the issuance of the Warrant  Shares upon the exercise of the Warrants) or the
Registration Rights Agreement without the consent of the Funds and Mercator.

         (h) Listing.  On the Closing  Date,  the  Company's  Common Stock shall
trade on the NASD Over-the-Counter Bulletin Board ("OTC"). The Company shall use
its best  efforts  to  continue  trading  of its  Common  Stock  on the OTC,  or
alternatively,  the Nasdaq National Market System,  Nasdaq Small Cap Market, the
New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX") (each a
"Subsequent  Market")  and  will  comply  in all  respects  with  the  Company's
reporting,  filing and other obligations under the bylaws or rules of the OTC or
a Subsequent Market, as applicable.

         (i)  Additional  Financing.   Within  one  hundred  twenty  (120)  days
following the Closing Date, the investment  committee for the Funds and Mercator
will consider making an additional equity or debt investment in the Company. For
one hundred  twenty (120) day following the Closing Date, the Funds and Mercator
shall have a right of first refusal on any financing in which the Company is the
issuer of debt or equity securities.

         (j) No Integrated  Offerings.  The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the
Securities Act under the Registration  Statement being filed with respect to the
transaction  contemplated  hereby or cause this  offering  of  Securities  to be
integrated  with any other  offering  of  securities  by the  Company  under the
Registration Statement being filed with respect to the transaction  contemplated
hereby.

         6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

         The  obligation  of the Company  hereunder to issue and sell Shares and
Warrants to a Fund at the Closing hereunder is subject to the  satisfaction,  at
or  before  the  Closing  Date,  of each of the  following  conditions  thereto;
provided,  however, that these conditions are for the Company's sole benefit and
may be waived by the Company at any time in its sole discretion.

         (a) The applicable  Fund shall have executed the signature page to this
Agreement and the Registration  Rights Agreement,  and delivered the same to the
Company.

         (b) The applicable Fund shall have delivered  sixty-five  (65%) percent
of such Fund's Investment  Amount in accordance with Section 2(b) above.  Within
two (2) trading days after the Registration Statement is filed with the SEC, the
Funds shall deliver to the Company the balance of the Investment Amount.

         (c) The  representations and warranties of the applicable Fund shall be
true and correct as of the date when made and as of the  Closing  Date as though
made at that time (except for  representations and warranties that speak as of a
specific date, which representations and warranties shall be true and correct as
of such date),  and the  applicable  Fund shall have  performed,  satisfied  and

                                       11
<PAGE>

complied in all material respects with the covenants,  agreements and conditions
required by this  Agreement to be  performed,  satisfied or complied with by the
applicable Fund at or prior to the Closing Date.

         (d) No statute,  rule,  regulation,  executive order,  decree,  ruling,
injunction;  action,  proceeding  or  interpretation  shall  have been  enacted,
entered, promulgated, endorsed or adopted by any court or governmental authority
of competent jurisdiction or any self-regulatory  organization,  or the staff of
any  thereof,  having  authority  over the  matters  contemplated  hereby  which
questions the validity of, or challenges or prohibits the  consummation  of, any
of the transactions contemplated by this Agreement.

         7.  CONDITIONS  TO EACH FUND'S  OBLIGATION TO PURCHASE  DEBENTURES  AND
WARRANTS.

         The  obligation  of each Fund  hereunder  to  purchase  Debentures  and
Warrants to be purchased by it hereunder is subject to the  satisfaction,  at or
before the Closing  Date,  of each of the  following  conditions,  provided that
these conditions are for such Fund's sole benefit and may be waived by such Fund
at any time in such Fund's sole discretion:

         (a) The  Company  shall  have  executed  the  signature  pages  to this
Agreement, the Debentures,  and delivered the same to Mercator on its own behalf
and on behalf of the Funds.

         (b) The Company shall have executed the signature pages of the Warrants
and the Registration Rights Agreement, and delivered the same to Mercator on its
own behalf and on behalf of the Funds.

         (c) The Shares shall be quoted on the OTC or  authorized  for quotation
or trading on a  Subsequent  Exchange  and shall not have been  suspended  or be
under threat of suspension by the SEC or the NASD.

         (d) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the  Closing  Date as though  made at
that time (except for representations and warranties that speak as of a specific
date, which  representations and warranties shall be true and correct as of such
date) and the  Company  shall have  performed,  satisfied  and  complied  in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date.  Mercator  shall have  received a  certificate  executed on
behalf of the Company by its Chief  Financial  Officer,  dated as of the Closing
Date,  to the  foregoing  effect and  attaching  true and correct  copies of the
resolutions  adopted by the Board of  Directors of the Company  authorizing  the
execution, delivery and performance by the Company of its obligations under this
Agreement, the Debentures, the Warrants and the Registration Rights Agreement.

         (e) No statute,  rule,  regulation,  executive order,  decree,  ruling,
injunction,  action,  proceeding  or  interpretation  shall  have been  enacted,
entered, promulgated, endorsed or adopted by any court or governmental authority
of competent jurisdiction or any self-regulatory  organization,  or the staff of
any  thereof,  having  authority  over the  matters  contemplated  hereby  which
questions the validity of, or challenges or prohibits the  consummation  of, any
of the transactions contemplated by this Agreement.

                                       12
<PAGE>

         (f) From the date of this  Agreement  through the Closing  Date,  there
shall not have occurred any Material Adverse Effect.

         8. GOVERNING LAW MISCELLANEOUS.

         (a) Governing Law;  Jurisdiction.  This Agreement  shall be governed by
and construed in accordance with the laws of the State of California  applicable
to contracts  made and to be performed in the State of  California.  Each of the
parties  irrevocably  consents to the  jurisdiction of the United States federal
courts and the state courts  located in the State of  California  in any suit or
proceeding based on or arising under this Agreement and irrevocably  agrees that
all claims in  respect  of such suit or  proceeding  may be  determined  in such
courts.  Each of the parties  irrevocably  waives the defense of an inconvenient
forum to the maintenance of such suit or proceeding. Each of the parties further
agrees that service of process upon such party mailed by first class mail to the
address  set forth in Section  8(f) shall be deemed in every  respect  effective
service  of  process  upon such  party in any such suit or  proceeding.  Nothing
herein  shall  affect the right of a Fund or  Mercator  to serve  process in any
other  manner  permitted  by  law.  Each  of the  parties  agrees  that a  final
non-appealable  judgment in any such suit or proceeding  shall be conclusive and
may be enforced in other  jurisdictions by suit on such judgment or in any other
lawful manner.

         (b)  Counterparts.  This  Agreement  may be  executed  in  two or  more
counterparts,  all of which shall be considered  one and the same  agreement and
shall  become  effective  when  counterparts  have been signed by each party and
delivered to the other party.  This Agreement,  once executed by a party, may be
delivered to the other  parties  hereto by facsimile  transmission  of a copy of
this Agreement  bearing the signature of the party so delivering this Agreement.
In the event any  signature is delivered  by facsimile  transmission,  the party
using such means of delivery shall cause the manually executed Execution Page(s)
hereof to be physically delivered to the other party within five (5) days of the
execution hereof.

         (c) Headings.  The headings of this  Agreement are for  convenience  of
reference  and shall not form part of, or affect  the  interpretation  of,  this
Agreement.

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

         (e)  Entire  Agreement;  Amendments;  Waiver.  This  Agreement  and the
instruments  referenced  herein contain the entire  understanding of the parties
with  respect  to  the  matters  covered  herein  and  therein  and,  except  as
specifically set forth herein or therein, neither the Company nor the Funds make
any  representation,  warranty,  covenant or  undertaking  with  respect to such
matters.  No provision of this  Agreement may be waived or amended other than by
an instrument in writing  signed by the Company and by the Funds.  Any waiver by
the Funds,  on the one hand,  or the Company,  on the other hand, of a breach of
any  provision  of this  Agreement  shall not operate as or be construed to be a
waiver  of any  other  breach of such  provision  of or any  breach of any other
provision of this  Agreement.  The failure of the Funds, on the one hand, or the
Company,  on the other hand to insist upon strict  adherence to any term of this
Agreement 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 Agreement.

                                       13
<PAGE>

         (f)  Notices.  Any notices  required or permitted to be given under the
terms of this  Agreement  shall be sent by certified or registered  mail (return
receipt  requested)  or  delivered  personally  or by  courier  or by  confirmed
telecopy,  and shall be effective  five days after being placed in the mail,  if
mailed,  or upon receipt or refusal of receipt,  if delivered  personally  or by
courier or confirmed telecopy,  in each case addressed to a party. The addresses
for such communications shall be:

If to the Company

         Tidlands Oil & Gas Corporation
         1862 West Bitters, Building #1
         San Antonio, Texas 78248
         Attention: President
         Telephone: (210) 764-8642
         Fax: 210-764-2809

With a copy to
         Greg Wilson
         18610 East 32nd Ave.
         Greenacres, Washington 99016
         Telephone: 509-891-8373
         Fax: _________________

If to a Fund or Mercator

Mercator Advisory Group, LLC
         555 South Flower Street
         Suite 4500
         Los Angeles, CA 90071
         Telephone No.: (213) 533-8288
         Facsimile No.: (213) 533-8285
         Attention: David Firestone

With a copy to

Sheppard Mullin Richter & Hampton LLP
         333 South Hope Street
         48th Floor
         Los Angeles, CA 90071-1448
         Telephone No.: (213) 620-1780
         Facsimile No.: (213) 620-1398
         Attention:  David C. Ulich

Each party hereto may from time to time change its address or  facsimile  number
for notices under this Section 8 by giving at least ten (10) days' prior written
notice of such changed address or facsimile  number, in the case of the Funds to
the Company, and in the case of the Company to all of the Funds and Mercator.

                                       14
<PAGE>

         (g)  Successors and Assigns.  This Agreement  shall be binding upon and
inure to the  benefit of the  parties  and their  successors  and  assigns.  The
Company shall not assign this Agreement or any rights or  obligations  hereunder
without the prior written consent of each of the Funds.

         (h) Third Party  Beneficiaries.  This  Agreement  is  intended  for the
benefit of the parties  hereto and their  respective  permitted  successors  and
assigns,  and is not for the benefit of nor may any provision hereof be enforced
by any other person.

         (i) Survival. The representations and warranties of the Company and the
agreements   and   covenants   of  the   Company   shall   survive  the  Closing
notwithstanding any due diligence investigation conducted by or on behalf of the
Funds and Mercator. Moreover, none of the representations and warranties made by
the  Company  herein  shall act as a waiver of any rights or  remedies a Fund or
Mercator may have under applicable federal or state securities laws. The Company
agrees to indemnify  and hold  harmless each Fund and Mercator and each of their
managers,  officers,  directors,   employees,   partners,  members,  agents  and
affiliates  for loss or damage  relating to the Securities  purchased  hereunder
arising as a result of or  related  to any  breach by the  Company or any of its
representations or covenants set forth herein, including advancement of expenses
as they are incurred.

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

         (k)  Termination.  In the event  that the  Closing  Date shall not have
occurred on or before  November 29, 2004,  unless the parties  agree  otherwise,
this  Agreement  shall  terminate  at  the  close  of  business  on  such  date.
Notwithstanding  any termination of this  Agreement,  any party not in breach of
this  Agreement  shall  preserve  all rights and  remedies  it may have  against
another party hereto for a breach of this Agreement  prior to or relating to the
termination hereof.

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

         (m) Equitable  Relief.  Each party  acknowledges that a breach by it of
its obligations  hereunder will cause  irreparable  harm to the other parties by
vitiating  the  intent  and  purpose of the  transactions  contemplated  hereby.
Accordingly,  each party acknowledges that the remedy at law for a breach of its
obligations hereunder will be inadequate and agrees, in the event of a breach or
threatened  breach by such party of the provisions of this  Agreement,  that the
other parties shall be entitled, in addition to all other available remedies, to
an  injunction  restraining  any breach and  requiring  immediate  issuance  and
transfer, without the necessity of showing economic loss and without any bond or
other security being required.

                                       15
<PAGE>

         (n) Determinations.  Except as otherwise expressly provided herein, all
consents, approvals and other determinations to be made by the Funds pursuant to
this  Agreement and all waivers and  amendments to or of any  provisions in this
Agreement  prior to the Closing  Date to be binding upon a Fund shall be made by
such Fund and except as  otherwise  expressly  provided  herein,  all  consents,
approvals  and other  determinations  (other  than  amendments  to the terms and
provisions of this Agreement) to be made by the Funds pursuant to this Agreement
and all waivers and amendments to or of any  provisions in this Agreement  after
the Closing Date shall be made by the Funds.

         (o) Costs and  Attorneys'  Fees.  If any  action at law or in equity is
necessary to enforce or interpret the terms of this Agreement,  the Registration
Rights  Agreement or any of the Debentures or Warrants,  the prevailing party or
parties shall be entitled to receive from the other party or parties  reasonable
attorneys'  fees,  costs and  necessary  disbursements  in addition to any other
relief to which the prevailing party or parties may be entitled.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       16
<PAGE>

         IN WITNESS  WHEREOF,  the parties have caused this Agreement to be duly
executed as of the date first above written.

Company:

Tidelands Oil & Gas Corporation

By:
Name:
Title:

The Funds:                                          Mercator:
Mercator Momentum Fund LP                        Momentum Advisory Group, LLC
Mercator Advisory Group, LLC,
General Partner:
By:                                              By:
   -----------------------------                    ----------------------------
Name:    David Firestone                         Name:    David Firestone
Title:   Managing Member                         Title:   Managing Member

Mercator Momentum Fund III                       Monarch Pointe Fund, Ltd.
Mercator Advisory Group, LLC,
General Partner:
By:                                              By:
   -----------------------------                    ----------------------------
Name:    David Firestone                         Name:   David Firestone
Title:   Managing Member                         Title:  President

                                       17
<PAGE>

                              DISCLOSURE SCHEDULESExhibit 10.2

                                    EXHIBIT A
                        to Securities Purchase Agreement
                        --------------------------------

                                                        Dated: November 18, 2004

NEITHER  THIS  DEBENTURE  NOR  THE  SECURITIES  INTO  WHICH  THIS  DEBENTURE  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.

No. 1                                                              $1,270,000.00

                         TIDELANDS OIL & GAS CORPORATION

                           7.0% CONVERTIBLE DEBENTURE
                                DUE May 18, 2006

THIS  DEBENTURE  is  issued  by  Tidelands  Oil  &  Gas  Corporation,  a  Nevada
Corporation (the "Company").  This Debenture is designated as the Company's 7.0%
Convertible  Debenture,  due May 18, 2006, in the aggregate  principal amount of
One  Million  Two  Hundred  Seventy   Thousand  Dollars   ($1,270,000.00)   (the
"Debenture").

FOR VALUE RECEIVED, the Company promises to pay to MERCATOR MOMENTUM FUND, L.P.,
a California limited partnership,  or its registered assigns (the "Holder"), the
principal sum of $1,270,000.00,  on or before May 18, 2006, or such earlier date
as the Debenture is required 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 at the rate of 7.0% per annum,
with interest accruing  commencing on the date hereof and payable monthly on the
first  Business  Day (as  defined  in  Section 5 below) of each  month  (each an
"Interest Payment Date").

         Interest  shall be  calculated on the basis of a 360-day year and shall
accrue daily  commencing  on the  Original  Issue Date (as defined in Section 5)
until payment in full of the principal sum, together with all accrued and unpaid
interest  and other  amounts,  which may  become due  hereunder,  has been made.
Interest hereunder will be paid to the Person (as defined in Section 5) in whose
name this  Debenture  is  registered  on the  records of the  Company  regarding
registration and transfers of Debentures (the "Debenture Register").

         This Debenture is subject to the following additional provisions:

                                       1
<PAGE>

         Section  1.  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.

         Section 2. This Debenture has been issued subject to certain investment
representations  of the original Holder set forth in the Purchase  Agreement (as
defined in Section 5) and may be  transferred  or exchanged  only in  compliance
with  the  Purchase  Agreement.  Prior to due  presentment  to the  Company  for
transfer of this  Debenture,  the Company and any agent of the Company may treat
the Person (as  defined  in  Section  5) 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 3. Events of Default.

         (a) An "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 the principal  of,  interest
on, or damages in respect of the Debenture,  free of any claim of subordination,
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 is not cured within
thirty (30) days after the date the payment became due and payable;

                  (ii) the  failure to file a  Registration  Statement  with the
Commission  within thirty (30) days of the Original Issue Date  registering  the
resale of the Underlying Shares;

                  (iii) the  failure to observe or perform  any other  covenant,
agreement  or  warranty  contained  in, or  otherwise  commit any breach of this
Debenture, the Purchase Agreement or the Registration Rights Agreement, and such
failure or breach shall not have been remedied within thirty (30) days after the
date on which notice of such failure or breach shall have been given;

                  (iv) any of the  following  which is not  dismissed  within 60
days,  the  Company  shall  commence,  or there shall be  commenced  against the
Company a case under any  applicable  bankruptcy  or  insolvency  laws as now or
hereafter in effect or any successor thereto, or the Company commences any other
proceeding under any reorganization,  arrangement, adjustment of debt, relief of
debtors,   dissolution,   insolvency  or  liquidation  or  similar  law  of  any
jurisdiction whether now or hereafter in effect relating to the Company or there
is commenced against the Company,  and any such bankruptcy,  insolvency or other
proceeding which remains  undismissed for a period of 60 days; or the Company is
adjudicated  insolvent  or  bankrupt;  or any  order of  relief  or other  order
approving  any such case or proceeding  is entered;  or the Company  suffers any
appointment of any custodian or the like for it or any  substantial  part of its
property which  continues  undischarged  or unstayed for a period of 60 days; or

                                       2
<PAGE>

the Company  makes a general  assignment  for the benefit of  creditors;  or the
Company  shall fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or the Company shall call
a meeting of its creditors with a view to arranging a composition, adjustment or
restructuring  of its debts;  or the Company  shall by any act or failure to act
expressly  indicate its consent to,  approval of or  acquiescence  in any of the
foregoing;  or any  corporate  or other  action is taken by the  Company for the
purpose of effecting any of the foregoing;

                  (v) the Common  Stock  shall cease to be quoted for trading or
listed  for  trading on the  National  Association  of  Securities  Dealers  OTC
Bulletin  Board  ("OTC") or Nasdaq  SmallCap  Market,  New York Stock  Exchange,
American  Stock  Exchange or the Nasdaq  National  Market  (each,  a "Subsequent
Market") and shall not again be quoted or listed for trading thereon within five
(5) Trading Days;

                  (vi) the Company  shall fail for any reason to deliver  Common
Stock certificates to a Holder prior to the fifth Trading Day after a Conversion
Date  pursuant to and in  accordance  with  Section  4(b) 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 the
Debenture in accordance with the terms hereof.  If the Company's  transfer agent
is not open for  business  during a Trading  Day,  such Trading Day shall not be
counted for purposes of determining  the number of days for delivery of a Common
Stock certificate;

                  (vii) the  Company  shall fail for any  reason to deliver  the
payment in cash  pursuant to a Buy-In (as defined  herein)  within ten  Business
Days after notice is deemed delivered hereunder;

                  (viii)  the  Company  shall  fail for any  reason to cause the
number of authorized but unissued  shares of its Common Stock to be increased to
an  amount  sufficient  to  enable  the  Company  to  comply  with  the  reserve
requirement of Section  4(c)(v) within a period of sixty (60) days following its
receipt of any Holder's  notice under  Section  4(c)(v) that such reserve is not
being satisfied if, at the time of the notice,  the number of authorized  shares
of the Company's Common Stock is insufficient for this purpose; or

                  (ix) the Company  shall fail to use its best  efforts to cause
the Commission to deem the Registration  Statement  effective within ninety (90)
days after the date on which it is filed with the Commission.

         (b) During the time that any portion of this Debenture is  outstanding,
if any Event of Default  pursuant to Section  3(a) occurs,  then the  Conversion
Price shall be reduced from 85% of the Market Price to 75% of the Market  Price,
but in no event higher that the Ceiling  Price or lower than the Floor Price (as
those terms are  defined in Section  4(c)(i) and 5 below).  In  addition,  if an
Event of Default under Section 3(a)(ii) occurs, the Company shall pay liquidated
damages  to Holder  equal to $3,333  for each day  during  which  such  Event of
Default remains uncured.  Any amounts to be paid as liquidated  damages shall be
paid in cash monthly in arrears on or before the 30th day  following  the end of
the month or partial month to which they relate.

         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

                                       3
<PAGE>

its rights and remedies  hereunder and all other remedies  available to it under
applicable law. Such  declaration may be rescinded and annulled by Holder at any
time prior to payment  hereunder.  No such  rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.

         Section 4. Conversion.

         (a) (i) Conversion at Option of Holder.

                  (A) 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, after the Original Issue Date (subject to the limitations on conversion
set forth in Section  4(a)(ii)  hereof).  The  number of shares of Common  Stock
issuable upon a conversion  hereunder  equals the quotient  obtained by dividing
(x) the  outstanding  principal  amount of this Debenture to be converted by (y)
the Conversion Price (as defined in Section 4(c)(i)).

                  (B) Reserved.

                  (C) The Holder  shall  effect  conversions  by  simultaneously
delivering  to the Company a  completed  notice in the form  attached  hereto as
Exhibit A (a "Conversion Notice"),  including a completed Conversion Schedule in
the form of Schedule I to the Conversion  Notice (on each  Conversion  Date, the
"Conversion  Schedule").  The Conversion  Schedule shall set forth the remaining
principal  amount of this Debenture and all accrued and unpaid interest  thereon
subsequent to the conversion at issue. The date on which a Conversion  Notice is
delivered is the  "Conversion  Date." Unless the Holder is converting the entire
principal amount outstanding under this Debenture, the Holder is not required to
physically   surrender  this  Debenture  to  the  Company  in  order  to  effect
conversions.  Subject to Section 4(b), each Conversion Notice, once given, shall
be  irrevocable.  Conversions  hereunder  shall have the effect of lowering  the
outstanding  principal  amount of this  Debenture  plus all  accrued  and unpaid
interest thereon in an amount equal to the applicable conversion, which shall be
evidenced by entries set forth in the  Conversion  Schedule.  The Holder and the
Company shall maintain  records showing the principal  amount  converted and the
date of such  conversions.  In the  event of any  dispute  or  discrepancy,  the
records of the Holder shall be controlling and  determinative  in the absence of
manifest error.

                  (ii) Certain Conversion Restrictions.

                           (A) A Holder may not convert the Debenture or receive
shares of Common  Stock as  payment of  interest  hereunder  to the extent  such
conversion  or receipt of such  interest  payment  would  result in the  Holder,
together  with any  affiliate  thereof,  beneficially  owning (as  determined in
accordance  with Section  13(d) of the  Exchange  Act and the rules  promulgated
thereunder)  in excess of 9.999% of the then  issued and  outstanding  shares of
Common  Stock,  including  shares  issuable upon  conversion  of, and payment of
interest  on,  the  Debenture  held by such  Holder  after  application  of this
Section.  Since the Holder  will not be  obligated  to report to the Company the
number  of  shares  of  Common  Stock it may  hold at the  time of a  conversion
hereunder, unless the conversion at issue would result in the issuance of shares
of Common  Stock in excess  of 9.999% of the then  outstanding  shares of Common
Stock without regard to any other shares which may be beneficially  owned by the

                                       4
<PAGE>

Holder  or an  affiliate  thereof,  the  Holder  shall  have the  authority  and
obligation to determine  whether the restriction  contained in this Section will
limit any  particular  conversion  hereunder  and to the extent  that the Holder
determines  that  the  limitation   contained  in  this  Section  applies,   the
determination  of which  portion of the  principal  amount of the  Debenture  is
convertible  shall be the  responsibility  and obligation of the Holder.  If the
Holder has delivered a Conversion Notice for a principal amount of the Debenture
that,  without  regard to any other shares that the Holder or its affiliates may
beneficially own, would result in the issuance in excess of the permitted amount
hereunder,  the Company shall notify the Holder of this fact and shall honor the
conversion for the maximum  principal  amount  permitted to be converted on such
Conversion Date in accordance with the periods described in Section 4(b) and, at
the option of the  Holder,  either  retain any  principal  amount  tendered  for
conversion in excess of the permitted amount hereunder for future conversions or
return  such  excess  principal  amount to the Holder.  The  provisions  of this
Section  may be waived by a Holder  (but only as to itself  and not to any other
Holder) upon not less than 65 days prior notice to the  Company.  Other  Holders
shall be unaffected by any such waiver.

         (b) (i) Reserved.

                  (ii)  Nothing  herein  shall limit a Holder's  right to pursue
actual  damages or declare an Event of Default  pursuant to Section 3 herein for
the  Company's  failure to deliver  certificates  representing  shares of Common
Stock upon conversion  within the period  specified herein and such Holder shall
have the right to pursue all  remedies  available  to it at law. 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.  Further,  if the
Company  shall not have  delivered  any cash due in respect of conversion of the
Debenture or as payment of interest thereon by the fifth (5th) Trading Day after
the  Conversion  Date,  the Holder  may, by notice to the  Company,  require the
Company to issue shares of Common Stock  pursuant to Section  4(c),  except that
for such purpose the Conversion Price applicable  thereto shall be the lesser of
the Conversion Price on the Conversion Date and the Conversion Price on the date
of such Holder demand. Any such shares will be subject to the provisions of this
Section.

                  (iii) In addition to any other rights available to the Holder,
if the Company fails to deliver to the Holder any  certificate  or  certificates
representing  shares of Common Stock upon conversion within the period specified
herein by the fifth (5th) Trading Day after the  Conversion  Date,  and if after
such fifth (5th) Trading Day the Holder purchases (in an open market transaction
or otherwise)  Common Stock to deliver in  satisfaction of a sale by such Holder
of the  Underlying  Shares  which the  Holder  anticipated  receiving  upon such
conversion  (a  "Buy-In"),  then the Company shall (A) pay in cash to the Holder
(in addition to any  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 market price of the
Common Stock at the time of the sale giving rise to such purchase obligation and
(B) at the option of the Holder,  either  reissue a Debenture  in the  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.  If the Company's
transfer  agent is not open for business  during a Trading Day, such Trading Day
shall not be counted for purposes of determining the number of days for delivery
of a Common Stock certificate. For example, if the Holder purchases Common Stock

                                       5
<PAGE>

having a total  purchase  price of $11,000 to cover a Buy-In with  respect to an
attempted conversion of Debentures with respect to which the market price of the
Underlying  Shares on the date of conversion 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.
Notwithstanding  anything contained herein to the contrary, if a Holder requires
the  Company to make  payment  in respect of a Buy-In for the  failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company  shall not be required to pay such Holder any damages  under Section
4(b)(ii) in respect of the  certificates  resulting  in such Buy-In  which would
represent  a double  recovery  for harm for which the  payments  made under this
Section 4(b)(iii) compensated the Holder .

         (c) (i) The  "Conversion  Price" shall be equal to Eighty-Five  Percent
(85%) of the  Market  Price (as  defined  in Section 5 below) on the date of any
Conversion  Notice,  rounded to the  nearest  penny,  subject to  adjustment  as
described herein;  provided,  however, the Conversion Price shall in no event be
higher than $0.76 (the "Ceiling  Price") nor shall such Conversion Price be less
than $0.45 per share (the  "Floor  Price").  In the event that the  Registration
Statement has not been deemed  effective by the SEC within 90 days after filing,
then the  Conversion  Price shall be reduced from 85% of the Market Price to 75%
of the Market Price, but in no event higher that the Ceiling Price or lower than
the Floor Price.

                  (ii) If the  Company,  at any  time  while  the  Debenture  is
outstanding  shall (a) pay a stock dividend or otherwise make a distribution  or
distributions  on  shares  of its  Common  Stock or any  other  equity or equity
equivalent   securities  payable  in  shares  of  Common  Stock,  (b)  subdivide
outstanding  shares of Common Stock into a larger number of shares,  (c) combine
(including  by way of reverse  stock split)  outstanding  shares of Common Stock
into a smaller number of shares, or (d) issue 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
before such event and of which the denominator  shall be the number of shares of
Common Stock  outstanding 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.

                  (iii) If the  Company,  at any time  while  the  Debenture  is
outstanding,  shall  distribute  to all holders of Common  Stock (and not to the
Holder)  evidences  of its  indebtedness  or assets or  rights  or  warrants  to
subscribe  for or purchase any security,  then in each such case the  Conversion
Price at which the Debenture shall thereafter be convertible shall be determined
by multiplying the 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 Per Share
Market Value  determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value 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

                                       6
<PAGE>

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.

                  (iv) In case of any  reclassification  of the Common  Stock or
any compulsory  share  exchange  pursuant to which the Common Stock is converted
into  other  securities,  cash or  property,  the  Holder  shall  have the right
thereafter to convert the then outstanding  principal amount,  together with all
accrued  but unpaid  interest  and any other  amounts  then owing  hereunder  in
respect of this  Debenture  only into the shares of stock and other  securities,
cash and property  receivable upon or deemed to be held by holders of the Common
Stock following such  reclassification or share exchange,  and the Holder of the
Debenture  shall  be  entitled  upon  such  event  to  receive  such  amount  of
securities,  cash or property  as the shares of the Common  Stock of the Company
into which the then outstanding principal amount,  together with all accrued but
unpaid  interest and any other  amounts then owing  hereunder in respect of this
Debenture could have been converted  immediately prior to such  reclassification
or share exchange would have been entitled.

                  (v) The  Company  shall  maintain a share  reserve of not less
than  105% of the  shares  of  Common  Stock  issuable  upon  conversion  of the
Debenture;  and within  five (5)  Business  Days  following  the  receipt by the
Company of a Holder's  notice that such minimum  number of Underlying  Shares is
not so  reserved,  the  Company  shall if there are  sufficient  authorized  but
unissued shares promptly  reserve a sufficient  number of shares of Common Stock
to comply with such  requirement.  If there are not  sufficient  authorized  but
unissued  shares,  the  Company  shall  use its best  efforts  to call a special
shareholders'  meeting  within  sixty (60) days of such notice to  increase  the
number of authorized shares of Common Stock.

                  (vi) All  calculations  under this  Section 4 shall be made to
the nearest ten thousandth.  No adjustments in either the Conversion Price shall
be required if such adjustment is less than $0.0001, provided, however, that any
adjustments which by reason of this Section are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.

                  (vii)  Whenever the Conversion  Price is adjusted  pursuant to
this  Section  4(c),  the  Company  shall  promptly  mail to the Holder a notice
setting forth the  Conversion  Price after such  adjustment  and setting forth a
brief statement of the facts requiring such adjustment.

                  (viii) If (A) the  Company  shall  declare a dividend  (or any
other distribution) 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

                                       7
<PAGE>

or agency  maintained for the purpose of conversion of the Debenture,  and shall
cause to be mailed to the Holder at its last address as it shall appear upon the
stock  books of the  Company,  at  least  ten (10)  calendar  days  prior to the
applicable 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 the Debenture  during the ten
(10) day calendar  period  commencing  the date of such notice to the  effective
date of the event triggering such notice.

                  (ix) In case of any (1) merger or consolidation of the Company
with or into another  Person,  or (2) sale by the Company of more than  one-half
(1/2) of its assets in one or a series of related  transactions,  a Holder shall
have the right to (A) convert the  aggregate  principal  amount of the Debenture
then  outstanding  into the  shares  of stock  and  other  securities,  cash and
property  receivable  upon or  deemed  to be held by  holders  of  Common  Stock
following such merger,  consolidation or sale, and such Holder shall be entitled
upon  such  event or  series  of  related  events  to  receive  such  amount  of
securities,  cash and  property  as the  shares of Common  Stock into which such
aggregate   principal   amount  of  the  Debenture  could  have  been  converted
immediately  prior to such  merger,  consolidation  or  sales  would  have  been
entitled, or (B) in the case of a merger or consolidation, require the surviving
entity to issue to the Holder a convertible  debenture  with a principal  amount
equal to the  aggregate  principal  amount  of the  Debenture  then held by such
Holder,  plus all accrued and unpaid  interest and other amounts owing  thereon,
which such  newly  issued  convertible  debenture  shall  have  terms  identical
(including with respect to conversion) to the terms of this Debenture, and shall
be entitled to all of the rights and  privileges  of the Holder of the Debenture
set forth  herein  and the  agreements  pursuant  to which the  Debentures  were
issued. In the case of clause (B), the conversion price applicable for the newly
issued shares of convertible preferred stock or convertible  debentures shall be
based upon the amount of securities, cash and property that each share of Common
Stock  would  receive in such  transaction  and the  Conversion  Price in effect
immediately prior to the effectiveness or closing date for such transaction. The
terms of any such merger,  sale or consolidation  shall include such terms so as
to  continue to give the Holder the right to receive  the  securities,  cash and
property set forth in this Section upon any  conversion or redemption  following
such event. This provision shall similarly apply to successive such events.

         (d) 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 the Debenture and payment of interest
on the Debenture,  each as herein provided,  free from preemptive  rights or any
other actual  contingent  purchase rights of persons other than the Holder,  not
less than such  number of shares of the Common  Stock as shall  (subject  to any
additional  requirements  of the  Company as to  reservation  of such shares set

                                       8
<PAGE>

forth in the  Debenture) be issuable  (taking into account the  adjustments  and
restrictions of Section 4(b)) upon the conversion of the  outstanding  principal
amount of the Debenture and payment of interest hereunder. The Company covenants
that all shares of Common Stock that shall be so issuable shall,  upon issue, be
duly and validly  authorized,  issued and fully paid,  nonassessable and, if the
Registration  Statement has been declared  effective  under the Securities  Act,
registered for public sale in accordance with such Registration Statement.

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

         (f) The  issuance  of  certificates  for shares of the Common  Stock on
conversion of the Debenture  shall be made without  charge to the Holder thereof
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 such  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.

         (g) Any and all notices or other  communications  or  deliveries  to be
provided by the Holder hereunder,  including, without limitation, any Conversion
Notice, shall be in writing and delivered  personally,  by facsimile,  sent by a
nationally  recognized  overnight  courier  service  or  sent  by  certified  or
registered mail, postage prepaid, addressed to the Company, at 1862 West Bitters
Rd., San Antonio, TX 78410, Attention:  President, Facsimile No. 210-764-2809 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 the
Company  hereunder shall be in writing and delivered  personally,  by facsimile,
sent by a nationally  recognized  overnight courier service or sent by certified
or registered mail,  postage prepaid,  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, and, in the case of each Holder, with
a copy to Sheppard  Mullin Richter & Hampton,  LLP, 333 South Hope Street,  48th
Floor, Los Angeles, CA 90071-1448, Attention David C. Ulich, Facsimile No. (213)
620-1398.  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 5:00 p.m. (the recipient's
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 5:00 p.m.  (the  recipient's  time) on any
date and earlier than 11:59 p.m. (the recipient's time) on such date, (iii) four
(4) days  after  deposit  in the  United  States  mail,  (iv) the  Business  Day
following  the  date of  mailing,  if sent by  nationally  recognized  overnight
courier service,  or (v) upon actual receipt by the party to whom such notice is
required to be given.

                                       9
<PAGE>

         Section 5.  Definitions.  For the purposes hereof,  the following terms
shall have the following meanings:

         "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  are  authorized or required by law or other  government  action to
close.

         "Commission" means the Securities and Exchange Commission.

         "Common Stock" means the common stock,  $0.001 par value per share,  of
the Company and stock of any other class into which such shares may hereafter be
changed or reclassified.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Market  Price" on any given  date  shall be the  average of the lowest
four intra-day  trading prices of the Company's Common Stock during the ten (10)
immediately  preceding trading days (which may include trading days prior to the
Original  Issue  Date),  provided,  that such 10  trading  day  period  shall be
extended  by the number of trading  days during such period on which (i) trading
in the Common Stock is  suspended  by, or not traded on, the OTC or a subsequent
market on which  the  common  stock is then  traded,  or (ii)  after the date of
Registration Statement for the underlying shares of Common Stock into which this
Debenture  may be  converted is declared  effective  by the SEC, the  prospectus
included in the Registration  Statement may not be used by the Holder for resale
of underlying shares of Common Stock, is suspended by, or not traded on, the OTC
or a subsequent  market on which the Common Stock is then listed, or (iii) after
the date the  Registration  Statement  is  declared  effective  by the SEC,  the
prospectus included in the Registration  Statement for the underlying shares may
not be used by the Holder for the resale of  underlying  shares of Common  Stock
(provided  such  inability to use the prospectus is not (a) caused by the Holder
or (b) as a result of the Company's filing of  post-effective  amendments to the
Registration Statement.

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

         "Per Share Market Value" means the price per share in the last reported
trade of the  Common  Stock on the OTC or on a  Subsequent  on which the  Common
Stock is then listed.

         "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 that Securities Purchase  Agreement,  dated
November 18, 2004 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  Original  Issue Date,  to which the Company and the
original Holder are parties,  as amended,  modified or supplemented from time to
time in accordance with its terms.

                                       10
<PAGE>

         "Registration  Statement" means the registration  statement to be filed
by the Company with the SEC pursuant to the Registration Rights Agreement.

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

         "Trading  Day"  means a day on which the  shares  of  Common  Stock are
quoted on the OTC or quoted  or  traded on such  Subsequent  Market on which the
shares of Common  Stock are then quoted or listed;  provided,  that in the event
that the shares of Common Stock are not listed or quoted, then Trading Day shall
mean a Business Day.

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

         Section 6. Except as expressly  provided  herein,  no provision of this
Debenture  shall  alter or impair  the  obligations  of the  Company,  which are
absolute  and  unconditional,  to pay the  principal  of, and  interest on, this
Debenture at the time,  place,  and rate,  and in the coin or  currency,  herein
prescribed. This Debenture is a direct obligation of the Company. This Debenture
ranks pari passu with all other  Debentures  now or  hereafter  issued under the
terms set forth  herein.  As long as the Debenture is  outstanding,  the Company
shall not and shall cause their  subsidiaries not to, without the consent of the
Holder,  (i) amend  its  articles  of  incorporation,  bylaws  or other  charter
documents  so as to  adversely  affect any  rights of the  Holder;  (ii)  repay,
repurchase  or offer to repay,  repurchase  or otherwise  acquire  shares of its
Common Stock or other equity securities;  or (iii) enter into any agreement with
respect to any of the foregoing.

         Section 7. This  Debenture  shall not  entitle the Holder to any of the
rights of a stockholder of the Company,  including without limitation, the right
to vote, to receive dividends and other distributions,  or to receive any notice
of, or to attend,  meetings  of  stockholders  or any other  proceedings  of the
Company,  unless  and to the extent  converted  into  shares of Common  Stock in
accordance with the terms hereof.

         Section 8. If this Debenture is mutilated,  lost,  stolen or destroyed,
the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of the mutilated Debenture,  or in lieu of or in substitution for a
lost, stolen or destroyed debenture, a new Debenture for the 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, and indemnity,  if requested,  all reasonably  satisfactory to
the Company.

         Section  9.  This  Debenture  shall be  governed  by and  construed  in
accordance  with the laws of the State of  California,  without giving effect to
conflicts of laws thereof.  The Company and the Holder hereby irrevocably submit
to the exclusive  jurisdiction  of the state and federal  courts  sitting in the
City of Los  Angeles,  for  the  adjudication  of any  dispute  hereunder  or in
connection  herewith or with any  transaction  contemplated  hereby or discussed
herein,  and  hereby  irrevocably  waive,  and  agree not to assert in any suit,
action  or  proceeding,  any  claim  that it is not  personally  subject  to the
jurisdiction  of any such  court,  or that such suit,  action or  proceeding  is
improper.  The Company hereby irrevocably waives personal service of process and
consents  to process  being  served in any such suit,  action or  proceeding  by
sending a copy  thereof to the  Company at the  address in effect for notices to

                                       11
<PAGE>

them under this  instrument  and the  Company  agrees  that such  service  shall
constitute good and sufficient  service of process and notice  thereof.  Nothing
contained  herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party  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  Agreement  or  the
transactions  contemplated  hereby.  If either party shall commence an action or
proceeding to enforce any provisions of this Debenture,  the Purchase  Agreement
or the Registration  Rights Agreement,  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.

         Section  10. 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.

         Section 11. 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  shall violate
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 they 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 the  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.

         Section 12. 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.

         Section  13.  Company may not assign  this  Agreement  or any rights or
obligations  hereunder  without the prior written consent of Holder.  Holder may
assign  this  Agreement,  in whole or in party,  and any  rights  or  obligation
hereunder  without the prior  written  consent of Company by delivery of written
notice to Company of such assignment.

                                       12
<PAGE>

         IN  WITNESS  WHEREOF,   each  of  the  Company  has  caused  this  7.0%
Convertible Debenture to be duly executed by a duly authorized officer as of the
date first above indicated.

TIDELANDS OIL & GAS CORPORATION

By:____________________________
Name:__________________________
Title:_________________________

                                       13
<PAGE>

                                    EXHIBIT A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert the Debenture)

The undersigned  hereby elects to convert the attached  Debenture into shares of
common stock, $0.0001 par value per share (the "Common Stock"), of Tidelands Oil
& Gas Corporation. (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.

Conversion calculations:          ______________________________________________
                                  Date to Effect Conversion

                                  ______________________________________________
                                  Principal Amount of Debentures to be Converted

                                  $__________             of Interest Accrued on
                                                          Account of Conversion
                                                          at Issue

                                  Payment of Interest in Kind            |_| Yes
                                                                         |_| No

                                     If yes, $ _______  of Interest Accrued on
                                                        Account of Conversion at
                                                        Issue

                                  ______________________________________________
                                  Number of shares of Common Stock to be Issued

                                  ______________________________________________
                                  Applicable Conversion Price

                                  ______________________________________________
                                  Signature

                                  ______________________________________________
                                  Name

                                  ______________________________________________
                                  Address

                                       14
<PAGE>

                                   Schedule 1

                               CONVERSION SCHEDULE
                               -------------------

7.0% Convertible  Debenture due May ___, 2006, in the aggregate principal amount
of $______________ issued by _________________________. This Conversion Schedule
reflects  conversions  made  under  Section  4(a)(i)  of  the  above  referenced
Debenture.

                                     Dated:

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

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                                       15

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