UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   Form 10-QSB



(Mark one)

[X]      Quarterly  Report Under Section 13 or 15(d) of The Securities  Exchange
         Act of 1934

                  For the quarterly period ending June 30, 2005

[_]      Transition Report Under Section 13 or 15(d) of The Securities  Exchange
         Act of 1934

         For the transition period from ______________ to _____________



                         Commission File Number: 0-29613

                         TIDELANDS OIL & GAS CORPORATION
        (Exact name of small business issuer as specified in its charter)

          Nevada                                                66-0549380
------------------------                                ------------------------
(State of incorporation)                                (IRS Employer ID Number)

                  1862 West Bitters Rd., San Antonio, TX 78248
                  --------------------------------------------
                    (Address of principal executive offices)

                                 (210) 764-8642
                                 --------------
                           (Issuer's telephone number)



      Securities registered under Section 12 (b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:
                         Common Stock - $0.001 par value



Check  whether  the issuer  has (1) filed all  reports  required  to be files by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period the Company was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X  No
                                                             ---   ---

APPLICABLE  ONLY TO  ISSUERS  INVOLVED  IN  BANKRUPTCY  PROCEEDINGS  DURING  THE
PRECEDING  FIVE YEARS  Check  whether the  registrant  filed all  documents  and
reports  required  to be filed by Section  12, 13 or 15(d) of the  Exchange  Act
after the distribution of securities  under a plan confirmed by a court.
Yes    No
   ---   ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS

As of June 30,  2005,  there were  74,279,148  shares of Common Stock issued and
outstanding.

Transitional Small Business Disclosure Format : Yes    No X
                                                   ---   ---

<PAGE>


                         TIDELANDS OIL & GAS CORPORATION
                                   FORM 10-QSB


                                      INDEX
                                      -----

                                                                            Page
PART I - Financial Information

Item 1 - Financial Statements
         Condensed Consolidated Balance Sheets as of
         June 30, 2005 and December 31, 2004.............................      3

         Condensed Consolidated Statements of Operations
         For the Three Months Ended June 30, 2005 and 2004...............      4

         Condensed Consolidated Statements of Operations
         For the Six Months Ended June 30, 2005 and 2004.................      5


         Condensed Consolidated Statements of Cash Flows
         For the Six Months Ended June 30, 2005 and 2004.................    6-7

         Notes to Condensed Consolidated Financial Statements............   8-14

Item 2 - Management's Discussion and Analysis or Plan of Operation.......  15-19

Item 3 - Controls and Procedures.........................................  19-20

PART II - Other Information

Item 1 - Legal Proceedings...............................................  20-24

Item 2 - Changes in Securities and Use of Proceeds.......................     24

Item 3 - Defaults Upon Senior Securities.................................     24

Item 4 - Submission of Matters to a Vote of Security Holdings............     25

Item 5 - Other Information...............................................     25

Item 6 - Exhibits and Reports on Form 8K ................................     25

Signature................................................................     25





                                       -2-


<PAGE>
<TABLE>
<CAPTION>

                         PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

                         TIDELANDS OIL & GAS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                    (ASSETS)
                                    --------
                                                        June 30,      December 31,
                                                          2005            2004
                                                      ------------    ------------
                                                       (Unaudited)
<S>                                                   <C>             <C>
Current Assets:
   Cash                                               $  3,468,839    $  5,459,054
   Cash Restricted                                          75,846          25,000
   Accounts and Loans Receivable                           309,323         516,387
   Inventory                                                75,573          82,523
   Prepaid Expenses                                        302,531         487,488
                                                      ------------    ------------
         Total Current Assets                            4,232,112       6,570,452
                                                      ------------    ------------

Property Plant and Equipment, Net                        9,630,591       9,086,313
                                                      ------------    ------------

Other Assets:
   Deposits                                                  6,608           4,108
   Deferred Charges                                              0         116,250
   Note Receivable                                         286,114         286,606
   Goodwill                                              1,158,937       1,158,937
                                                      ------------    ------------
      Total Other Assets                                 1,451,659       1,565,901
                                                      ------------    ------------
         Total Assets                                 $ 15,314,362    $ 17,222,666
                                                      ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

Current Liabilities:
   Accounts Payable and Accrued Expenses              $    656,302    $    574,224
   Convertible Debentures Payable                        2,480,000               0
                                                      ------------    ------------

      Total Current Liabilities                          3,136,302         574,224

Long-Term Debt                                           4,368,490      11,731,883
                                                      ------------    ------------

      Total Liabilities                                  7,504,792      12,306,107
                                                      ------------    ------------

Commitments and Contingencies                                 --              --

Stockholders' Equity:
   Common Stock, $.001 Par Value Per Share,
     100,000,000 Shares Authorized, 74,279,148
     and 61,603,359 Shares Issued and
     Outstanding at June 30, 2005
     and December 31, 2004 Respectively                     74,281          61,604
   Paid-in Capital in Excess of Par Value               28,655,789      22,537,340
   Subscriptions Receivable                               (550,000)       (550,000)
   Accumulated (Deficit)                               (20,370,500)    (17,132,385)
                                                      ------------    ------------
      Total Stockholders' Equity                         7,809,570       4,916,559
                                                      ------------    ------------

      Total Liabilities and Stockholders' Equity      $ 15,314,362    $ 17,222,666
                                                      ============    ============
</TABLE>



      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -3-


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)




                                     Three Months Ended       Three Months Ended
                                        June 30, 2005            June 30, 2004
                                        -------------            -------------
Revenues:
   Gas Sales and Pipeline Fees          $     262,541            $     507,712
   Construction Services                       77,995                        0
                                        -------------            -------------
      Total Revenues                          340,536                  507,712
                                        -------------            -------------

Expenses:
   Cost of Sales                              130,569                  497,820
   Operating Expenses                          62,363                    2,616
   Depreciation                               120,954                   36,638
   Interest                                   184,073                   43,718
   Sales, General and Administrative        1,877,659                2,184,169
                                        -------------            -------------
      Total Expenses                        2,375,618                2,764,961
                                        -------------            -------------

(Loss) From Operations                     (2,035,082)              (2,257,249)
(Loss) on Sale of Asset                             0                        0
Interest and Dividend Income                   33,659                    7,206
                                        -------------            -------------

Net (Loss)                              $  (2,001,423)           $  (2,250,043)
                                        =============            =============

Net (Loss) Per Common Share:
   Basic and Diluted                    $       (0.03)           $       (0.05)
   -----------------                    =============            =============

Weighted Average Number of Common
   Shares Outstanding                      68,321,251               49,701,986
                                        =============            =============









      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -4-


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)




                                           Six Months Ended     Six Months Ended
                                             June 30, 2005        June 30, 2004
                                             -------------        -------------
Revenues:
   Gas Sales and Pipeline Fees               $     849,490        $     507,712
   Construction Services                           119,121                    0
                                             -------------        -------------
      Total Revenues                               968,611              507,712
                                             -------------        -------------

Expenses:
   Cost of Sales                                   415,248              497,820
   Operating Expenses                              129,137                2,616
   Depreciation                                    236,395               47,918
   Interest                                        393,860               48,437
   Sales, General and Administrative             3,098,570            3,706,378
                                             -------------        -------------
      Total Expenses                             4,273,210            4,303,169
                                             -------------        -------------

(Loss) From Operations                          (3,304,599)          (3,795,457)
(Loss) on Sale of Asset                             (3,167)                   0
Interest and Dividend Income                        69,651               11,073
                                             -------------        -------------

Net (Loss)                                   $  (3,238,115)       $  (3,784,384)
                                             =============        =============

Net (Loss) Per Common Share:
   Basic and Diluted                         $       (0.05)       $       (0.08)
   -----------------                         =============        =============

Weighted Average Number of Common
       Shares Outstanding                       67,941,251           47,676,976
                                             =============        =============









      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -5-


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                 STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
                                   (UNAUDITED)




                                             Six Months Ended   Six Months Ended
                                               June 30, 2005      June 30, 2004
                                               -------------      -------------


Cash Flows Provided (Required) By
  Operating Activities:
    Net (Loss)                                 $  (3,238,115)     $  (3,784,384)
    Adjustments to Reconcile Net (Loss)
      to Net Cash Provided (Required) By
      Operating Activities:

    Depreciation                                     236,395             47,918
    Loss on Disposal of Equipment                      3,167                  0
    Issuance of Common Stock:
      For Services Provided                        1,098,625          3,005,816
        Changes in:
         Accounts Receivable                         207,064           (540,528)
         Inventory                                     6,950                  0
         Prepaid Expenses                            184,957           (328,404)
         Deferred Charges                            116,250                  0
         Deposits                                     (2,500)              (308)
         Accounts Payable and
          Accrued Expenses                            82,078            (33,274)
                                               -------------      -------------
Net Cash (Required)
   By Operating Activities                        (1,305,129)        (1,633,164)
                                               -------------      -------------

Cash Flows Provided (Required)
  By Investing Activities:
     Increase in Investments                               0           (575,363)
     Acquisitions of Property, Plant
       and Equipment                                (784,640)        (6,347,501)
     Disposals of Equipment                              800                  0
                                               -------------      -------------

      Net Cash (Required)
        By Investing Activities                     (783,840)        (6,922,864)
                                               -------------      -------------











      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -6-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                 STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
                                   (CONTINUED)

                                   (UNAUDITED)



                                             Six Months Ended   Six Months Ended
                                               June 30, 2005      June 30, 2004
                                               -------------      -------------


Cash Flows Provided (Required)
   by Financing Activities:
Proceeds from Issuance of Common Stock                     0          4,088,317
Proceeds From Long-Term Loans                        149,108          6,523,773
Repayment of Short-Term Loans                              0           (100,000)
Repayment of Loan by Related Party                       492                  0
                                               -------------      -------------

Net Cash Provided by
  Financing Activities                               149,600         10,512,090
                                               -------------      -------------

Net Increase (Decrease) in Cash                   (1,939,369)         1,956,062
Cash at Beginning of Period                        5,484,054            894,457
                                               -------------      -------------
Cash at End of Period                          $   3,544,685      $   2,850,519
                                               =============      =============

Supplemental Disclosures of
   Cash Flow Information:
     Cash Payments for Interest                $     266,938      $      14,123
                                               =============      =============

     Cash Payments for Income Taxes            $           0      $           0
                                               =============      =============

Non-Cash Financing Activities:
   Issuance of Common Stock:
   Operating Activities                        $   1,098,625      $   3,005,816
   Repayment of Note                               2,512,500             75,000
   Repayment of Convertible Debentures             2,520,000                  0
   Payment of Accounts Payable                             0             38,311
                                               -------------      -------------

     Total Non-Cash Financing Activities       $   6,131,125      $   3,119,127
                                               =============      =============





      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -7-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005



NOTE 1 - BASIS OF PRESENTATION
------   ---------------------

         The accompanying  unaudited condensed consolidated financial statements
         for the six  month  periods  ended  June 30,  2005 and 2004  have  been
         prepared in conformity with accounting principles generally accepted in
         the United States of America for interim financial information and with
         the  instructions  to Form 10-QSB and  Regulation  S-B.  The  financial
         information  as of December 31, 2004 is derived  from the  registrant's
         Form 10-KSB for the year ended December 31, 2004.  Certain  information
         or  footnote  disclosures  normally  included in  financial  statements
         prepared in accordance with accounting principles generally accepted in
         the United States of America have been condensed or omitted pursuant to
         the rules and regulations of the Securities and Exchange Commission.

         The  preparation  of condensed  consolidated  financial  statements  in
         conformity with accounting  principles generally accepted in the United
         States of America requires management to make estimates and assumptions
         that affect the reported  amounts of assets and liabilities at the date
         of the financial  statements  and the reported  amounts of revenues and
         expenses during the reporting period.  Actual results could differ from
         those  estimates.  In  the  opinion  of  management,  the  accompanying
         financial statements include all adjustments  necessary (which are of a
         normal and recurring  nature) for the fair  presentation of the results
         of the interim periods  presented.  While the registrant  believes that
         the  disclosures  presented are adequate to keep the  information  from
         being  misleading,  it is suggested that these  accompanying  financial
         statements  be  read  in  conjunction  with  the  registrant's  audited
         consolidated financial statements and notes for the year ended December
         31, 2004,  included in the registrant's  Form 10-KSB for the year ended
         December 31, 2004.

         Operating  results for the six-month period ended June 30, 2005 are not
         necessarily  indicative  of the results  that may be  expected  for the
         remainder of the fiscal year ending December 31, 2005. The accompanying
         unaudited  condensed  consolidated  financial  statements  include  the
         accounts of the registrant,  its wholly-owned  subsidiaries,  Rio Bravo
         Energy,  LLC, Sonora Pipeline,  LLC,  Arrecefe  Management,  LLC, Marea
         Associates,  L.P., Reef Ventures,  L.P., Reef International,  LLC, Reef
         Marketing,  LLC,  and  Terranova  Energia  S. de R.  L.  de C.  V.  All
         significant   inter-company   accounts  and   transactions   have  been
         eliminated in consolidation.









                                       -8-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005

NOTE 2 - LONG-TERM DEBT
------   --------------

         A summary of  long-term  debt at June 30, 2005 and December 31, 2004 is
         as follows:

                                                       June 30,     December 31,
                                                         2005           2004
                                                     ------------   ------------
         Note Payable, Secured, Interest Bearing
           at 2% Over Prime Rate, Maturing
              May 25, 2008                           $  4,368,490   $  6,731,883

         Convertible Debentures, Unsecured,
            7% Interest Bearing,
               Maturing May 17, 2006                    2,480,000      5,000,000
                                                     ------------   ------------
                                                        6,848,490     11,731,883

         Less:  Current Maturities                      2,480,000              0
                                                     ------------   ------------

                   Total Long-Term Debt              $  4,368,490   $ 11,731,883
                                                     ============   ============

NOTE 3 - LITIGATION
------   ----------

         On January 6, 2003,  we were  served as a third  party  defendant  in a
         lawsuit titled  Northern  Natural Gas Company vs. Betty Lou Sheerin vs.
         Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the
         150th  Judicial  District  Court,  Bexar  county,  Texas,  Cause Number
         2002-C1-16421.  The lawsuit was initiated by Northern  Natural Gas when
         it sued Betty Lou Sheerin  for her  failure to make  payments on a note
         she executed  payable to Northern in the original  principal  amount of
         $1,950,000.  Northern's  suit was filed on November 13,  2002.  Sheerin
         answered  Northern's  lawsuit  on January  6,  2003.  Sheerin's  answer
         generally denied Northern's claims and raised the affirmative  defenses
         of fraudulent inducement by Northern,  estoppel, waiver and the further
         claim that the note does not comport with the legal  requirements  of a
         negotiable instrument. Sheerin seeks a judicial ruling that Northern be
         denied  any  recovery  on  the  note.   Sheerin's   answer  included  a
         counterclaim  against  Northern,  ZG  Gathering,  and Ken Lay generally
         alleging, among other things, that Northern, ZG Gathering, Ltd. and Ken
         Lay, fraudulently induced her execution of the note. Northern has filed
         a general denial of Sheerin's counterclaims.  Sheerin's answer included
         a third party cross claim against Tidelands. She alleges that Tidelands
         entered into an agreement to purchase the Zavala  Gathering System from
         ZG  Gathering  Ltd.  and that,  as a part of the  agreement,  Tidelands
         agreed to satisfy  all of the  obligations  due and owing to  Northern,
         thereby relieving Sheerin of all obligations she had to Northern on the
         $1,950,000 promissory note in question. Tidelands and Sheerin agreed to
         delay the  Tideland's  answer date in order to allow time for mediation
         of the case. Tideland's  participated in a mediation on March 11, 2003.
         The case was not settled at that time.  Tideland's answered the Sheerin
         suit on March 26,  2003.  Tideland's  answer  denies  all of  Sheerin's
         allegations.



                                       -9-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005


NOTE 3 - LITIGATION (CONTINUED)
------   ----------------------

         On May 24 and June 16, 2004  respectively,  Betty Lou Sheerin filed her
         first and second amended original answer, affirmative defenses, special
         exceptions and second  amended  original  counterclaim,  second amended
         original  third party  cross-actions  and requests for  disclosure.  In
         these amended  pleadings,  she sued Michael Ward,  Royis Ward, James B.
         Smith, Carl Hessell and Ahmed Karim in their individual capacities. Her
         claims  against these  individuals  are for fraud,  breach of contract,
         breach of the Uniform Commercial Code, breach of duty of good faith and
         fair dealing and conversion.

         In September  2002, as a pre-closing  deposit to the purchase of the ZG
         pipelines,  the Company executed a $300,000 promissory note to Betty L.
         Sheerin,  a partner of ZG  Gathering,  Ltd.  In  addition,  the Company
         issued  1,000,000  shares of its common stock to various partners of ZG
         Gathering,  Ltd. On December 3, 2003,  Sheerin filed a separate lawsuit
         against Tidelands in the 150th District Court of Bexar County, Texas on
         this  promissory  note  seeking a judgment  against  Tidelands  for the
         principle  amount of the note, plus interest.  On December 29th,  2003,
         Tidelands answered this lawsuit denying liability on the note. On April
         1,  2004,  Tidelands  filed a plea in  abatement  asking  the  court to
         dismiss or abate Sheerin's  lawsuit on the $300,000  promissory note as
         it was related to and its outcome was  dependent  on the outcome of the
         Sheerin  third party cross  action  against  Tidelands  in Cause Number
         2002-C1-16421. The Company believes that the promissory note and shares
         of common  stock  should be  cancelled  based  upon the  outcome of the
         litigation  described  above.  Accordingly,  our  financial  statements
         reflect this belief.

         On  September  15,  2004 and again on October  15,  2004  respectively,
         Sheerin  amended her  pleadings  to include a third and fourth  amended
         third  party  cross  action  against  Tidelands  adding a claim for the
         $300,000  promissory  note.  In these amended  pleadings,  Sheerin also
         deleted her claims against Carl Hessel and Ahmed Karim.

         On August 5,  2005,  Northern  Natural  Gas  Company  filed its  Fourth
         Amended Original Petition which, for the first time, named Tidelands as
         a  defendant  to  Northern.  Northern  seeks  to  impose  liability  on
         Tidelands  for  $1,950.000  promissory  note  signed  by  McDay  Energy
         Partners, Ltd. (the predecessor to ZG Gathering,  Ltd.) and Sheerin and
         the $1,700,000  promissory note signed by McDay only. Northern contends
         that Tidelands is alternatively  liable to Northern for payment of both
         such  promissory  notes  totaling   $3,709,914  plus  interest  because
         Northern is a third party beneficiary under a December 3, 2001 purchase
         and sale  agreement  between  ZG and  Tidelands  claiming  that in such
         agreement  Tidelands  agreed to assume and satisfy all indebtedness due
         and owing  Northern by Sheerin and ZG.  Northern also claims that it is
         entitled  to  foreclosure  of a lien on the gas  gathering  system  and
         pipeline that was the subject of the promissory notes in question.

         Sheerin  seeks  damages  against  Tidelands  for indemnity for any sums
         found to be due from her to Northern  Natural Gas Company,  unspecified
         amounts of actual damages,  statutory damages,  unspecified  amounts of
         exemplary  damages,  attorneys fees, costs of suit, and prejudgment and
         post judgment interest.

         Some  discovery  has been  completed  at this  time.  Based on  initial
         investigation,  and  discovery  to date,  Tidelands  appears  to have a
         number of  potential  defenses to the claims of Sheerin  and  Northern.
         Tideland's intends to aggressively defend the lawsuit. At this stage in
         the  litigation,  and in  light  of our  continuing  investigation  and
         incomplete  discovery,  we cannot give a more definitive  evaluation of
         the extent of Tideland's liability exposure.


                                      -10-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005

NOTE 3 - LITIGATION (CONTINUED)
------   ----------------------

         During April and May, 2005, three separate legal actions were initiated
         against  Sonterra  Energy   Corporation   (Sonterra),   a  wholly-owned
         subsidiary of the Company.  Two of the actions  concern  claims made by
         developers  against Sonterra for their failure to pay rent and easement
         use fees as a  result  of  their  asset  purchase  from  Oneok  Propane
         Distribution  Company on November 1, 2004. The third action  involves a
         claim made by a builder that Sonterra  does not have a proper  easement
         for the current use of certain property.  The Company believes that the
         three actions  filed are without merit and intend to vigorously  defend
         itself.  Litigation  regarding  these three  actions are still in their
         early stages, therefore, potential financial impacts, if any, cannot be
         determined at this time.

NOTE 4 - COMMON STOCK TRANSACTIONS
------   -------------------------

         On May 1, 2005,  the company  issued  500,000  shares of its restricted
         common stock valued at $225,000 to Impact  International,  LLC pursuant
         to the terms of the purchase of Reef Ventures, L.P.

         On June 15, 2005,  Mercator Momentum Fund, L.P., Mercator Momentum Fund
         III, L.P. and Monarch  Pointe Fund,  Ltd.  (the  "Funds")  notified the
         Company of their  intent to  convert a portion of their 7%  Convertible
         Debentures into common stock as follows:

         Mercator  Momentum Fund  converted  $380,000  dollars of 7% Convertible
         Debentures  into 500,000 common shares at the "Ceiling  Price" of $0.76
         per share.

         Mercator Momentum Fund III converted $273,600 dollars of 7% Convertible
         Debentures  into 360,000 common shares at the "Ceiling  Price" of $0.76
         per share.

         Monarch  Point  Fund  converted  $866,400  dollars  of  7%  Convertible
         Debentures into 1,140,000 common shares at the "Ceiling Price" of $0.76
         per share.

         On June 22, 2005, the Company issued these common shares to the Funds.











                                      -11-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005


NOTE 4 - COMMON STOCK TRANSACTIONS (CONTINUED)
------   ------------------------------------

         On June 23, 2005,  the Company issued Impact  International,  LLC Seven
         Million Five Hundred Thousand  (7,500,000) common shares in response to
         Impact's  exercise of their  common  stock  purchase  warrants.  Impact
         tendered  payment  in the form of a  promissory  note in the  amount of
         $2,512,500.  The note will reduce and offset the principal balance owed
         by the Company under the Purchase and Sale Agreement dated May 25, 2004
         whereby it acquired the Eagle Pass pipeline by purchasing an additional
         73% of Reef Ventures, LP.

         On June 27, 2005, the Company authorized the issuance of 150,000 shares
         of its  restricted  common stock valued at $97,500 to each of the three
         members of the Board of  Directors,  Michael R. Ward,  Ahmed  Karim and
         Carl Hessel

         On June 27, 2005, the Company authorized the issuance of 150,000 shares
         of common stock under a 2004 non-qualified  stock grant and option plan
         which was  registered  on Form S-8,  November 5, 2004.  the shares were
         valued at $199,125  and were issued to James B.  Smith,  the  Company's
         Senior Vice President,  CFO and newly appointed  member of the Board of
         Directors.

         On June 27, 2005,  Mercator Momentum Fund, L.P., Mercator Momentum Fund
         III, L.P. and Monarch  Pointe Fund,  Ltd.  (the  "funds")  notified the
         company of their intent to collectively  convert $1,000,000 of their 7%
         Convertible Debentures into common stock as follows:

         Mercator  Momentum Fund  converted  $250,000  dollars of 7% Convertible
         Debentures  into 328,947 common shares at the "Ceiling  Price" of $0.76
         per share.  The Principal  balance of the Debenture  after this partial
         debenture conversion is $513,000 dollars.

         Mercator Momentum Fund III converted $175,000 dollars of 7% Convertible
         Debentures  into 230,263 common shares at the "Ceiling  Price" of $0.76
         per share.  The principal  balance of the Debenture  after this partial
         debenture conversion is $338,900 dollars.

         Monarch  Point  Fund  converted  $575,000  dollars  of  7%  Convertible
         Debentures  into 756,579 common shares at the "Ceiling  Price" of $0.76
         per share.  The principal  balance of the Debenture  after this partial
         debenture conversion is $1,128,100 dollars.





                                      -12-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005


NOTE 4 - COMMON STOCK TRANSACTIONS (CONTINUED)
------   -------------------------------------

         On June 28, 2005, the Company issued these common shares to the Funds.

         The Mercator and Impact shares were included in Tideland's registration
         statement  filed on Form  SB-2  which  was  declared  effective  by the
         Securities & Exchange commission on May 27, 2005.

NOTE 5 - SUMMARY OF TERMS OF CONVERTIBLE DEBENTURE AND WARRANTS
------   ------------------------------------------------------

         On November 18, 2004,  the Company  entered into a Securities  Purchase
         Agreement with Mercator  Momentum Fund, LP, Mercator Momentum Fund III,
         LP,  Monarch Pointe Fund,  LP,  (collectively,  "the Funds") and M.A.G.
         Capital,  LLC  ("MAG"),  formerly  Mercator  Advisory  Group,  LLC.  In
         exchange for  $5,000,000,  the Company issued to the Funds and Mercator
         Advisory Group,  7% convertible  debentures with a maturity date of May
         18, 2006. Under the terms of the agreement, the Company is obligated to
         make monthly interest payments until maturity of $29,166,67.

         The 7% Convertible Debentures are convertible into the Company's common
         stock at a 15% discount to the market price at the time of  conversion,
         subject to a $0.45 floor and a $0.76 ceiling.  In connection  with this
         financing the Company  issued  6,578,948  common stock  warrants  which
         expire  November 18,  2007.  The  warrants  are  exercisable  at prices
         ranging  from $.80 to $.87.  The  Company  granted the Funds and M.A.G.
         registration rights on both groups of securities, such registration was
         declared effective May 27, 2005.

         During June,  the Funds  converted  $2,520,000 of their 7%  Convertible
         Debentures  to 3,315,789  shares of the Company's  common  stock.  (See
         detailed  explanation  of these  transactions  in Note 4  Common  Stock
         Transactions above.)

         The Funds also transferred $500,000 of their 7% Convertible  Debentures
         to Robinson Reed, Inc. (a managed account of M.A.G.) along with 328,948
         of their common stock  warrants.  Monthly  interest  payments have been
         reduced  to  approximately  $14,667  as a result of the  aforementioned
         conversions.






                                      -13-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2005




NOTE 6 - RELATED PARTY TRANSACTION
------   -------------------------

         The Company  executed an agreement in January 2004 with a related party
         to provide charter air transportation for its employees,  customers and
         contractors to job sites and other  business  related  destinations.  A
         prepayment of $300,000 5% interest bearing loan due in January 2007 was
         made by the Company  regarding  the  transaction.  The loan  balance is
         credited  by  airtime  charges at  standard  industry  rates  offset by
         interest charges  computed on the average monthly balance.  At June 30,
         2005, the loan balance was $286,114.
















                                      -14-


<PAGE>

Item 2.     Management's Discussion and Analysis or Plan of Operation

Business Overview

Our products and services are primarily  focused on development and operation of
transportation,  processing,  distribution  and storage projects for natural gas
and  natural  gas  liquids  in the  northeastern  states of  Mexico  (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.

We derive our revenue from  transportation  fees from delivery of natural gas to
Conagas, the local distribution company in Piedras Negras, Coahuila, through the
pipeline owned by Reef Ventures, L.P. and the sale of propane gas to residential
customers  through the assets  owned by  Sonterra  Energy  Corporation.  We also
design and construct  residential  propane  delivery systems for new residential
developments in Central Texas.

With respect to our pipeline system owned by Reef Ventures,  L.P., management is
evaluating  an expansion of the pipeline in Coahuila to serve new markets  along
the state  highway No. 57 corridor to Monclova,  Coahuila.  We currently  expect
that this project will not be activated  until the fourth  quarter of 2005.  The
planned  natural gas liquid line between Eagle Pass,  Texas and Piedras  Negras,
Coahuila is being  re-evaluated in light of new supply sources emerging in Texas
and  Mexico.  We are  evaluating  the utility of the project as either a tolling
business  model for existing  demand in Coahuila or as a merchant  facility in a
direct  contract with the propane  importation  arm of PEMEX.  We expect further
development  of the  project  to be  announced  by the  fourth  quarter of 2005.
Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the  residential  propane  distribution  business  on  November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin,  Texas.  Sonterra's  existing and future market area includes several
central  Texas  locations  that do not have  access to natural gas as a fuel for
home heating and appliance usage.  Current expansion of over 400 lots within the
existing  subdivisions  is  possible.  Sonterra  has  also  entered  into  a new
agreement  with the  developer  of  Northshore  on Lake  Travis  to  expand  the
currently  serviced lots by an additional  1,000 units.  Up to 2,625  additional
lots may be  available  for  installation  of  residential  propane  delivery in
developments  currently  in the  planning  stages in the  nearly  central  Texas
vicinity. Management is actively seeking new subdivision installation of propane
systems in the Central Texas and has recently  identified 4 new  subdivisions in
the  San  Antonio/Austin   Hill  Country  corridor  as  prospective  for  system
installation.




                                      -15-
<PAGE>

Rio Bravo  Energy,  LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing  Plant which was  purchased  in 1999 and was  processing  natural gas
primarily from Conoco Oil's Sacatosa Field.  The Sacatosa Field was primarily an
oilfield  which  produced  high BTU casing  head gas from  which gas  processing
operations would yield valuable hydrocarbon  components such as propane,  butane
and natural  gasolines.  As the field  depleted lower volumes of casing head gas
were being  delivered by Conoco and other gas producers  could not be contracted
with for  processing of additional  replacement  volumes of gas.  Therefore,  in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume  operation of the plant. We plan to either reopen the
plant in 2005 when adequate  volumes of LPG  feedstock  from third parties makes
plant operations economically attractive or sell the assets to a third party. As
noted  above,  Rio Bravo  Energy LLC owns a general  partner  interest  in Marea
Associates,  L.P. and the minority interest in Terranova Energia,  S. de R.L. de
C.V.

Sonora  Pipeline,  LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering  adequate  volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline.  Presently,  the line is not
in use. The pipeline was acquired in conjunction with the Chittim Gas Processing
Plant   acquisition.   When   operational,   it  would  generate   revenue  from
transportation fees charged to third party gas producers shipping natural gas to
the Chittim Gas Plant owned by Rio Bravo Energy LLC.  Management  is  evaluating
whether to sell or utilize these assets and a decision is expected by the fourth
quarter of 2005.Sonora  Pipeline LLC will also own and operate the U.S.  (Texas)
pipeline segments to be constructed in connection with the Mexican pipeline, LNG
regasification  terminal and gas storage projects which will interconnect to the
U.S. via two international pipeline crossings near McAllen, Texas. The estimated
capital cost of these U.S. segments is approximately $60 million USD. Management
expects a filing  with the Federal  Energy  Regulatory  Commission  in the third
quarter of 2005 for  permission  to operate these new pipelines and the granting
of  presidential  permits  for the  international  crossings  near  Penitas  and
Progreso, Texas for delivery of natural gas into the state of Tamaulipas and the
pipelines owned by our Mexican subsidiary, Terranova Energia S. de R.L. de C.V.

In  October  2003,  we  entered  into a  confidentiality  agreement  with  Pemex
Exploration and Production  ("PEP") to facilitate the exclusive exchange of well
control  and seismic  data for the purpose of  evaluating  the  feasibility  and
design of one or more underground  natural gas storage  facilities in the Burgos
Basin of Northeast  Mexico.  In December  2003,  we entered into a Memorandum of
Understanding  (MOU)  with  PEMEX to design,  build and  operate an  underground
natural gas storage facility in the vicinity of Reynosa, Tamaulipas,  Mexico, in
the  Burgos  Basin area and  eventually  at other  regions  in  Mexico.  The MOU
provides  for  exclusivity  in the  development  of the projects and the related
transportation and interconnecting pipelines to and from the storage facilities.

We have  completed  the  initial  study of the Burgos  facility  and our Mexican
subsidiary,  Terranova  Energia,  S. de R.L.  de C.V.  has filed for a permit to
build and operate the gas  storage  facility  with the  Comision  Reguladora  de
Energia  (CRE) in  Mexico.  A system of two  interconnecting  pipelines  is also
proposed  to enhance  the overall  pipeline  grid in Mexico and the  operational



                                      -16-
<PAGE>

efficiency of the storage  facility.  A permit from the CRE for the construction
and  operation of these  pipelines  has been filed in the first quarter of 2005.
The  capital  budget  for  these  projects  exceeds  $700  Million  Dollars.  We
anticipate  funding these projects with  additional  equity of the Company,  the
addition of joint venture partners and/or debt financing. Marea Associates, L.P.
was formed  during the fiscal  quarter  ended June 30, 2004 to own the  majority
interest in Terranova Energia,  S. de R.L. de C.V., a Mexican company which will
conduct all business  dealings in Mexico on behalf of the  Tidelands.  Rio Bravo
Energy  LLC, an  existing  wholly  owned  subsidiary  owns the  general  partner
interest in Marea Associates, L.P. and a minority interest in Terranova Energia,
S. de R.L. de C.V.

We are in the preliminary design phase for an LNG regasification  terminal to be
located  in  offshore  Mexican  waters  of the Gulf of  Mexico  near  Matamoros,
Tamaulipas.  The  Dorado  LNG  Terminal  would  provide  additional  supply  for
Northeast Mexico natural gas markets which are currently importing approximately
1.0 BCF per day  from the U.S.  The  capital  cost to  build  the  terminal  and
interconnecting  pipeline to the planned storage facility is expected to be over
$200 million USD.  Management  anticipates  a permit  filing with the CRE in the
third or fourth  quarter of 2005.  Management  estimates  a  cumulative  capital
investment of approximately $1 billion USD for the LNG regasification  terminal,
the  pipelines in the U.S. and Mexico and the Mexican  storage  facility.  These
projects  are  targeted to address  the  critical  infrastructure  needs for the
natural gas and power  markets in  Northeast  Mexico  through  the year 2013.  A
collateral  opportunity  to import  natural gas into the U.S. via the  project's
route and facilities is also contemplated.  Management is in active negotiations
for LNG supply,  U.S.  supply and off take gas  contracts in Mexico and the U.S.
The projects will be developed and operated with a tolling business model as the
revenue premise,  however, joint venture or contractual relationships with third
parties  may allow the Company to  participate  in  merchant  operations  in the
energy supply business for Mexican and U.S. customers.

The Company has engaged  the Project & Export  Finance  team of HSBC  Securities
(USA),  Inc.  as  its  financial  advisor  with  respect  to the  capital  raise
requirements  for the above  projects.  We have also had substantive and ongoing
discussions with interested third parties for private equity  participation  and
will continue those  discussions in the upcoming year as further  development of
the projects occurs.

Results of Operations

REVENUES:  The Company  reported  revenues of $968,611  for the six months ended
June 30, 2005 as compared with revenues from  continuing  operations of $507,712
for the six months  ended June 30,  2004.  The revenue  increase  resulted  from
additional  revenues due to the acquisition of the Sonterra  Energy  Corporation
assets from ONEOK. These operations were not included in the results for the six
months ended June 30, 2004.

TOTAL COSTS AND EXPENSES:  Total costs and expenses from  continuing  operations
decreased  from  $4,303,169 for the six months ended June 30, 2004 to $4,273,210
for the six months ended June 30, 2005.  Cost of Sales  decreased  from $497,820
for the six months ended June 30, 2004 to $415,248 for the six months ended June
30, 2005 as described below.  Operating  Expenses  increased from $2,616 for the
six months  ended June 30,  2004 to $129,137  for the six months  ended June 30,
2005.  Depreciation Expense increased from $47,918 for the six months ended June



                                      -17-
<PAGE>

30, 2004 to $236,395 for the six months ended June 30,  2005.  Interest  Expense
increased  from $ 48,437 for the six months  ended June 30, 2004 to $393,860 for
the six  months  ended June 30,  2005.  The  increases  in  Operating  Expenses,
Depreciation  Expense and Interest  Expense  resulted  primarily  from growth in
assets and debt related to the acquisition of 98% of the partnership interest in
the Reef Ventures, L.P. international pipeline operations and the acquisition of
the  residential  propane sales business near Austin,  Texas by Sonterra  Energy
Corporation.   Sales,   General  and  Administrative   Expenses  decreased  from
$3,706,378  for the six months  ended June 30,  2004 to  $3,098,570  for the six
months ended June 30, 2005 as described below.

COST OF SALES:  Total Cost of Sales  decreased  from $497,820 for the six months
ended June 30, 2004 to $415,248  for the six months  ended June 30,  2005.  This
decrease  resulted due to the change in  operations of the Reef  Ventures,  L.P.
pipeline from gas marketing to  transportations  fees as the operating model for
this business segment.  The entire cost of sales expense category now represents
cost of propane  and the cost of propane  system  assets  incurred  by  Sonterra
Energy Corporation.

OPERATING EXPENSES: Operating expenses from continuing operations increased from
$2,616 for the six months  ended June 30,  2004 to  $129,137  for the six months
ended June 30, 2005.  This increase was  primarily  due to additional  operating
expenses  incurred by Sonterra  Energy  Corporation  in its  operations  for the
period  which  were  not  present  in  the  comparative  six  months  for  2004.
Depreciation  expense  increased  by $188,477 for the period ended June 30, 2005
due to the  reporting of five months of additional  depreciation  related to the
acquisition  of the natural gas pipeline  owned by Reef  Ventures,  L.P. and six
months of depreciation  related to the  depreciable  assets acquired by Sonterra
Energy  Corporation  for the operation of the residential  propane  distribution
systems in Austin,  Texas. Interest expense increased by $345,423 during the six
months  ended June 30, 2005 due to the debt  incurred to acquire the natural gas
pipeline  owned by Reef Ventures,  L.P. and the issuance of convertible  debt to
entities  associated  with the Mercator  Advisory  Group,  LLC, now known as MAG
Capital, LLC.

SALES,  GENERAL AND  ADMINISTRATIVE:  Sales,  General & Administrative  Expenses
decreased by $607,808 during the six months ended June 30, 2005 as compared with
the  period  ended  June 30,  2004.  Decreased  consulting  fees were  primarily
responsible for the difference between the respective periods.

NET LOSS FROM OPERATIONS: Net loss of ($3,795,457) for the six months ended June
30, 2004  decreased  to  ($3,304,599)  for the six months ended June 30, 2005, a
decrease  in the  amount  of loss of  $490,858.  Included  in the net loss  from
operations  is  $1,098,625  of expenses  for  director  fees,  financing  costs,
consulting fees, and legal fees paid by issuance of common stock.




                                      -18-
<PAGE>

LIQUIDITY AND CAPITAL  RESOURCES:  Direct  capital  expenditures  during the six
months  ended June 30, 2005  totaled  $784,640.  The capital  expenditures  were
composed of increased  office  furniture,  equipment  and  leasehold  costs plus
pre-construction costs regarding potential  international pipeline crossings and
storage facilities in Mexico, and additional machinery, equipment, trucks, autos
and  trailers  for the  operation of the  Sonterra  Energy  Corporation  propane
systems.  Total debt  decreased  from  $12,306,107  at  December  31,  2004 to $
7,504,792  at June 30,  2005.  The  decrease in total debt is due  primarily  to
conversion of  debentures  to common stock in the amount of  $2,520,000  and the
exercise of warrants which reduced an outstanding  note payable in the amount of
$2,512,500.  Net loss for the six months ended June 30, 2005 was  ($3,238,115) a
decrease in net loss of 14% from the net loss of ($3,784,384) for the six months
ended June 30, 2004. Basic and diluted net loss per common share decreased 37.5%
to ($0.05). The net loss per share calculation for the six months ended June 30,
2005 included an increase in actual and equivalent shares outstanding.

FORWARD-LOOKING STATEMENTS:

We have included  forward-looking  statements in this report.  For this purpose,
any  statements  contained in this report that are not  statements of historical
fact may be  deemed to be  forward  looking  statements.  Without  limiting  the
foregoing,  words  such as "may",  "will",  "expect",  "believe",  "anticipate",
"estimate",  "plan" or "continue" or the negative or other variations thereof or
comparable  terminology  are  intended to identify  forward-looking  statements.
These statements by their nature involve  substantial  risks and  uncertainties,
and actual  results  may differ  materially  depending  on a variety of factors.
Factors that might cause  forward-looking  statements to differ  materially from
actual  results  include,  among other  things,  overall  economic  and business
conditions,  demand  for the  Company's  products,  competitive  factors  in the
industries  in which we compete or intend to compete,  natural gas  availability
and cost and timing,  impact and other  uncertainties of our future  acquisition
plans.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

The  Company  does  not  issue  or  invest  in  financial  instruments  or their
derivatives for trading or speculative  purposes.  The operations of the Company
are conducted  primarily in the United States,  and, are not subject to material
foreign  currency  exchange risk.  Although the Company has outstanding debt and
related  interest  expense,  market risk of interest rate exposure in the United
States is currently not material.

Item 3. Controls and Procedures

(a)      Evaluation of Disclosure Controls and Procedures.

         As of the end of the reporting period, June 30, 2005, we carried out an
evaluation,  under the supervision and with the participation of our management,
including  the  Company's  Chairman  and Chief  Executive  Officer and the Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of our
disclosure controls and  procedures pursuant to Rule 13a-15(e) of the Securities



                                      -19-
<PAGE>

Exchange  Act of 1934  (the  "Exchange  Act"),  which  disclosure  controls  and
procedures are designed to insure that information required to be disclosed by a
company  in the  reports  that it files  under  the  Exchange  Act is  recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms.  Based upon that  evaluation,  the Chairman and the Chief
Financial  Officer  concluded  that our  disclosure  controls and procedures are
effective  in timely  alerting  them to  material  information  relating  to the
Company required to be included in the Company's period SEC filings.

(b)      Changes in Internal Control.

         Subsequent   to  the  date  of  such   evaluation   as   described   in
subparagraph(a)above,  there were no changes in our  internal  controls or other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.

(c)      Limitations.

         Our management, including our Principal Executive Officer and Principal
Financial  Officer,  does not expect  that our  disclosure  controls or internal
controls over  financial  reporting  will prevent all errors or all instances of
fraud. A control system,  no matter how well designed and operated,  can provide
only reasonable,  not absolute,  assurance that the control system's  objectives
will be met. Further,  the design of a control system must reflect the fact that
there are resource constraints,  and the benefits of controls must be considered
relative to their  costs.  Because of the  inherent  limitations  in all control
systems,  no  evaluation  of controls can provide  absolute  assurance  that all
control  issues and  instances  of fraud,  if any,  within our company have been
detected.  These  inherent  limitations  include the realities that judgments in
decision-making  can be faulty,  and that breakdowns can occur because of simple
error or mistake.  Controls can also be  circumvented  by the individual acts of
some persons,  by collusion of two or more people, or by management  override of
the controls. The design of any system of controls is based in part upon certain
assumptions  about the  likelihood  of future  events,  and any  design  may not
succeed in achieving  its stated goals under all  potential  future  conditions.
Over time,  controls may become  inadequate  because of changes in conditions or
deterioration  in the degree of compliance with policies or procedures.  Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.




                                      -20-
<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Matter No. 1:

On January 6,  2003,  we were  served as a third  party  defendant  in a lawsuit
titled  Northern  Natural Gas Company vs. Betty Lou Sheerin vs.  Tidelands Oil &
Gas Corporation,  ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court,  Bexar  County,  Texas,  Cause  Number  2002-C1-16421.  The  lawsuit  was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
to make  payments on a note she  executed  payable to  Northern in the  original
principal amount of $1,950,000.  Northern's suit was filed on November 13, 2002.
Sheerin  answered  Northern's  lawsuit  on January  6,  2003.  Sheerin's  answer
generally  denied  Northern's  claims  and raised the  affirmative  defenses  of
fraudulent inducement by Northern,  estoppel,  waiver and the further claim that
the  note  does  not  comport  with  the  legal  requirements  of  a  negotiable
instrument. Sheerin seeks a judicial ruling that Northern be denied any recovery
on the note.  Sheerin's  answer  included a counterclaim  against  Northern,  ZG
Gathering, and Ken Lay generally alleging, among other things, that Northern, ZG
Gathering,  Ltd. and Ken Lay,  fraudulently  induced her  execution of the note.
Northern has filed a general denial of Sheerin's counterclaims. Sheerin's answer
included a third party cross claim against Tidelands. She alleges that Tidelands
entered  into an  agreement  to  purchase  the Zavala  Gathering  System from ZG
Gathering Ltd. and that, as a part of the agreement, Tidelands agreed to satisfy
all of the obligations due and owing to Northern,  thereby  relieving Sheerin of
all  obligations  she  had to  Northern  on the  $1,950,000  promissory  note in
question.  Tidelands and Sheerin agreed to delay the  Tideland's  answer date in
order to  allow  time for  mediation  of the  case.  Tidelands  participated  in
mediation on March 11, 2003.  The case was not settled at that time.  Tideland's
answered  the Sheerin suit on March 26, 2003.  Tideland's  answer  denies all of
Sheerin's allegations.

On May 24 and June 16, 2004 respectively,  Betty Lou Sheerin filed her first and
second amended original answer,  affirmative  defenses,  special  exceptions and
second  amended  original  counterclaim,  second  amended  original  third party
cross-actions and requests for disclosure.  In these amended pleadings, she sued
Michael Ward, Royis Ward, James B. Smith,  Carl Hessell and Ahmed Karim in their
individual  capacities.  Her claims  against  these  individuals  are for fraud,
breach of contract,  breach of the Uniform  Commercial  Code,  breach of duty of
good faith and fair  dealing  and  conversion.  Sheerin has now  non-suited  her
claims against Michael Ward, Royis Ward, and James B. Smith.

In September 2002, as a pre-closing deposit to the purchase of the ZG pipelines,
the Company executed a $300,000  promissory note to Betty L. Sheerin,  a partner
of ZG Gathering,  Ltd. In addition,  the Company issued  1,000,000 shares of its
common  stock to various  partners  of ZG  Gathering,  Ltd. On December 3, 2003,
Sheerin filed a separate  lawsuit against  Tidelands in the 150th District Court
of Bexar County,  Texas,  Case Number  2003-CI-18795,  on this  promissory  note
seeking a judgment against  Tidelands for the principle amount of the note, plus
interest.  On December  29th,  2003,  Tidelands  answered  this lawsuit  denying
liability  on the note.  On April 1, 2004,  Tidelands  filed a plea in abatement
asking  the  court  to  dismiss  or  abate  Sheerin's  lawsuit  on the  $300,000
promissory  note as it was  related  to and its  outcome  was  dependent  on the
outcome of the Sheerin  third  party cross  action  against  Tidelands  in Cause
Number  2002-C1-16421.  The company believes that the promissory note and shares
of common  stock should be  cancelled  based upon the outcome of the  litigation
described above. Accordingly, our financial statements reflect this belief.



                                      -21-
<PAGE>

On  September  15,  2004 and again on October  15,  2004  respectively,  Sheerin
amended her  pleadings to include a third and fourth  amended  third party cross
action against  Tidelands  adding a claim for the $300,000  promissory  note. In
these amended pleadings, Sheerin also deleted her claims against Carl Hessel and
Ahmed Karim. After adding the claim on the $300,000 promissory note to the third
party claims of Sheerin against  Tidelands in Cause No.  2002-C1-16421,  Sheerin
dismissed Cause Number 2003-C1-18795.

Sheerin seeks damages  against  Tidelands for indemnity for any sums found to be
due from her to Northern  Natural  Gas  Company,  unspecified  amounts of actual
damages, statutory damages,  unspecified amounts of exemplary damages, attorneys
fees, costs of suit, and prejudgment and post judgment interest.

On August 5,  2005,  Northern  Natural  Gas  Company  filed its  Fourth  Amended
Original  Petition which,  for the first time, named Tidelands as a defendant to
Northern.  Northern  seeks to  impose  liability  on  Tidelands  for  $1,950.000
promissory  note signed by McDay Energy  Partners,  Ltd. (the  predecessor to ZG
Gathering,  Ltd.) and Sheerin and the $1,700,000 promissory note signed by McDay
only.  Northern contends that Tidelands is alternatively  liable to Northern for
payment of both such promissory notes totaling  $3,709,914 plus interest because
Northern is a third party beneficiary under a December 3, 2001 purchase and sale
agreement  between ZG and Tidelands  claiming that in such  agreement  Tidelands
agreed to assume and satisfy all  indebtedness due and owing Northern by Sheerin
and ZG. Northern also claims that it is entitled to foreclosure of a lien on the
gas gathering  system and pipeline that was the subject of the promissory  notes
in question.

Some discovery has been completed at this time. Based on initial  investigation,
and discovery to date,  Tidelands appears to have a number of potential defenses
to the claims of Sheerin and Northern. Tideland's intends to aggressively defend
these lawsuits. At this stage in the litigation,  and in light of our continuing
investigation  and  incomplete  discovery,  we  cannot  give a  more  definitive
evaluation of the extent of Tideland's liability exposure.

Matter No. 2:

On May 4, 2005,  HBH  Development  Company,  LLC initiated  legal action against
Sonterra Energy Corporation in the District Court of Travis County,  Texas, 98th
Judicial  District.  This action  involves the developer of the Austin's  Colony
Subdivision  in  Travis  County,  Texas  and  the  propane  distribution  system
originally constructed by Southern Union Company.  Southern Union entered into a
letter agreement with HBH concerning the construction and operation of a propane
distribution  system in the  subdivision  to be owned and  operated  by Southern
Union.  Southern  Union  assigned the letter  agreement and its interests in the




                                      -22-
<PAGE>

propane  system to Oneok,  Inc.,  the parent  company of Oneok Propane  Company.
Sonterra  acquired  its  interest  in the  propane  system  from  Oneok  Propane
Distribution Company. HBH is claiming that Sonterra has failed or refused to pay
HBH rent and  easement  use fees  under the terms of the letter  agreement.  HBH
alleges that  Sonterra's  actions cause a failure of the  assignment  whereby it
acquired  rights in the propane  system or  alternatively,  if the assignment is
effective,  for  breach  of  contract.  HBH  seeks to have the  court  terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages,  cancellation  of the contract and rights  associated  with the propane
distribution system, issue to HBH a writ of possession for the property, and for
attorneys fees.

Sonterra is defending the legal action.  It believes that under the terms of the
letter  agreement  between HBH  Development  Company and Southern Union Company,
that the easement use fees  terminated when Southern Union conveyed its interest
in the propane distribution system to Oneok Propane Company.

Matter No. 3:

On May 4, 2005, Senna Hills, Ltd. initiated legal action against Sonterra Energy
Corporation  in the  District  Court of  Travis  County,  Texas,  53rd  Judicial
District.  This action involves the developer of the Senna Hills  Subdivision in
Travis County, Texas and the propane distribution system originally  constructed
by Southern Union Company.  Southern Union entered into a letter  agreement with
Senna Hills concerning the construction and operation of a propane  distribution
system in the subdivision to be owned and operated by Southern  Union.  Southern
Union  assigned the letter  agreement and its interests in the propane system to
Oneok, Inc., the parent company of Oneok Propane Company.  Sonterra acquired its
interest in the propane system from Oneok Propane  Distribution  Company.  Senna
Hills is claiming  that  Sonterra  has failed or refused to pay Senna Hills rent
and  easement  use fees under the terms of the  letter  agreement.  Senna  Hills
alleges that  Sonterra's  actions cause a failure of the  assignment  whereby it
acquired  rights in the propane  system or  alternatively,  if the assignment is
effective, for breach of contract. Senna Hills seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, and cancellation of the contract and rights associated with the propane
distribution system, issue to Senna Hills a writ of possession for the property,
and attorneys fees.

Senna Hills sold certain  undeveloped  sections of Senna Hills  Subdivision to a
new owner.  Sonterra  believes that it has the right to expand its  distribution
system into such  undeveloped  sections of the  subdivision.  Sonterra  plans to
expand the  distribution  system into these sections under an agreement with the
new owner. Senna Hills has stated that although it is not presently objecting to
Sonterra's  expansion of the system at this time, it is reserving its claim that
Sonterra  does not have the right to do so and that it  intends to ask the court
to cancel  Sonterra's  right to use and  possession of the propane  distribution
system, including the system in the new sections of the subdivision.

Sonterra is defending the legal action.  It believes that under the terms of the
letter  agreement  between  Senna Hills and  Southern  Union  Company,  that the
easement use fees  terminated  when Southern  Union conveyed its interest in the
propane distribution system to Oneok Propane Company.



                                      -23-
<PAGE>

Matter No. 4:

On April of 2005, Goodson Builders,  Ltd. named Sonterra Energy Corporation in a
legal action titled, Goodson Builders,  Ltd, Plaintiff vs. Jim Blackwell and BNC
Engineering,  LLC,  Defendants.  The legal  action is in the  District  Court of
Travis County,  Texas 345th Judicial  District.  This legal action arises from a
claim that an  underground  propane  storage tank and  underground  distribution
lines is situated on the  Plaintiff's  lot in the Hills of Lakeway  subdivision,
Travis  County,  Texas.  Plaintiff  alleges  that there is no recorded  easement
setting forth the rights and  obligations  of the parties for use of the propane
tank and lines. However,  there is reference to a "suburban propane easement" on
the plat  document.  Plaintiff  alleges  that the property is being used without
permission  and the use  constitutes  an on-going  trespass.  Plaintiff asks the
court to determine that his lot is not subject to a "suburban propane easement",
declare the propane  equipment the property of plaintiff,  enjoin  Sonterra from
use of  Plaintiff's  land,  and award  damages.  The Plaintiff  seeks damages of
$165,000 based on a market rental rate he claims to be $5,000 per month, $50,000
damages  for  depreciation  of the value of the lot,  an  unspecified  amount of
exemplary damages, and attorneys' fees. Sonterra is defending the claims.

Matter No. 5:

On April 20th, 2005,  Tidelands filed suit against L.L. Capital Group, L.L.C. in
Bexar County,  Texas,  224th  Judicial  District  Court.  On August 11th,  2004,
Tidelands entered into a consulting  services  agreement with L.L. Capital.  The
agreement  provided for L.L. Capital to provide  advisory  services to Tidelands
regarding certain business  opportunities,  including various types of financial
arrangements.  As compensation  for the services that were to be provided,  L.L.
Capital was to receive  $500,000 of  unrestricted  common  stock and $550,000 of
restricted  common stock,  and $500,000 of Warrants Shares  exercisable at $1.45
per share.

L. L. failed to perform the required  services for which  Tidelands  has sued to
rescind the agreement and have all stock and warrants returned to Tidelands, for
discharge from any obligation  under the agreement,  and for its attorney's fees
and costs.

The parties have commenced settlement negotiations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

All  unregistered  sales of equity  securities were disclosed in Current Reports
filed on Form 8-K during the second quarter.




                                      -24-
<PAGE>

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

No  matter  was  submitted  to a  vote  of the  security  holders,  through  the
solicitation  of proxies or otherwise,  during the second  quarter of the fiscal
year covered by this report.

Item 5.  Other Information

         None.

Item 6.  Exhibits

a) Exhibits

      Exhibit No.          Exhibit Name

         31.1              Chief  Executive  Officer-Section  302  Certification
                           pursuant to Sarbanes-Oxley Act.
         31.2              Chief Financial  Officer-  Section 302  Certification
                           pursuant to Sarbanes-Oxley Act.
         32.1              Chief  Executive  and Financial  Officer-Section  906
                           Certification pursuant to Sarbanes-Oxley Act.


                                   SIGNATURES

In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                                                       TIDELANDS OIL & GAS CORP.


Dated: August 10, 2005                                  /s/ Michael Ward
                                                       -------------------------
                                                       By: Michael Ward
                                                       Title: President, CEO



Dated: August 10, 2005                                  /s/ James B. Smith
                                                       -------------------------
                                                       By: James B. Smith
                                                       Title: CFO








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