UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549








Form
      10-Q/A







(Mark
      one)




xQuarterly
      Report Under
      Section 13 or 15(d) of The Securities Exchange Act of
      1934




For
      the quarterly period ending March 31, 2007




oTransition
      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 filed 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 o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definitions of "accelerated
      filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer o, Accelerated
      filer
o, Non-accelerated
      filer x




Indicate
      by check mark whether the registrant is a shell company (as defined by Rule
      12b-2of the Exchange Act. Yes oNo x




APPLICABLE
      ONLY TO CORPORATE ISSUERS




As
      of May
      18, 2007, there were 102,633,706 shares of Common Stock issued and
      outstanding.




Transitional
      Small Business Disclosure Format: Yes o    No
x






Table
          of Contents


EXPLANATORY
          NOTE
 
 As
          previously disclosed in our report on Form 8-K filed on November 19, 2007,
          the
          Board of Directors of Tidelands Oil & Gas Corporation, after discussions
          with our registered independent public accounting firm, determined that
          the
          accounting treatment of certain options issued to its directors (the “Options”)
          originally reported on its Quarterly Report of Form 10-Q for the three
          months
          ended March 31, 2007 was incorrect and required revision.   We are
          filing this amendment to the prior report on Form 10-Q for the period ended
          March 31, 2007 to make this correction.
 
 This
          Amendment corrects the accounting treatment of the Options to comply with
          the
          provisions of Financial Accounting Standards Board Statement No. 123 Share
          Based
          Payment (FAS 123(R)).  FAS 123(R) was adopted by the Company on January 1,
          2006; however, with respect to the Options, the Company inadvertently failed
          to
          record the appropriate expense for such Options in accordance with FAS
          123(R).
 
 The
          Company uses the Black-Scholes option pricing model to compute the fair
          value of
          stock options, which requires the Company to make the following
          assumptions:
 
 §
                The
                    risk-free interest rate is based on the short-term Treasury bond
                    at date
                    of grant.§
                The
                    dividend yield on the Company’s common stock is assumed to be zero since
                    the Company does not pay dividends and has no current plans to
                    do
                    so.
 
 §
                The
                    market price volatility of the Company’s common stock is based on daily
                    historical prices for the twelve months previous to the grant
                    date.§
                The
                    term of the grants is the current year since all grants are vested
                    at the
                    time of the grants; therefore, the entire fair value of stock-based
                    compensation was recorded in 2007.
 
 We
          have
          also revised the related narrative as it relates to these changes in the
          condensed consolidated financial statements, including additional disclosure
          in
          the Notes thereto under the heading “Summary of Restated Interim Report” and
          have revised the disclosure in Part I, Item 2 “Management’s Discussion and
          Analysis” and Part I, Item 4 “Controls and Procedures” .  In addition,
          currently-dated certifications from our Chief Executive Officer and Chief
          Financial Officer have been included as exhibits to this Amendment.
 
 Other
          than as set forth above, there are no other significant changes to the
          original
          10-Q and this 10-Q/A does not reflect events occurring after the filing
          of the
          original 10-Q, or modify or update disclosures therein in any other
          way.





1
 Table
          of Contents




TIDELANDS
      OIL & GAS CORPORATION


FORM
      10-Q






INDEX
  PART
                  I   Financial InformationItem
                  1
              Financial
                  Statements (Unaudited)
              3Condensed
                    Consolidated Balance Sheets as of March 31, 2007 (Restated) and
                    December
                    31, 2006
              4Condensed
                    Consolidated Statements of Operations For the Three Months Ended
                    March 31,
                    2007(Restated) and 2006
              5-6Condensed
                    Consolidated Statements of Cash FlowsFor
                    the Three Months Ended March 31, 2007 (Restated) and
                    2006
              7-17Notes
                to (Unaudited) Condensed Consolidated Financial
                StatementsItem
                  2
              Management's
                  Discussion and Analysis or Plan of
                  Operation
              18Item
                  3
              Quantitative
                    and Qualitative Disclosures About Market Risk
              20Item
                  4
              Controls
                and Procedures
              21PART
                  II  Other InformationItem
                  1
              Legal
                  Proceedings
              21Item
                1A
              Risk
                  Factors
              22Item
                  2
              Unregistered
                  Sale Of Equity Securities And Use Of
                  Proceeds
              22Item
                  3
              Defaults
                  Upon Senior Securities
              23Item
                  4
              Submission
                  Of Matters To Vote Of Security
                  Holders
              23Item
                  5
              Other
                  Information
              23Item
                  6
              Exhibits
              23Signature





2
 Table
          of Contents




TIDELANDS
                  OIL & GAS CORPORATIONCONDENSED
                  CONSOLIDATED BALANCE SHEETSASSETSMarch
                    31,2007
              
              
              December
                    31,2006(Restated–Note
                  5)(Unaudited)Current
                  Assets:Cash
              
              $
              302,202
              
              
              $
              367,437Accounts
                  and Other Receivable
              
              
              284,951
              
              
              
              388,754Inventory
              
              
              119,478
              
              
              
              84,030Prepaid
                  Expenses
              
              
              95,634
              
              
              
              148,551Total
                  Current Assets
              
              
              802,265
              
              
              
              988,772Property
                  Plant and Equipment, Net
              
              
              13,147,781
              
              
              
              12,364,359Other
                  Assets:Deposits
              
              
              56,858
              
              
              
              56,708Cash
                  Restricted
              
              
              53,250
              
              
              
              52,642Deferred
                  Charges
              
              
              256,392
              
              
              
              565,221Goodwill
              
              
              1,158,937
              
              
              
              1,158,937Total
                  Other Assets
              
              
              1,525,437
              
              
              
              1,833,508Total
                  Assets
              
              $
              15,475,483
              
              
              $
              15,186,639LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  Liabilities:Current
                  Maturities - Note Payable
              
              $
              2,599,291
              
              
              $
              225,000Accounts
                  Payable and Accrued Expenses
              
              
              1,988,261
              
              
              
              1,624,752Customer
                  Deposits
              
              
              8,100
              
              
              
              0Reserve
                  for Litigation
              
              
              2,250,000
              
              
              
              2,250,000Total
                  Current Liabilities
              
              
              6,845,652
              
              
              
              4,099,752Due
                  to Related Party
              
              
              100,000
              
              
              
              0Long-Term
                  Debt
              
              
              4,586,315
              
              
              
              8,934,294Total
                  Liabilities
              
              
              11,531,967
              
              
              
              13,034,046Stockholders'
                  Equity:Common
                  Stock, $.001 Par Value per Share,250,000,000
                  Shares Authorized, 98,688,909and
                  86,457,922 Shares Issued and Outstanding atMarch
                  31, 2007 and December 31, 2006 Respectively
              
              
              98,690
              
              
              
              86,459Additional
                  Paid-in Capital
              
              
              53,490,250
              
              
              
              46,703,202Subscriptions
                  Receivable
              
              
              (110,000
              )
              
              
              (220,000
              )Minority
                  Interest
              
              
              -
              
              
              
              -Accumulated
                  (Deficit)
              
              
              (49,535,424
              )
              
              
              (44,417,068
              )Total
                  Stockholders' Equity
              
              
              3,943,516
              
              
              
              2,152,593Total
                  Liabilities and Stockholders' Equity
              
              $
              15,475,483
              
              
              $
              15,186,639See
                  Accompanying Notes to Unaudited Consolidated Financial
                  Statements
   3
 Table
            of Contents
 
 TIDELANDS
                  OIL & GAS CORPORATIONCONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)Three
                  Months Ended
              
              
              Three
                  Months EndedMarch
                  31,
                  2007
              
              
              March
                  31,
                  2006(Restated)Revenues:Gas
                  Sales and Pipeline Fees
              
              $
              1,001,882
              
              
              $
              672,506Construction
                  Services
              
              
              102,089
              
              
              
              129,388Total
                  Revenues
              
              
              1,103,971
              
              
              
              801,894Expenses:Cost
                  of Sales
              
              
              567,721
              
              
              
              376,866Operating
                  Expenses
              
              
              83,371
              
              
              
              84,531Depreciation
              
              
              122,609
              
              
              
              115,764Interest
              
              
              346,104
              
              
              
              111,059Stock-Based
                  Compensation – Related Parties
              
              
              3,767,000
              
              
              
              445,000Sales,
                  General and Administrative
              
              
              1,336,147
              
              
              
              1,397,942Total
                  Expenses
              
              
              6,222,952
              
              
              
              2,531,162(Loss)
                  From Operations
              
              
              (5,118,981
              )
              
              
              (1,729,268
              )Interest
                  and Dividend Income
              
              
              625
              
              
              
              33,620Net
                  (Loss)
              
              $
              (5,118,356
              )
              
              $
              (1,695,648
              )Net
                  (Loss) Per Common Share:Basic
                  and
                  Diluted
              
              $
              (0.06
              )
              
              $
              (0.02
              )Weighted
                  Average Number of CommonShares
                  Outstanding
              
              
              92,573,416
              
              
              
              79,712,485See
                  Accompanying Notes to Unaudited Condensed Consolidated Financial
                  Statements
   4
 Table
            of Contents
  TIDELANDS
                    OIL & GAS CORPORATIONSTATEMENTS
                    OF CONDENSED CONSOLIDATED CASH FLOWS(UNAUDITED)
 Three
                    Months Ended
                
                
                Three
                    Months EndedMarch
                    31,
                    2007
                
                
                March
                    31,
                    2006(Restated)Cash
                    Flows Provided (Required) ByOperating
                    Activities:Net
                    (Loss)
                
                $
                (5,118,356
                )
                
                $
                (1,695,648
                )Adjustments
                    to Reconcile Net (Loss)to
                    Net Cash Provided (Required) ByOperating
                    Activities:Depreciation
                
                
                122,609
                
                
                
                115,764Change
                    in Derivative Liability
                
                
                0
                
                
                
                0Issuance
                    of Common Stock:For
                    Services Provided – Related Parties
                
                
                3,767,000
                
                
                
                445,000For
                    Services Provided – Other
                
                
                599,033
                
                
                
                424,500Changes
                    in:Accounts
                    Receivable
                
                
                103,803
                
                
                
                128,825Inventory
                
                
                (35,448
                )
                
                
                25,599Prepaid
                    Expenses
                
                
                52,917
                
                
                
                31,132Deferred
                    Charges
                
                
                308,829
                
                
                
                (1,625,458
                )Deposits
                
                
                (150
                )
                
                
                (50,000
                )Restricted
                    Cash
                
                
                (608
                )
                
                
                (561
                )Accounts
                    Payable and Accrued Expenses
                
                
                706,753
                
                
                
                24,626Customer
                    Deposits
                
                
                8,100
                
                
                
                0Net
                    Cash Provided (Required) By Operating Activities
                
                
                514,482
                
                
                
                (2,176,221
                )Cash
                    Flows (Required)By
                    Investing Activities:Acquisitions
                    of Property, Plant and Equipment
                
                
                (906,031
                )
                
                
                (637,301
                )Net
                    Cash (Required) By Investing Activities
                
                
                (906,031
                )
                
                
                (637,301
                )See
                    Accompanying Notes to Unaudited Condensed Consolidated Financial
                    Statements
   5
 Table
            of Contents
  
 TIDELANDS
                  OIL & GAS CORPORATIONSTATEMENTS
                  OF CONDENSED CONSOLIDATED CASH FLOWS(CONTINUED)(UNAUDITED)  Three
                    Months Ended
                
                
                Three
                    Months EndedMarch
                    31,
                    2007
                
                
                March
                    31,
                    2006(Restated)Cash
                    Flows Providedby
                    Financing Activities:Proceeds
                    from Stock Subscriptions Receivable
                
                
                0
                
                
                
                110,000Proceeds
                    from Exercise of Stock Option
                
                
                200,000
                
                
                
                0Proceeds
                    from Long-Term Loans
                
                
                26,314
                
                
                
                6,644,502Loan
                    from Related Party
                
                
                100,000
                
                
                
                (3,606
                )Repayment
                    of Loan by Related Party
                
                
                0
                
                
                
                0Net
                    Cash Provided by Financing Activities
                
                
                326,314
                
                
                
                6,750,896Net
                    Decrease (Increase) in Cash
                
                
                (65,235
                )
                
                
                3,937,374Cash
                    at Beginning of Period
                
                
                367,437
                
                
                
                1,113,911Cash
                    at End of Period
                
                $
                302,202
                
                
                $
                5,051,285Supplemental
                    Disclosures of Cash Flow Information:Cash
                    Payments for Interest
                
                $
                75,043
                
                
                $
                84,657Cash
                    Payments for Income Taxes
                
                $
                0
                
                
                $
                0Non-Cash
                    Investing and Financing Activities:Issuance
                    of Common Stock:Payments
                    of Accrued Expenses & Accounts Payable
                
                $
                343,244
                
                
                $
                445,000Conversion
                    of Debentures
                
                
                2,000,000
                
                
                
                0Cancellation
                    of Common Stock:In
                    Payment of Stock Subscription
                
                
                (110,000
                )
                
                
                0Total
                    Non-Cash Investing and Financing Activities
                
                $
                2,233,244
                
                
                $
                445,000See
                    Accompanying Notes to Unaudited Condensed Consolidated Financial
                    Statements
  
 6
 Table
            of Contents
  TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        1–BASIS OF
        PRESENTATION
 
 The
        accompanying unaudited condensed consolidated financial statements for the
        three
        month periods ended March 31, 2007, and 2006, 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-Q
        and
        Regulation S-X.  The financial information as of December 31, 2006, is
        derived from the registrant’s Form 10-K for the year ended December 31,
        2006.  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, 2006, included in the registrant’s Form 10-K for the
        year ended December 31, 2006.
 
 Operating
        results for the three-month period ended March 31, 2007, are not necessarily
        indicative of the results that may be expected for the remainder of the fiscal
        year ending December 31, 2007.  The accompanying unaudited condensed
        consolidated financial statements include the accounts of the registrant,
        its
        wholly-owned subsidiaries, Rio Bravo Energy, LLC, Sonora Pipeline, LLC, Sonterra
        Energy Corporation, Arrecefe Management, LLC, Marea Associates, LP, Reef
        Ventures, LP, Reef International, LLC, Reef Marketing, LLC, Terranova Energia
        S.
        de R. L. de C. V., Esperanza Energy, LLC, and Tidelands Exploration &
Production Corporation.  All significant inter-company accounts and
        transactions have been eliminated in consolidation.
 
 
 
 
 7
 Table
            of Contents
   TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        2– GOING
        CONCERN
 
 The
        Company has sustained recurring losses and negative cash flows from
        operations.  Over 2006, the Company’s growth had been funded through
        issuance of convertible debentures.  As of March 31, 2007, the Company
        had approximately $302,202 of unrestricted cash.  However, the Company
        has experienced and continues to experience negative cash flows from operations,
        as well as an ongoing requirement for substantial additional capital
        investment.  The Company needs to raise substantial additional capital
        to accomplish its business plan this year and over the next several
        years.  The Company is seeking to obtain such additional funding
        through private equity sources, from financial partners for some of its projects
        and the possible sale of certain operating assets along with a continued
        reduction of operating expenses.  There can be no assurance as to the
        availability or terms upon which such financing and capital might be available
        or that asset sales will be possible at suitable pricing.
 
 The
        Company’s ability to continue as a going concern will depend on management’s
        ability to successfully implement a business plan which will increase revenues,
        control costs, and obtain additional forms of debt and/or equity financing
        or
        financial partners.  These financial statements do not include any
        adjustments that might be necessary if the Company is unable to continue
        as a
        going concern.
 
 
 NOTE
        3– DEBT
        FINANCING
 
 On
        January 20, 2006, the Company completed a private placement of $6,569,750
        of
        convertible debt with six institutional investors.  The net proceeds
        realized by the Company were $4,949,291 after deduction of legal costs,
        commissions and interest discount.  The Company issued original issue
        discount debentures with a maturity date of January 20, 2008, and a conversion
        feature which permitted the holders to convert into common stock of the Company
        at a price of $0.87 per share.  The investors also received three-year
“Series A Common Stock Warrants” to purchase, in the aggregate, 2,491,975 shares
        of common stock of the Company at a conversion price of $0.935 per
        share.  Additionally, the Company issued to the investors “Series B
        Common Stock Warrants” which provided for a thirteen-month exercise period, at a
        conversion price of $1.275 per share, and an aggregate purchase total of
        7,551,432 shares of common stock of the Company.
 
 
 
 
 
 
 8
 Table
            of Contents
  TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        3– DEBT FINANCING
        (CONTINUED)
 
 As
        of
        March 31, 2007, two of the six institutional investors had converted $3,586,709
        of their debentures for 4,122,654 shares of the Company’s common stock at $0.87
        per share.  In addition, one investor had its $608,750 of debentures
        redeemed by the Company as a result of a default.  After accounting
        for the above conversions and redemption, $2,374,291 of convertible debentures
        convertible into 2,729,070 shares of Tidelands’ common stock at $0.87 per share
        remain outstanding.  On February 20, 2007, the “Series B Common Stock
        Warrants” exercisable at $1.275 per share for an aggregate purchase total of
        7,551,432 shares of the Company’s common stock expired.
 
 
 NOTE
        4– COMMON
        STOCK
        TRANSACTIONS
 
 On
        January 2, 2007, the Company issued 500,000 shares of its common stock valued
        at
        $135,000 to the former President in accordance with his Severance
        Agreement.
 
 On
        January 11, 2007, the Company issued 589,288 shares of its common stock valued
        at $162,500 to a law firm for 2007 legal services related to securities law
        matters.
 
 On
        January 22, 2007, the current President cancelled 500,000 of his shares of
        the
        Company’s restricted common stock valued at $110,000 which was offset against
        the stock subscription due from him to the Company.
 
 On
        February 2, 2007 and on four other occasions until March 5, 2007, the Company
        issued a total of 2,298,848 shares of its common stock to a holder of its
        Convertible Debentures for conversion of $2,000,000.
 
 On
        February 6, 2007, the Company issued 120,000 shares of its restricted common
        stock valued at $27,000 for 2006 investor public relations
        services.
 
 On
        February 13, 2007, the Company issued 500,000 shares of its common stock
        valued
        at $115,000 each to two Directors for a total of 1,000,000 common shares
        valued
        at $230,000.
 
 On
        February 15, 2007, the Company issued 681,818 shares of its common stock
        valued
        at $150,000 to a law firm for legal services related to the Northern Natural
        Gas
        Company/Betty Lou Sherrin Litigation matter (see NOTE 3 –
Litigation).
 
 On
        February 21, 2007, the Company issued 69,000 shares of its restricted Company
        stock valued at $14,490 for preparation of a Research Report.
 
  9
 Table
            of Contents
 
 TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        4– COMMON
        STOCK TRANSACTIONS
        (CONTINUED)
 
 On
        March
        1, 2007, the Company issued 642,858 shares of its common stock valued at
        $135,000 each to two Directors for a total of 1,285,716 common shares valued
        at
        $270,000.
 
 On
        March
        8, 2007, the Company issued 2,133,938 shares of its common stock valued at
        $426,787 to a law firm for past and future general and coordinating legal
        services.
 
 On
        March
        12, 2007, the Company issued 952,381 shares to a Director for $200,000 as
        a
        result of his exercise of stock options at $0.21 per share.
 
 On
        March
        14, 2007, the Company issued 1,500,000 shares of its common stock valued
        at
        $300,000 to each of two Directors for a total of 3,000,000 shares valued
        at
        $600,000.
 
 On
        March
        19, 2007, the Company issued 100,000 shares of its restricted common stock
        valued at $26,500 to an employee of a subsidiary as a stock bonus.
 
 NOTE
        5– SUMMARY
        OF RESTATED INTERIM
        REPORT
 
 On
        November 14, 2007, the Board of Directors of Tidelands Oil & Gas Corporation
        (the “Company”), determined that the accounting treatment of certain options
        issued to its directors (the “Options”) originally reported on its Quarterly
        Report of Form 10-Q for the three months ended March 31, 2007, was incorrect
        and
        required revision.  Therefore, the Board of Directors has determined that
        the financial statements in the Company’s Quarterly Report of Form 10-Q for the
        three months ended March 31, 2007 should not be relied upon and should be
        restated.
 
 The
        adjustments to this Report listed below correct the accounting treatment
        of the
        Options to comply with the provisions of Financial Accounting Standards Board
        Statement No. 123 Share Based Payment (FAS 123(R)).  FAS 123(R) was adopted
        by the Company on January 1, 2006; however, with respect to the Options,
        the
        Company inadvertently failed to record the appropriate expense for such Options
        in accordance with FAS 123(R).
 
 
 
 
 
 
 
 
 
  10
 Table
            of Contents
 
 TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        5– SUMMARY
        OF RESTATED INTERIM
        REPORTS (CONTINUED)
 
 The
        Company uses the Black-Scholes option pricing model to compute the fair value
        of
        stock options, which requires the Company to make the following
        assumptions:
 
 §
              The
                  risk-free interest rate is based on the short-term Treasury bond
                  at date
                  of grant.
 §
              The
                  dividend yield on the Company’s common stock is assumed to be zero since
                  the Company does not pay dividends and has no current plans to
                  do
                  so.
 §
              The
                  market price volatility of the Company’s common stock is based on daily
                  historical prices for the twelve months previous to the grant
                  date.
 §
              The
                  term of the grants is the current year since all grants are vested
                  at the
                  time of the grants; therefore, the entire fair value of stock-based
                  compensation was recorded in 2007.
 
 The
        Company has now recognized the fair value stock option compensation expense
        as
        follows:
 
 Quarterly
                    Report of 10-Q for the Three Months Ended March 31, 2007
                
                $
                2,667,000
 
 
 
 
 
 
 
 
 11
 Table
            of Contents
  TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 NOTE
        5– SUMMARY
        OF RESTATED INTERIM
        REPORTS (CONTINUED)
 
 The
        transaction referred to above relates to non-cash charges and did not affect
        the
        Company’s revenues, cash flows from operations, liquidity, assets, liabilities
        or total stockholders’ equity.
 
 Three
                  Months Ended March 31,
                  2007Previously
              
              
              
              Restatement
              
              
              RestatedReported
              
              
              
              Adjustment
              
              
              AmountConsolidated
                  Balance Sheets:Total
                  Assets
              
              $
              15,475,483
              
              
              
              $
              -
              
              
              $
              15,475,483Total
                  Liabilities
              
              
              11,531,967
              
              
              
              
              -
              
              
              
              11,531,967Stockholders’
                  EquityCommon
                  Stock
              
              
              98,690
              
              
              
              
              -
              
              
              
              98,690Additional
                  Paid-in Capital
              
              
              50,823,250
              
              
              
              
              2,667,000
              
              (1)
              
              53,490,250Subscriptions
                  Receivable
              
              
              (110,000
              )
              
              
              
              -
              
              
              
              (110,000
              )Accumulated
                  Deficit
              
              
              (46,868,424
              )
              
              
              
              (2,667,000
              )
              (3)
              
              (49,535,424
              )Total
                  Stockholders’ Equity
              
              $
              3,943,516
              
              
              
              $
              -
              
              
              $
              3,943,516Consolidated
                  Statement of Operations:Revenues
              
              $
              1,103,971
              
              
              
              $
              -
              
              
              $
              1,103,971Expenses
              
              
              3,555,952
              
              
              
              
              2,667,000
              
              (2)
              
              6,222,952Net
                  (Loss) from Operations
              
              
              (2,451,981
              )
              
              
              
              (2,667,000
              )
              
              
              (5,118,981
              )Other
                  Income
              
              
              625
              
              
              
              
              -
              
              
              
              625Net
                  (Loss)
              
              $
              (2,451,356
              )
              
              
              $
              (2,667,000
              )
              
              $
              (5,118,356
              )Net
                  (Loss) per Common Share:Basic
                  and
                  Diluted
              
              $
              (0.03
              )
              
              
              
              
              
              
              $
              (0.06
              )Weighted
                  Average Number of Common Shares Outstanding:Basic
                  and
                  Diluted
              
              
              92,573,416
              
              
              
              
              
              
              
              
              92,573,416
  (1)
              Adjust
                  additional paid-in capital to record fair value of stock options
                  issued.(2)
              Adjust
                  expenses to reflect fair value of stock-based
                  compensation.(3)
              Adjust
                  accumulated deficit to reflect additional losses as a result of
                  stock-based compensation expense.
 
  12
 Table
            of Contents
  TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 NOTE
        6– RELATED
        PARTY
        TRANSACTION
 
 During
        the quarter, the Company issued 2,642,858 shares of common stock valued at
        $550,000 to each of its two outside Directors.  In addition to their
        customary duties as directors, these board members provided regular and ongoing
        management services to the Company.  This compensation to the two outside
        Directors represents their compensation for 2007.
 
 NOTE
        7– LITIGATION
 
 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 (“Northern”) when it sued Betty Lou Sheerin
        (“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 Oil
        and
        Gas Corporation (“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 Tidelands' 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. Tidelands answered
        the
        Sheerin suit on March 26, 2003. Tidelands' 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 Hessel 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.
   
 13
 Table
            of Contents
  TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        7– LITIGATION
        (CONTINUED)
 
 Matter
        No. 1: (Continued)
 In
        September 2002, as a pre-closing deposit to the purchase of the Zavala Gathering
        System, 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 (“Company Directors”). 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 2002-C1-16421.
 
 Tidelands
        won a partial summary judgment against Sheerin as to all of her tort claims
        pled
        against Tidelands, save and except only her claim for conversion of 500,000
        shares of Tidelands’ stock.
 
 Sheerin
        seeks damages against Tidelands for indemnity for any sums found to be due
        from
        her to Northern, unspecified amounts of actual damages, statutory damages,
        unspecified amounts of exemplary damages, attorneys fees, costs of suit,
        and
        prejudgment and post judgment interest.
 
 
 
 
  14
 Table
            of Contents
   
 TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        7– LITIGATION
        (CONTINUED)
  Matter
        No. 1: (Continued)
 On
        August
        5, 2005, Northern 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 Gathering, Ltd., and Tidelands claiming that in such agreement
        Tidelands agreed to assume and satisfy all indebtedness due and owing Northern
        by Sheerin and ZG Gathering, Ltd. 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.  Tidelands won a summary
        judgment motion it filed against Northern and the court has now dismissed
        Northern's claims against Tidelands.
 
 On
        November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management ("ZG") filed
        its answer to Northern's Fifth Amended Petition, its counter-claim against
        Northern, and its answer and cross claim against Tidelands. ZG contends that
        the
        promissory notes given by ZG and Sheerin to Northern were procured by Northern's
        fraudulent misrepresentations and it claims unspecified amounts of damages
        against Northern. ZG's cross action against Tidelands claims Tidelands entered
        into an agreement to purchase the Zavala Gathering System from ZG and that,
        as
        part of that agreement, Tidelands agreed to satisfy the $3,700,914 Northern
        indebtedness of ZG, and to defend, indemnify, and hold ZG and Sheerin harmless
        from such indebtedness, to pay off a Sheerin loan of $300,000, and to issue
        1
        million shares of Tidelands’ stock, of which 500,000 was to be free trading
        shares. ZG claims that Tidelands breached this agreement by failing to satisfy
        the Northern indebtedness, failing to defend and indemnify it from such debt,
        failing to pay off the $300,000 note, failing to issue the free trading shares
        in Tidelands, and by placing a stop transfer order on the restricted stock
        that
        was issued by Tidelands. ZG seeks specific performance of the agreement,
        recovery of an unspecified amount of damages, and its attorney's
        fees.
 
 On
        March
        6, 2006, the Court granted Tidelands’ motion for summary judgment against
        Northern and dismissed Northern’s suit against Tidelands.  On March
        16, 2006, the Court denied Tidelands’ motion for summary judgment against
        Sheerin on Tidelands’ affirmative defense of mutual mistake.  On July
        19, 2006, the Court denied ZG’s motion for summary judgment to strike Tidelands’
affirmative defense of mutual mistake.
 
   
 15
 Table
            of Contents
 
 
 TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        7– LITIGATION
        (CONTINUED)
  Matter
        No. 1: (Continued)
 The
        trial
        date has been extended to July 9, 2007, by mutual agreements of the litigants
        unless a settlement is reached before that date.  The parties are
        currently in advanced settlement negotiations and the Company is hopeful
        that an
        agreement will be concluded in the near future.  Based on
        negotiations, the Company has reserved $2,250,000 as an estimated litigation
        settlement and that amount has been included in this report.
 
 Matter
        No. 2:
 Cause
        No.
        GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
        Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
        Court of Travis County, Texas.  This case involves a claim that
        Defendant Toll Brothers Property, LP (“Toll Brothers”) sold Plaintiff Goodson
        Builder, Ltd. (“Plaintiff” or “Goodson”) property without disclosing a propane
        easement.  Plaintiff sued Sonterra Energy Corp. (“Sonterra”) for
        trespassing through the use of the easement.  Goodson’s primary claim
        is against the seller for fraud and non-disclosure.  Toll Brothers has
        responded with a claim for sanctions because the claim is
        frivolous.  Toll Brothers offers a witness who is Plaintiff’s former
        employee and took pictures of the propane tank prior to the Plaintiff’s
        purchase.  Goodson seeks damages in the hundreds of thousands of
        dollars.  Insurance would not cover these damages.
 
 The
        case
        is pending summary judgment.  The Company is contesting the case
        vigorously; however, the Company is willing to settle if the Plaintiff is
        willing to drop the claim.
 
 Matter
        No. 3:
 Cause
        No.
        GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp., Defendant,
        was filed in the 53rd Judicial District of Travis County, Texas and Cause
        No. GN
        501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy Corp.,
        Defendant, was filed in the 98th
        Judicial District Court of Travis County, Texas.  The above matters
        were each filed against Sonterra in May 2005 and involve the same claims
        arising
        from the same propane service agreement.  In each case, the plaintiff
        initially brought claims against Sonterra arising from Sonterra’s failure, as an
        assignee of the agreement, to pay easement use fees to the
        plaintiff.  Sonterra obtained summary judgment as to the plaintiffs’
respective breach of contract and failure of assignment claims arising from
        the
        failure to pay easement use fees.  The cases were not, however, fully
        dismissed because the plaintiffs added new causes of action for failure to
        pay
        easement use fees, claims for unpaid developer bonus, reformation of the
        agreements to require payment of easement use fees and alleged failure of
        assignment.  These separate lawsuits have since been consolidated into
        one suit for purposes of pretrial and trial.  The May 2007 trial date
        has been continued and will likely be reset in September 2007.
 
  16
 Table
            of Contents
 
 TIDELANDS
        OIL & GAS CORPORATION
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31, 2007
 
 
 NOTE
        7– LITIGATION
        (CONTINUED)
 
 Matter
        No. 3: (Continued)
 In
        accordance with Statement of Financial Accounting Standards No. 5, “Accounting
        for Contingencies,” management has reached the conclusion that there is a remote
        possibility that the claims enumerated in Matters No. 2 and 3 above would
        be
        upheld at trial and has also determined that the amount of the claims cannot
        be
        reasonably estimated.  Accordingly, the Company’s financial statements
        reflect no accrual of a loss contingency with respect to these legal
        matters.










17
 Table
          of Contents





Item
      2. Management's Discussion and Analysis of Financial Condition
      and Results of Operation




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.




Business
      Overview




Our
      products and services are primarily focused on development and operation of
      transportation, processing, distribution and storage projects of natural gas
      and
      natural gas liquids in the northeastern states of Mexico (Coahuila, Nuevo Leon
      and Tamaulipas) and the states of Texas and California 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. Sonterra
      also
      designs and constructs residential propane delivery systems for new residential
      developments in Central Texas. We derive revenue from this activity in two
      ways,
      the first being from construction revenue for yard lines and meter sets
      installed to a homeowner's lot, and the second being the sale of LPG gas to
      customers in the residential subdivisions. Sonterra Energy Corporation has
      recently begun performing construction services for third party utility
      companies in order to more efficiently utilize its existing expertise and
      assets.




Recent
      Developments




In
      the
      three months ended March 31, 2007, certain significant developments occurred
      with respect to the businesses operated by the Company.




On
      January 31, 2007, Sonora Pipeline LLC (“Sonora”) filed an application before the
      Federal Energy Regulatory Commission for certificate of convenience and
      necessity to construct and operate the Mission and Progreso International
      Pipelines including application for two presidential permits for a cross-border
      connection to the planned Terranova Energia pipelines in Mexico. Sonora
      continues to respond to FERC inquiries and analysis with respect to these
      applications and has asked the FERC to grant the authorizations requested in
      the
      applications by July 1, 2007. The current catalog of FERC correspondence for
      Sonora’s activities is located at www.ferc.gov under
      Docket No. PF07-74 et sequence.




On
      March
      7, 2007, Esperanza Energy LLC (“Esperanza”) announced plans to file applications
      with state and federal agencies to build a floating liquefied natural gas (LNG)
      receiving facility 15 miles off the Port of Long Beach, California. The project,
      named Port Esperanza, will bring natural gas to the Southern California
      marketplace. Esperanza plans to formally file its application in late 2007.
      The
      LNG receiving facility has attracted the commercial interest of several parties
      who could participate as co-venturers and/or gas purchasers. More information
      is
      available at www.esperanza-energy.com.




18
 Table
          of Contents




Results
      of Operations





THREE
      MONTHS ENDED MARCH 31,
      2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006





REVENUES:
      The Company reported revenues of $1,103, 971 for the three months ended March
      31, 2007 as compared with revenues of $801,894 for the three months ended March
      31, 2006, which is a 37% increase in revenue for the three months ended March
      31, 2007 compared to the three months ended March 31, 2006. Revenues from Reef
      Ventures, LP decreased to $41,508 for the three months ended March 31, 2007
      compared to $58,589 for the three months ended March 31, 2006. The decrease
      was
      due to lower volumes of gas transported in Mexico through the 12 inch natural
      gas pipeline owned by Reef Ventures, LP. Revenues from Sonterra Energy
      Corporation increased to $1,045,776 for the three months ended March 31, 2007
      compared to $743,305 for the three months ended March 31, 2006. Gas sales at
      Sonterra increased to $943,687 for the three months ended March 31, 2007
      compared to $613,917 for the three months ended March 31, 2006. The increase
      in
      gas sales was primarily due to an increase in total customers served by Sonterra
      Energy Corporation. Construction services revenues at Sonterra decreased to
      $102,089 for the three months ended March 31, 2007 compared to $129,388 for
      the
      three months ended March 31, 2006.





TOTAL
          COSTS AND EXPENSES: Total costs and expenses increased to $6,222,952 for
          the
          three months ended March 31, 2007 compared to $2,531,162 for the three
          months
          ended March 31, 2006. The most significant increase occurred in stock based
          compensation due to issuances of common stock and options for services
          of
          directors.


COST
      OF
      SALES: Cost of sales increased to $567,721 for the three months ended March
      31,
      2007 compared to $376,866 for the three months ended March 31, 2006. The
      increase was due almost entirely to increased cost and volume of propane sold
      through our Sonterra Energy Corporation subsidiary.





OPERATING
      EXPENSES: Operating expenses decreased to $83,371 for the three months ended
      March 31, 2007 compared to $84,531 for the three months ended March 31, 2006.
      This decrease was attributable to slightly reduced operating costs from Sonterra
      Energy Corporation. Depreciation Expense increased to $122,609 for the three
      months ended March 31, 2007 compared to $115,674 for the three months ended
      March 31, 2006. The increase in depreciation expense is primarily from the
      additions of depreciable property in Sonterra Energy Corporation and our
      Tidelands Exploration & Production Corporation subsidiary.





INTEREST
      EXPENSE: Interest expense increased to $346,104 for the three months ended
      March
      31, 2007 compared to $111,059 for the three months ended March 31, 2006. The
      increase resulted primarily from additional interest expense associated with
      the
      issuance of convertible debentures in the financing described in Footnote 3
      to
      Condensed Consolidated Financial Statements for the three months ended March
      31,
      2007.




SALES,
            GENERAL AND ADMINISTRATIVE:
            Sales, General and Administrative Costs (including Stock-Based Compensation)
            increased to $5,103,147for
            the three months ended March 31,
            2007 compared to $1,842,942 for the three months ended March 31, 2006.
            Staff and
            Officer Salaries and Officer Stock Bonuses decreased by $926,332 for
            the three
            months ended March 31, 2007 compared to the three months ended March
            31, 2006.
            This was a result of staff reductions undertaken in the fourth quarter
            of 2006.
            Director compensation for corporate management and reorganization efforts
            and
            legal fees associated primarily with litigation expenses were paid by
            issuance
            of common stock in the amount of $1,658,043 for the three months ended
            March 31,
            2007. Of the total Sales, General and Administrative Costs (including
            stock
            based compensation of directors) of $5,103,147for
            the three months ended March 31,
            2007, $4,339,533of
            these costs were paid by issuance of
            common stockand optionsand
            the remaining $763,614
            of costs were paid with cash.




INTEREST
      AND DIVIDEND INCOME: Interest and Dividend income decreased to $625 for the
      three months ended March 31, 2007 as compared to $33,620 for the three months
      ended March 31, 2006 due to lower cash balances held in interest bearing
      accounts during the three months ended March 31, 2007.





NET
          LOSS:
          Net loss of $5,118,356 for the three months ended March 31, 2007 represents
          an
          increase in loss of $3,422,708 as compared to net loss of $1,695,648 for
          the
          three months ended March 31, 2006. This increased loss was primarily due
          to the
          increased issuance of common stock and options by the Company for directors’
services and legal fees.


LIQUIDITY
      AND CAPITAL RESOURCES: The independent auditors report on our March 31, 2007
      financial statements included in this Form 10-Q states that our difficulty
      in
      generating sufficient cash flow to meet our obligations and sustain operations
      raises substantial doubts about the our ability to continue as a going
      concern.




19
 Table
          of Contents




With
      regard to liquidity and adequacy of capital resources, the Company will need
      additional equity or debt financing during the second quarter of 2007.
      Management plans to raise additional capital through debt and common stock
      offerings and to pursue all available financing alternatives in this regard.
      Management may also consider a variety of potential partnership or strategic
      alliances to strengthen its financial position. Additional funding for the
      permit process for the offshore LNG regas terminal in Southern California will
      be needed by the third quarter of 2007. Furthermore, the Company will need
      to
      raise additional capital to fund ongoing development activities for our Mexican
      subsidiary, Terranova Energia and also to fund operating overhead at the parent
      company level and the possible cost of a litigation settlement or adverse
      verdict if a pending case goes to trial. New issuance of common stock and debt
      sufficient to retire the outstanding debentures and to provide additional
      required capital is being actively pursued by the Company. No assurance can
      be
      made that such capital can be acquired in a timely fashion or at all.
      Furthermore, if capital is available through these sources, if may be at terms
      that are disadvantageous to the Company and its shareholders.




In
      light
      of these possible outcomes and the current cash resources available for the
      sustenance of corporate operations, management has taken action to reduce
      overhead costs and otherwise conserve cash resources for the Company including
      the use of stock issuances, when feasible, to pay for services rendered to
      the
      Company.




Direct
          capital expenditures during the three months ended March 31, 2007, totaled
          $906,031. The capital expenditures were composed of increased pre-construction
          costs regarding potential international pipeline crossings and storage
          facilities in Mexico, pre-construction costs regarding an offshore LNG
          terminal
          in Southern California, additional machinery and equipment for the operation
          of
          the Sonterra Energy Corporation propane systems and an investment in a
          natural
          gas pipeline and nearby leases for development. Total debt decreased from
          $13,034,046 at December 31, 2006, to $11,531,967 at March 31, 2007. The
          decrease
          in total debt is due primarily to the conversion of $2,000,000 of convertible
          debentures from the financing transaction of January 20, 2006 into common
          stock
          and was offset by an increase in accounts payable. Net loss for the three
          months
          ended March 31, 2007, was $5,118,356, an increase in net loss of 202% from
          the
          net loss of $1,695,648 for the three months ended March 31, 2006. Basic
          and
          diluted net loss per common share increased to $0.06 for the three months
          ended
          March 31, 2007, as compared to $0.02 for the three months ended March 31,
          2006.
          The net loss per share calculation for the three months ended March 31,
          2007,
          included an increase in actual and equivalent shares
          outstanding.




Item
      3. Quantitativeand Qualitative Disclosures About Market
      Risk




Cash
      and Cash Equivalents




We
      have
      historically invested our cash and cash equivalents in short-term, fixed rate,
      highly rated and highly liquid instruments which are reinvested when they mature
      throughout the year. Although our existing investments are not considered at
      risk with respect to changes in interest rates or markets for these instruments,
      our rate of return on short-term investments could be affected at the time
      of
      reinvestment as a result of intervening events. As of March 31, 2007, we had
      cash and cash equivalents aggregated $302,202.




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.




Debt




The
      interest rate on our Impact International debt obligation is generally
      determined based on the prime interest rate plus two percent and may be subject
      to market fluctuation as the prime rate changes.




20
 Table
          of Contents




Item
      4. Controls and Procedures




Evaluation
      Of Disclosure Controls And Procedures




James
          B.
          Smith, our Chief Executive Officer and Chief Financial Officer (Principal
          Executive Officer and Principal Financial Officer) performed an evaluation
          of
          the Company’s disclosure controls and procedures, as that term is defined in
          Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange
          Act”), as of March 31, 2007.  Based on that evaluation, in light of
          the restatement of the Company's financial statements to correct the accounting
          treatment of certain stock options issued to the Board of Directors, Mr.
          Smith
          has concluded that these disclosure controls and procedures were ineffective
          as
          of the end of the period covered by this Report.


Changes
      In Internal Control Over Financial Reporting




During
      the quarter ended March 31, 2007, there were no changes in the Company’s
      internal control over financial reporting that have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.








PART
      II - OTHER INFORMATION




Item
      1.Legal Proceedings




Except
      as
      set forth below, there have been no material changes to the legal proceeding
      or
      investigations reported in Part I, Item 3 - "Legal Proceedings" in the Company's
      Form 10-K filed with the SEC on April 17, 2007 (the "Prior 10-K"). Other than
      as
      set forth below and in the Prior 10-K, the Company is not a party to any
      material pending legal proceeding.




Matter
      No. 1


As
      described in the Prior 10-K and in Note 6 above to the Company’s condensed
      consolidated financial statements, the Company is a party to a pending 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. During the
      quarter ended March 31, 2007, the trial date has been extended to July 9, 2007,
      by mutual agreements of the litigants unless a settlement is reached before
      that
      date. The parties are currently in advanced settlement negotiations and the
      Company is hopeful that an agreement will be concluded in the near future.
      Based
      on negotiations, the Company has reserved $2,250,000 as an estimated litigation
      settlement and that amount has been included in this report.




21
 Table
          of Contents




Item
      1A. Risk Factors




During
      the quarter ended March 31, 2007, there were no material changes to the risk
      factors described in Part I, Item 1A “Risk Factors” of the Company’s Annual
      Report on Form 10-K for the fiscal year ended December 31,
      2006.




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





The
      Company made the following issuances of unregistered securities during the
      quarter ended March 31, 2007 (not previously reported in a Form
      8-K):





On
      February 6, 2007, the Company issued 120,000 shares of its restricted common
      stock valued at $27,000 for 2006 investor public relations
      services.





On
      February 21, 2007, the Company issued 69,000 shares of its restricted Company
      stock valued at $14,490 for preparation of a Research Report.





On
      March
      19, 2007, the Company issued 100,000 shares of its restricted common stock
      valued at $26,500 to an employee of a subsidiary as a stock bonus.





No
      commissions were paid in connection with any of these sales. We did not employ
      any form of general solicitation or advertising in connection with the offer
      and
      sale of the securities described below. Except as otherwise noted above, the
      offer and sale of the securities listed below were made in reliance on the
      exemption from registration provided by Section 4(2) of the Securities Act
      and/or Regulation D promulgated by the Securities and Exchange Commission as
      transactions by an issuer not involving any public offering.





The
      Company did not make any purchases of its common stock during the quarter ended
      March 31, 2007. However, on January 22, 2007, the current President cancelled
      500,000 of his shares of the Company’s restricted common stock valued at
      $110,000, which was offset by cancellation of the stock subscription due from
      him to the Company.




22
 Table
          of Contents




Item
      3. DefaultsUpon Senior Securities




None.




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




No
      matters were submitted to a vote of security holders during the quarter covered
      by this report.




Item5.
      Other Information




None.




Item6.
      Exhibits




Exhibit
            
            Description
            
            Location
                of Exhibit10.1
            
            Employment
                Agreement with James B. Smith*
            
            Incorporated
                by reference to Exhibit 10.1 to 8-K filed April 3, 200710.2
            
            2007
                Non-Qualified Stock Grant and Option Plan *
            
            Incorporated
                by reference to Exhibit 10.1 of Form 8-K filed on February 16,
                200710.3
            
            Form
                of Option Grant under 2007 Non-Qualified Stock Grant and Option Plan
                *
            
            Incorporated
                by reference to Exhibit 10.2 of Form 8-K filed on February 16,
                200710.4
            
            Form
                of Stock Award Agreement under 2007 Non-Qualified Stock Grant and
                Option
                Plan *
            
            Incorporated
                by reference to Exhibit 10.3 of Form 8-K filed on February 16,
                200731.1
            
            Chief
                Executive Officer and Chief Financial Officer Section 302 Certification
                pursuant to Sarbanes - Oxley Act.
            
            Included
                with this filing32.1
            
            Chief
                Executive Officer-Section 906 Certification pursuant To Sarbanes-Oxley
                Act
            
            Furnished
                herewith


*
      Management or compensatory plan or arrangement.







23
 Table
          of Contents





SIGNATURES






Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Company has
      duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.





TIDELANDS
                OIL & GAS CORPORATIONDate: January
                23, 2008
            By:
            /s/  James
                B.
                SmithJames
                B. Smith
              President
                and Chief Executive Officer









24