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 March 31, 2006

[_]  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
                                                             -----   -----

Indicate by check mark whether the  registrant is a shell company (as defined by
Rule 12b-2of the Exchange Act. Yes      No  X
                                  -----   -----

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 March 31, 2006,  there were  79,712,485  shares of Common Stock issued and
outstanding.

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

                                      -1-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                                   FORM 10-QSB


                                      INDEX
                                      -----

                                                                            Page

PART I - Financial Information

Item 1 - Financial Statements
         Condensed Consolidated Balance Sheets as of
         March 31, 2006, and December 31, 2005.................................3

         Condensed Consolidated Statements of Operations
         For the Three Months Ended March 31, 2006 and 2005....................4

         Condensed Consolidated Statements of Cash Flows
         For the Three Months Ended March 31, 2006 and 2005..................5-6

         Notes to Condensed Consolidated Financial Statements...............7-12

Item 2 - Management's Discussion and Analysis or Plan of Operation............13

Item 3 - Controls and Procedures..............................................14


PART II - Other Information

Item 1 - Legal Proceedings....................................................15

Item 2 - Changes in Securities and Use of Proceeds............................15

Item 3 - Defaults Upon Senior Securities......................................15

Item 4 - Submission of Matters to a Vote of Security Holdings.................15

Item 5 - Other Information....................................................15

Item 6 - Exhibits and Reports on Form 8K......................................15

Signature.....................................................................16





                                      -2-
<PAGE>
<TABLE>
<CAPTION>

                         PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

                         TIDELANDS OIL & GAS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                     ------
                                                               March 31,     December 31,
                                                                 2006            2005
                                                             ------------    ------------
<S>                                                          <C>             <C>
                                                             (Unaudited)      (Restated)
Current Assets:
      Cash                                                   $  5,051,285    $  1,113,911
      Accounts and Loans Receivable                               339,633         468,458
      Inventory                                                   116,605         142,204
      Prepaid Expenses                                            152,806         183,938
                                                             ------------    ------------
         Total Current Assets                                   5,660,329       1,908,511
                                                             ------------    ------------

Property Plant and Equipment, Net                              10,563,625      10,042,088
                                                             ------------    ------------

Other Assets:
      Deposits                                                     64,004          14,004
      Restricted Cash                                              77,364          76,803
      Note Receivable                                             292,112         288,506
      Deferred Charges                                          1,625,458               0
      Goodwill                                                  1,158,937       1,158,937
                                                             ------------    ------------
         Total Other Assets                                     3,217,875       1,538,250
                                                             ------------    ------------

         Total Assets                                        $ 19,441,829    $ 13,488,849
                                                             ============    ============

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

Current Liabilities:
      Current Maturities - Notes Payable                     $    225,000    $    225,000
      Accounts Payable and Accrued Expenses                       805,180       1,225,554
                                                             ------------    ------------
         Total Current Liabilities                              1,030,180       1,450,554

Long-Term Debt                                                 10,916,270       4,271,768
                                                             ------------    ------------

         Total Liabilities                                     11,946,450       5,722,322
                                                             ------------    ------------

Commitments and Contingencies                                        --              --

Stockholders' Equity:
      Common Stock, $.001 Par Value per Share,
        100,000,000 Shares Authorized, 79,955,815
        and 78,495,815 Shares Issued and
        Outstanding at March 31, 2006
        and December 31, 2005 Respectively                         79,957          78,497
      Paid-in Capital in Excess of Par Value                   42,131,214      40,818,174
      Subscriptions Receivable                                   (440,000)       (550,000)
      Minority Interest                                              --              --
      Accumulated (Deficit)                                   (34,275,792)    (32,580,144)
                                                             ------------    ------------
         Total Stockholders' Equity                             7,495,379       7,766,527
                                                             ------------    ------------

         Total Liabilities and Stockholders' Equity          $ 19,441,829    $ 13,488,849
                                                             ============    ============
</TABLE>

      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      -3-
<PAGE>
<TABLE>
<CAPTION>

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


                                               Three Months Ended    Three Months Ended
                                                 March 31, 2006        March 31, 2005
                                               ------------------    ------------------
<S>                                            <C>                   <C>
                                                                         (Restated)
Revenues:
      Gas Sales and Pipeline Fees              $          672,506    $          586,949
      Construction Services                               129,388                41,126
                                               ------------------    ------------------
         Total Revenues                                   801,894               628,075
                                               ------------------    ------------------

Expenses:
      Cost of Sales                                       376,866               284,679
      Operating Expenses                                   84,531                66,774
      Depreciation                                        115,764               115,441
      Interest                                            111,059               209,787
      Beneficial Conversion Feature Interest                    0             4,736,843
      Sales, General and Administrative                 1,842,942             1,818,411
                                               ------------------    ------------------
         Total Expenses                                 2,531,162             7,231,935
                                               ------------------    ------------------

(Loss) From Operations                                 (1,729,268)           (6,603,860)

Derivative (Loss)                                               0            (2,894,500)
(Loss) on Sale of Asset                                         0                (3,167)
Interest and Dividend Income                               33,620                35,992
                                               ------------------    ------------------

Net (Loss)                                     $       (1,695,648)   $       (9,465,535)
                                               ==================    ==================

Net (Loss) Per Common Share:
      Basic and Diluted                        $            (0.02)   $            (0.15)
      -----------------                        ==================    ==================

Weighted Average Number of Common
       Shares Outstanding                              79,712,485            61,983,359
                                               ==================    ==================
</TABLE>





      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      -4-
<PAGE>
<TABLE>
<CAPTION>

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


                                                 Three Months Ended    Three Months Ended
                                                   March 31, 2006        March 31, 2005
                                                 ------------------    ------------------
<S>                                              <C>                   <C>
                                                                           (Restated)
Cash Flows Provided (Required) By
  Operating Activities:
     Net (Loss)                                  $       (1,695,648)   $       (9,465,535)
     Adjustments to Reconcile Net (Loss)
      to Net Cash Provided (Required) By
      Operating Activities:
         Depreciation                                       115,764               115,441
         Loss on Disposal of Equipment                            0                 3,167
         Change in Derivative Liability                           0             2,894,500
         Issuance of Common Stock:
           For Services Provided                            869,500               979,500
         Beneficial Conversion Feature Interest                   0             4,736,843
         Changes in:
           Accounts Receivable                              128,825               111,899
           Inventory                                         25,599                22,364
           Prepaid Expenses                                  31,132                69,126
           Deferred Charges                              (1,625,458)               77,500
           Deposits                                         (50,000)               (2,500)
           Restricted Cash                                     (561)                    0
           Accounts Payable and
             Accrued Expenses                                24,626              (135,394)
                                                 ------------------    ------------------

Net Cash (Required) By Operating Activities               (2,176,221)             (593,089)
                                                 ------------------    ------------------

Cash Flows Provided (Required)
  By Investing Activities:
      Acquisitions of Property, Plant
           and Equipment                                   (637,301)             (278,421)
      Disposals of Equipment                                      0                   800
                                                 ------------------    ------------------

Net Cash (Required) By Investing Activities                (637,301)             (277,621)
                                                 ------------------    ------------------
</TABLE>



      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      -5-
<PAGE>
<TABLE>
<CAPTION>

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

                                   (UNAUDITED)



                                               Three Months Ended    Three Months Ended
                                                 March 31, 2006        March 31, 2005
                                               ------------------    ------------------
<S>                                            <C>                   <C>
                                                                         (Restated)
Cash Flows Provided (Required)
   by Financing Activities:
      Proceeds from Stock Subscriptions
         Receivable                                       110,000                     0
      Proceeds from Long-Term Loans                     6,644,502                85,418
      Repayment of Short-Term Loans                             0                     0
      Loan to Related Party                                (3,606)                 (564)
                                               ------------------    ------------------

Net Cash Provided by Financing Activities               6,750,896                84,854
                                               ------------------    ------------------

Net Increase (Decrease) in Cash                         3,937,374              (785,856)

Cash at Beginning of Period                             1,113,911             5,484,054
                                               ------------------    ------------------

Cash at End of Period                          $        5,051,285    $        4,698,198
                                               ==================    ==================

Supplemental Disclosures of
   Cash Flow Information:
      Cash Payments for Interest               $           84,657    $          115,994
                                               ==================    ==================

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

Non-Cash Investing and Financing Activities:
   Issuance of Common Stock:
      Payment of Accrued Expense               $          445,000    $                0
                                               ------------------    ------------------

      Total Non-Cash Investing and
         Financing Activities                  $          445,000    $                0
                                               ==================    ==================
</TABLE>



      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      -6-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


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

          The accompanying unaudited condensed consolidated financial statements
          for the three month periods ended March 31, 2006, and 2005,  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, 2005, is derived from the  registrant's
          Form 10-KSB for the year ended December 31, 2005. 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, 2005,  included in the  registrant's  Form
          10-KSB for the year ended December 31, 2005.

          Operating results for the three-month period ended March 31, 2006, are
          not necessarily indicative of the results that may be expected for the
          remainder  of  the  fiscal  year  ending   December   31,  2006.   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, LP, Reef Ventures, LP, Reef International, LLC, Reef
          Marketing,  LLC, Terranova Energia S. de R. L. de C. V., and Esperanza
          Energy, LLC. All significant  inter-company  accounts and transactions
          have been eliminated in consolidation.


                                      -7-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 2  - 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
          (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,  Ltd., 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.


                                      -8-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 2  - LITIGATION (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 29, 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.  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 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.





                                      -9-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 2  - LITIGATION (CONTINUED)
------    ----------------------

          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 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.

          On March 6, 2006,  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 that
          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.

          Much of the  discovery  has  been  completed  at this  time.  Based on
          investigation,  and  discovery  to date,  Tidelands  appears to have a
          number of  potential  defenses to the claims of Sheerin and  Northern.
          Tidelands   intends  to  aggressively   defend  these  lawsuits.   The
          complexity  of the issues in this case and the inherent  uncertainties
          in litigation of this kind prevent a more definitive evaluation of the
          extent of Tidelands' liability exposure.


                                      -10-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 2  - 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.

          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  any  or  all  of  the
          aforementioned claims 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 response to the above legal matters.

NOTE 3  - COMMON STOCK TRANSACTIONS
------    -------------------------

          On  January  2,  2006,  the  Company  issued  500,000  shares  of  its
          restricted  common stock valued at $455,000  pursuant to an employment
          contract with an officer of the Company.

          On January 3, 2006,  the Company  issued  500,000 shares of its common
          stock  valued at  $445,000  under the 2004 Stock Grant and Option Plan
          pursuant to an employment contract with an officer of the Company.

          On January 16, 2006,  the Company  issued 250,000 shares of its common
          stock for 2006  legal  fees  valued at  $215,000  under the 2004 Stock
          Grant and Option Plan.

          On January 30, 2006,  the Company  issued  60,000 shares of its common
          stock valued at $57,000 for legal services.

          On  January  30,  2006,  the  Company  issued  150,000  shares  of its
          restricted  common stock valued at $142,500  pursuant to an employment
          contract with an officer of the Company.


                                      -11-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2006


NOTE 4  - 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
          $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 March 31, 2006, the loan
          balance was $292,112.



NOTE 5  - DEBT FINANCING
------    --------------

          On January 20,  2006,  the Company  completed a private  placement  of
          $6,569,750 of convertible debt with seven institutional investors. The
          net  proceeds  realized by the Company  were  $4,964,410.  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.

          In accordance with this private placement,  the Company entered into a
          "Registration  Rights  Agreement" with the investors,  whereby,  among
          other  terms and  conditions,  the Company  must  comply with  various
          effective  dates and  periods  or, if in default of said dates  and/or
          periods,  be subject to  liquidated  damages as outlined in the master
          agreement.


NOTE 6  - SUBSEQUENT EVENTS
------    -----------------

          During  this  quarter,  the  Company  solicited   shareholder  written
          consents  in  lieu  of a  special  meeting  of the  shareholders.  The
          consents were counted and effective April 17, 2006. The Company sought
          and  obtained  a 77.5%  majority  shareholder  approval  to amend  our
          Company's  Certificate  of  Incorporation  increasing  our  authorized
          Capital Stock from 100,000,000 shares to 250,000,000 shares.





                                      -12-
<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.  The Company has also begun a  feasibility  study for the  potential
development of an offshore LNG  regasification  terminal and connecting  natural
gas pipeline in the vicinity of Long Beach, California.

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.  Additionallly,  revenues are derived from
the provision of  construction  services for yard lines and meter sets installed
to a homeowner's  lot, and the sale of propane gas to  residential  customers in
Central Texas through the assets owned by Sonterra Energy Corporation.


Recent Developments

In the three  months  ended March 31,  2006,  several  significant  developments
occurred with respect to the businesses operated by the Company.


Financing Transaction

On January 20, 2006, the Company  entered into  Securities  Purchase  Agreements
with seven accredited investors(collectively,  "Purchasers or Holders"). We sold
$6,569,750 Dollars, in the aggregate principal amount, of discounted convertible
debentures("Debentures")  and Series A and Series B Warrants to purchase  common
stock  ("Warrants")  for an aggregate  payment of $5,396,098 after deduction for
the interest discount. The Company paid an 8% commission to the placement agent,
HPC Capital Management,  LLC., a registered  broker-dealer.  The Company granted
HPC Capital  Management  Series A Common Stock  Purchase  Warrants as additional
transaction  compensation.  The Company  received net proceeds of  $4,949,291.88
after deduction of legal costs,  commissions and interest discount. We intend to
use the proceeds for working capital.

The sale of these  securities  required the Company to increase  its  authorized
common stock capital because it had  insufficient  authorized  capital to comply
with all of the Debenture  conversion and Warrant exercise provisions  contained
in the Transaction  Documents.  We have reserved  9,000,000 common shares of our
unissued authorized common stock capital for the transaction. On April 17, 2006,
an amendment to the  articles of  incorporation  of the Company was approved via
written consent in lieu of a special meeting of the  shareholders of the Company
and on April 19,  2006,  the Company  amended its articles of  incorporation  by
increasing  its  authorized  common  stock  capital  from  One  Hundred  Million
(100,000,000)  shares,  par value $0.001 per share to Two Hundred  Fifty Million
(250,000,000)   shares,   par  value  $0.001  per  share,  thus  satisfying  the
requirements of the financing documents.


                                      -13-
<PAGE>

We have also agreed to file a registration  statement on Form SB-2 with the U.S.
Securities  and  Exchange  Commission  ("SEC")  to  register  the  common  stock
underlying the Debentures and Warrants.

We sold these  securities in an exempt  transaction  under the Securities Act of
1933,(the "Act") as amended, pursuant to Section 4(2) and Regulation D Rule 506.
These are restricted securities and may not be resold without registration under
the Act or an exemption from the registration requirements of the Act.

The  Debentures  are Original  Issue  Discount  Convertible  Debentures  with an
aggregate face amount of $6,569,750.  The purchasers paid an aggregate principal
sum of  $5,396,098.  The face amount of the  Debentures is due January 20, 2008.
The  difference  between  the  face  amount  and the  aggregate  principal  paid
represents the interest expense. The Debenture Holder may convert all or part of
the Debenture  face amount into shares of Tidelands  common stock at any time at
an initial conversion rate of $0.87 per share.

The Purchasers have agreed to restrict their ability to convert their Debentures
or Exercise their Warrants and receive our shares such that the number of shares
of common stock held by each of them  individually  in the aggregate  after such
conversion or exercise does not exceed 4.99% of the then issued and  outstanding
Company common shares. This beneficial ownership limitation may be waived by the
Holder.

Subject to specific terms and  conditions in the Debenture,  the Company has the
option to force conversion of the Debentures into common shares if the Company's
share price as quoted on the Over-the-Counter  Electronic Bulletin Board exceeds
250% of the  then  Conversion  Price  for a  period  of time  based  on a Volume
Weighted  Average  Price (VWAP)  formula.  The VWAP share price must exceed this
250% price for at least 20 consecutive Trading Days.

The conversion price will be subject to adjustment for corporate events, such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

We granted the  Purchasers  Series A Common Stock  Purchase  Warrants  (Series A
Warrants) to purchase  2,491,974 shares of our common stock at $0.935 per share.
We also  granted  HPC  Capital  Management  65,697  Series A Common  Warrants to
purchase our common stock at $0.935 per share.

The  Series A  Warrants  may be  exercised  immediately  by the  Purchasers  and
terminate on January 20, 2009.

Subject to specific  terms and  conditions in the Series A Warrant  including an
effective  registration statement registering underlying shares, the Company has
the call option to force  conversion  of this Warrant into common  shares if the
Company's  share  price as quoted on the  Over-the-Counter  Electronic  Bulletin
Board  exceeds 250% of the then  effective  Exercise  Price for a period of time
based on a Volume Weighted  Average Price (VWAP)  formula.  The VWAP share price
must exceed this 250% threshold price for at least 20 consecutive Trading Days.

If at any time after one year from the date of  issuance  there is no  effective
registration statement  registering,  or no current prospectus available for the
resale of the  underlying  shares,  then this  Warrant may also be  exercised by


                                      -14-
<PAGE>

means of  "cashless  exercise"  as  determined  by a  formula  described  in the
Warrant.

The exercise price will be subject to adjustment for corporate  events,  such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

We granted the  Purchasers  Series B Common Stock Purchase  Warrants  ("Series B
Warrants") to purchase 7,551,432 shares of our common stock at $1.275 per share.
The  Purchasers  have the right to exercise the Series B Warrants  commencing at
any time on, or after January 20, 2007 and on, or before February 19, 2007.

Subject to specific terms and  conditions in the Series B Warrant,  including an
effective  registration statement registering underlying shares, the Company has
the option to force the  exercise  of this  Warrant  into  common  shares if the
Company's  share  price as quoted on the  Over-the-Counter  Electronic  Bulletin
Board  exceeds 150% of the then  effective  Exercise  Price for a period of time
based on a Volume Weighted  Average Price (VWAP)  formula.  The VWAP share price
must exceed this 150% threshold price for at least 20 consecutive Trading Days.

If at any time after one year from the date of  issuance  there is no  effective
registration statement  registering,  or no current prospectus available for the
resale of the  underlying  shares,  then this  Warrant may also be  exercised by
means of  "cashless  exercise"  as  determined  by a  formula  described  in the
Warrant.

The exercise price will be subject to adjustment for corporate  events,  such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

We have granted the Purchasers and HPC Capital Management registration rights on
the  shares  underlying  the  Debentures  and the  Warrants.  The  Common  Stock
underlying the  Debentures and Warrants will be registered  under the Securities
Act of 1933,  as amended,  for  re-offer and re-sale by the  Purchasers  and HPC
Capital Management. If the Company fails to timely file a registration statement
or is unable to have the registration  statement  declared  effective by the SEC
within the stated  periods of time,  we will trigger a default and be subject to
among other things,  acceleration of the Debentures, at the Purchasers' options,
additional  default  interest  payment  and  monetary  liquidated  damages.  The
liquidated damages will be capped at 20% of the Debentures face amounts.


Esperanza Energy LLC

Esperanza  Energy LLC  ("Esperanza")  was formed as a wholly owned subsidiary of
the Company in March 2006 to evaluate the feasibility of developing an offshore,
deep-water  liquefied  natural gas (LNG) regas  terminal in the offshore  waters
near Long Beach,  California.  Esperanza would utilize TORP Technology's  HiLoad
LNG Regas unit which attaches to an LNG tanker, directly vaporizes the LNG as it
is offloaded and injects the  regasified  natural gas into an undersea  pipeline
for  transportation  of  the  natural  gas  to  onshore  metering  stations  and
transmission  pipelines to supply nearby gas markets.  The TORP HiLoad LNG Regas
unit  eliminates  the need for  extensive  above-ground  storage  tanks or large
marine structures required for berthing and processing of the LNG.


                                      -15-
<PAGE>

Esperanza  is  conducting  the  feasibility  study  for  this  project  with the
assistance of best-in-class LNG, environmental,  pipeline and legal experts that
include:

     o    David Maul, former Manager of the California Energy Commission Natural
          Gas Office,

     o    ENTRIX,   Inc.,  a  professional   environmental   consulting  company
          specializing  in  environmental  permitting  and  compliance for major
          offshore oil and gas projects in California and the United States,

     o    Project   Consulting   Services,   Inc.,  a  leader  in   engineering,
          construction,  management,  and  inspection  of onshore  and  offshore
          pipelines, and

     o    Pillsbury Winthrop Shaw Pittman,  LLP, an  interdisciplinary  law firm
          with  leading  practices in  environmental,  land use and energy legal
          advice and in project development and finance.

          Active  consultations  continue with California  stakeholders  and the
     above   mentioned  team  regarding  the  optimal  design  and   operational
     configuration  of  the  project.   A  primary   objective  of  the  project
     feasibility   study  is  to  design  the   project  to  exceed   California
     environmental, public health and safety requirements.


Sonora Pipeline LLC and Terranova Energia, S. de R.L. de C.V.

The  cross-border gas pipeline and storage  development  activities of the above
entities to establish the Burgos Hub Export/Import project progressed forward in
two principal areas:

Permitting Activities -
Sonora Pipeline LLC continued its efforts to finish all activities  necessary to
move from NEPA pre-filing  status to a submission for  Certification for its two
International Pipeline U.S. segment, the Progreso International Pipeline and the
Mission  International  Pipeline.  Sonora  believes  it  has  filed  all  needed
revisions  to the Draft  Environmental  Report  for the  Progreso  International
Pipeline   with  FERC  for  purposes  of  the  NEPA   Environmental   Assessment
requirements.  This pipeline is the eastern leg of the U.S. pipelines which will
interconnect  with the  Tennessee Gas Pipeline  transmission  lines at the Alamo
Station and deliver natural gas to the Brasil Storage facility  approximately 17
miles  south  of  the  U.S./Mexico  border  at  Progreso,   Texas.  The  Mission
International  Pipeline segment was re-designed in the first quarter of 2006 due
to a routing conflict with a fiber optic line. It will be approximately 24 miles
long and will commence at the existing HPL  Valero-Gilmore  gas plant in Hidalgo
County,  Texas and extend southward to the Arguelles  crossing of the Rio Grande
River into  Mexico  near the city of  Mission,  Texas.  The  completion  of NEPA
pre-filing  activities  for the  Mission  segment  including  responses  to FERC
inquiries  and scoping of affected  stakeholders  is  anticipated  in the second
quarter  of 2006.  The  current  catalog  of FERC  correspondence  for  Sonora's
activities is located at www.ferc.gov under Docket No. PF05-15.

Terranova Energia,  S. de R.L. de C.V. continued its permitting efforts with the
Comision  Reguladora de Energia (CRE) in Mexico by submitting several additional
capex and opex revisions to its previous  submissions for the Occidente Pipeline
segment in response to comments  from CRE staff and with the  assistance  of its


                                      -16-
<PAGE>

financial   advisory  firm,   HSBC  Securities  USA.  We  submitted  the  permit
application for the Terranova pipeline Occidente section to the CRE, the Mexican
energy  regulatory  entity,  on March 18, 2005 and they were  accepted  for full
review on June 14, 2005.  Terranova  expects that barring further  requests from
CRE for information or revisions of existing information from the Company, final
drafting of the CRE resolution for approval of the pipeline permit will occur in
the next few  weeks  with  approval  of a final  resolution  and  issuance  of a
pipeline  permit  after  appropriate  consideration  by the  CRE  commissioners.
Additionally,  we submitted the storage  permit to the CRE on August 5, 2005 and
it was accepted for full review on October 14, 2005.  Several  unique  questions
are presented by the filing of this permit due to the proposed  location and the
lack of previous storage permit  applications having been considered by the CRE.
As a result,  management has no reliable  estimate  concerning  when this permit
application will be presented for decision by staff to the CRE Commissioners.

Commercial Activities -
The Company continues to present the pipeline and storage segments of the Burgos
Hub  Export/Import  project to commercial  audiences in efforts to solicit their
interest and  participation  in the project at various  levels.  There have been
numerous  introductory  meetings  with  staff  of  the  CFE  and  the  Monterrey
industrial consumers of natural gas with a view toward clarifying their need and
usage of the proposed project facilities. Future efforts will concentrate on the
development and negotiation of precedent  agreements for capacity reservation of
the project  facilities.  Preliminary  evaluation of demand for storage capacity
reservation   based  upon  direct  discussion  with  the  various  customers  is
conservatively  estimated  at 40 Bcf  for  the  market  area  influenced  by the
project. Similarly,  several discussions continue with interested parties in the
U.S. and Mexico regarding the execution of a joint development agreement between
Terranova  and their firms for the  funding,  development  and  ownership of the
project.


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.


                                      -17-
<PAGE>

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.


Results of Operations

REVENUES:  The Company reported  revenues of $801,894 for the three months ended
March 31, 2006 as compared with revenues from continuing  operations of $628,075
for the three months ended March 31, 2005.  The revenue  increase  resulted from
increasing  revenues of Sonterra Energy  Corporation due to an increase in total
customers served and product prices in the first three months of 2006 versus the
first three months of 2005.

TOTAL COSTS AND EXPENSES:  Total costs and expenses from  continuing  operations
decreased  from  $7,231,935  for  the  three  months  ended  March  31,  2005 to
$2,531,162 for the three months ended March 31, 2006 . The principal  reason for
this  amount of  decrease  was the lack of  expense  for  Beneficial  Conversion
Feature  Interest  in the three  months  ended  March 31,  2006 versus the three
months ended March 31, 2005.

COST OF SALES:  Total Cost of Sales increased from $284,679 for the three months
ended March 31, 2005 to $376,866 for the three months ended March 31, 2006. This
increase  resulted from the increased  volume of propane sold by Sonterra Energy
Corporation in the three months ended March 31, 2006 versus March 31, 2005.

OPERATING EXPENSES: Operating expenses from continuing operations increased from
$66,774  for the three  months  ended  March 31,  2005 to $84,531  for the three
months  ended March 31, 2006.  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  three  months for 2005.
Depreciation  expense  remained  basically  flat for the first  quarter  of 2006
versus the first quarter of 2005,  increasing from $115,441 for the three months
ended March 31, 2005 to $115,  764 for the three months ended  December 31, 2006
and reflecting no significant increase or decrease in depreciable assets for the
respective periods.

INTEREST EXPENSE: Interest expense decreased from $209, 787 for the three months
ended March 31, 2005 to $111, 059 for the three months ended March 31, 2005 as a
result  of the  reduction  of the  principal  amount  of the note owed to Impact
International LLC by $2,512,500 after the end of the first three months of 2005.
No expense for Beneficial Conversion Feature Interest was recorded for the three
months ended March 31, 2006 as compared to $4,736,843 for the three months ended
March 31, 2005 (as restated). The market price for the Company's common stock at
the relevant  measurement dates during the three months ended March 31, 2006 was
less than the conversion  price for the  debentures  issued on January 20, 2006.


                                      -18-
<PAGE>

Accordingly,  there was no benefit to the holders of the debentures in the event
of conversion during those periods and no beneficial  conversion interest charge
was recorded.

SALES,  GENERAL AND  ADMINISTRATIVE:  Sales,  General & Administrative  Expenses
increased  marginally by $24,531 during the three months ended March 31, 2006 to
a total amount of $1,842,942 as compared  $1,818,411  for the three months ended
March 31, 2005. The majority of this increase was due to the operations of a new
subsidiary, Esperanza Energy LLC during the three months ended March 31, 2006.

DERIVATIVE LOSS: Loss from embedded derivative instrument  liabilities decreased
from  ($4,736,843)  for the three months  ended March 31, 2005 (as  restated) to
zero for the  three  months  ended  March  31,  2006.  The  warrants  issued  in
connection  with the January 20, 2006  financing had an exercise  price that was
greater the fair market  value of the  Company's  common  stock at the  relevant
measurement  dates.  Accordingly,  no  derivative  loss  and  liability  for the
issuance of the warrants in this financing transaction was recorded.

NET LOSS: Net loss of ($9,465,535) for the three months ended March 31, 2005 (as
restated) decreased to ($1,695,648) for the three months ended March 31, 2006, a
decrease  in the amount of loss of  $7,769,887.  The  principal  reason for this
amount  of  decline  in net loss  was the  absence  of  charges  for  Beneficial
Conversion  Interest and Derivative Loss charges from issuance of debentures and
warrants in the three  months ended March 31, 2006 versus the three months ended
March 31,  2005.Included  in the net loss of  ($1,695,648)  for the three months
ended March 31, 2006 is $869,500 of expenses for  employment  contract costs and
legal fees paid by issuance of common stock.

LIQUIDITY  AND CAPITAL  RESOURCES:  With  regard to  liquidity  and  adequacy of
capital  resources,   management  believes  that  adequate  liquidity  and  cash
resources exist to sustain current corporate activities for the remainder of the
fiscal year.  However, in the event that a decision to proceed with the offshore
LNG regas  terminal  project in Southern  California is made during the upcoming
months,  additional  funding for the permit  process will be needed.  Management
will evaluate the required budget and funding alternatives for such an effort as
an integral  part of the project  feasibility  study  underway.  Direct  capital
expenditures during the three months ended March 31, 2006 totaled $637,301.  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, and additional machinery,  equipment, trucks, autos and trailers for
the operation of the Sonterra Energy  Corporation  propane  systems.  Total debt
increased  from  $5,722,322  at December 31, 2005 to $  11,946,450  at March 31,
2006.  The increase in total debt is due primarily to the issuance of $6,569,750
of convertible  debentures in the financing transaction of January 20, 2006. Net
loss for the three  months ended March 31, 2006 was  ($1,695,648)  a decrease in
net loss of 82% from the net loss of  ($9,465,535)  for the three  months  ended
March 31, 2005.  Basic and diluted net loss per common share  decreased 86.7% to
($0.02). The net loss per share calculation for the three months ended March 31,
2006 included an increase in actual and equivalent shares outstanding.












                                      -19-
<PAGE>

Item 3.   Controls and Procedures

(a)  Evaluation Of Disclosure Controls And Procedures.

     Item 308(a)(3) of Regulation  S-B states that  "Management is not permitted
to conclude that the small  business  issuer's  internal  control over financial
reporting is effective if there are one or more material weaknesses in the small
business issuer's internal control over financial reporting." As a result of the
restatements  to our December 31, 2004  financial  statements  and our quarterly
reports for the periods  ending March 31, June 30 and  September  30,  2006,  as
disclosed in our Current  Report on Form 8-K and described  under  Footnote 2 to
our December 31, 2005 financial statements contained herein, our Chief Executive
Officer and  Principal  Accounting  Officer,  can no longer  conclude that after
evaluating the  effectiveness  of our  "disclosure  controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as
of the end of the  period  covered  by this  Report  on Form  10-QSB,  that  our
disclosure   controls  and  procedures  were  effective  to  provide  reasonable
assurance  that  information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods  specified  in the  Securities  and Exchange  Commission
rules and forms,  and that such  information is accumulated and  communicated to
our  management,  including  our Chief  Executive  Officer  and Chief  Financial
Officer,   as  appropriate,   to  allow  timely  decisions   regarding  required
disclosure.

     However, the Company believes that its restatement to its December 31, 2004
financial statements and restatements to quarterly reports for March 31, June 30
and September 30, 2005 financial  statements,  will be a one time occurrence and
that moving forward our Controls and Procedures  will once again be effective as
the embedded  derivative  accounting matters contained in the December 31, 2004,
March 30, June 30 and September 30, 2005 financial  statements involved a highly
complex transaction involving an "unconventional"  warrants and convertible debt
instruments,  and the Company does not  anticipate  entering into any additional
complex financing transactions involving derivates in the future. The Company is


                                      -20-
<PAGE>

utilizing  the  guidelines   communicated   to  it  by  the  SEC  after  various
communications regarding accounting for derivatives.

(b)  Changes In Internal Control Over Financial Reporting.

     There were no  significant  changes in our internal  control over financial
reporting  during the last fiscal year  and/or up to and  including  the date of
this  filing  (except  as  disclosed  in (a) above)  that we believe  materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.

(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.

                           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


                                      -21-
<PAGE>

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 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 Hessell
and Ahmed Karim.  After adding the claim on the $300,000  promissory note to the


                                      -22-
<PAGE>

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  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.

Tidelands has 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.


                                      -23-
<PAGE>

Much of the discovery has been completed at this time.  Based on  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.  The  complexity  of the  issues in this case and the  inherent
uncertainties in litigation of this kind prevent a more definitive evaluation of
the extent of Tidelands' 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,  Cause No. GN 501626 HBH  Development  Co., LLC vs. Sonterra
Energy  Corp.  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
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. HBH has amended its complaint  adding claims for mutual mistake
and reformation as to the letter  agreement and a developer's  bonus under terms
of the letter agreement.

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  Cause No. GN 501625 Senna Hills,  Ltd. vs Sonterra  Energy Corp.  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


                                      -24-
<PAGE>

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. Senna Hills
has amended its complaint adding claims for mutual mistake and reformation as to
the  letter  agreement  and a  developer's  bonus  under  terms  of  the  letter
agreement.

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.

Matter No. 4:

On April 7, 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.


                                      -25-
<PAGE>

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

On January 2, 2006, we issued  Michael Ward,  the Company's  President,  CEO and
member of the board of directors,  500,000 common shares  representing a partial
stock grant under his employment contract. The shares were valued at $455,000 or
$0.91 per share.

On January 30, 2006,  we issued Gene Kaslow 60,000  shares as  compensation  for
legal services valued at $57,000 or $0.95 per share.

On January 30, 2006, we issued Julio  Bastarrachea  150,000 shares as additional
employee compensation valued at $142,500 or $0.95 per share.

We believe the  securities  issued  above were  issued in a private  transaction
pursuant  to  Section  4(2) of the  Securities  Act of 1933,  as  amended,  (the
"Securities Act"). These shares are considered restricted securities and may not
be publicly resold unless  registered for resale with  appropriate  governmental
agencies or unless exempt from any applicable registration requirements.

Item 3.   Defaults Upon Senior Securities

     None.

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

     During this quarter, the Company solicited  shareholder written consents in
lieu of a special  meeting of the  shareholders.  The consents  were counted and
effective  April 17,  2006.  The Company  sought and  obtained a 77.5%  majority
shareholder  approval  to  amend  our  Company's  Certificate  of  Incorporation
increasing our authorized  Capital Stock from 100,000,000  shares to 250,000,000
shares.

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.


                                      -26-
<PAGE>

                                   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: May 19, 2006                                     /s/ Michael Ward
                                                       -------------------------
                                                       By: Michael Ward
                                                       Title: President, CEO



Dated: May 19, 2006                                     /s/ James B. Smith
                                                       -------------------------
                                                       By: James B. Smith
                                                       Title: CFO















                                      -27-