**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        DC 20549**
  Form
        10-Q
 
  **(Mark
        one)**
  xQuarterly
        Report Under
        Section 13 or 15(d) of The Securities Exchange Actof
        1934
  **For
        the quarterly period ending June 30, 2007**
  o  
         Transition Report Under Section 13 or 15(d) of The Securities ExchangeAct
        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 Noo
  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 o  No x
  **APPLICABLE
        ONLY TO CORPORATE ISSUERS**
  As
        of August 14, 2007, there were106,084,806 shares
        of Common Stock issued and
        outstanding.
  Transitional
        Small Business Disclosure Format: Yes o     No
x




Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**FORM
      10-Q**




**Table
      of Contents**





****


**Page****PART
                  I**
                **Financial
                  Information**Item
                    1
                Financial
                  Statements (Unaudited)
                F-1Condensed
                    Consolidated Balance Sheets as of June
                    30, 2007 and December 31, 2006
                F-1Condensed
                    Consolidated Statements of Operations For
                    the Three Months Ended June 30, 2007 and 2006
                F-2Condensed
                    Consolidated Statements of Operations For
                    the Six Months Ended June 30, 2007 and 2006
                F-3Condensed
                    Consolidated Statements of Cash Flows For
                    the Six Months Ended June 30, 2007 and 2006
                F-4
                    - F-5Notes
                    to Condensed Consolidated Financial
                    Statements
                F-6
                    - F-15Item
                    2
                Management’s
                  Discussion and Analysis or Plan of
                  Operation of
                  Financial Condition and Results of
                  Operations
                1Item
                    3
                Quantitative
                  and Qualitative Disclosures About Market
                  Risk
                3Item
                    4
                Controls
                    and Procedures
                4**PART
                  II**
                **Other
                  Information**Item
                    1
                Legal
                  Proceedings
                5Item
                  1A
                Risk
                  Factors
                5Item
                    2
                Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
                5Item
                    3
                Defaults
                  Upon Senior Securities
                6Item
                    4
                Submission
                  of Matters to a Vote of Security
                  Holders
                6Item
                    5
                Other
                  Information
                6Item
                    6
                Exhibits
                6Signature
                
                7








Table
          of Contents




**PART
          I - FINANCIAL INFORMATION**
  **Item
          1. Financial Statements**
  **TIDELANDSOIL
&
GAS
        CORPORATION**
 **CONDENSED
          CONSOLIDATED BALANCE SHEETS**


**ASSETS******
            ****
            ****
            ********
            **June
                30,**
            ****
            ****
            **December
                31,**
            ********
            **2007**
            ****
            ****
            **2006****(Unaudited)**Current
                Assets:Cash
            $
            85,762
            
            
            $
            367,437Accounts
                and Other Receivable
            
            163,438
            
            
            
            388,754Inventory
            
            115,782
            
            
            
            84,030Prepaid
                Expenses
            
            411,571
            
            
            
            148,551Total
                Current Assets
            
            776,553
            
            
            
            988,772Property
                Plant and Equipment, Net
            
            10,995,265
            
            
            
            12,364,359Other
                Assets:Deposits
            
            187,324
            
            
            
            56,708Cash
                Restricted
            
            53,703
            
            
            
            52,642Deferred
                Charges
            
            0
            
            
            
            565,221Goodwill
            
            1,158,937
            
            
            
            1,158,937Total
                Other Assets
            
            1,399,964
            
            
            
            1,833,508Total
                Assets
            $
            13,171,782
            
            
            $
            15,186,639**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                Liabilities:Current
                Maturities - Note Payable
            $
            7,303,290
            
            
            $
            225,000Accounts
                Payable and Accrued Expenses
            
            2,381,748
            
            
            
            1,624,752Customer
                Deposits
            
            9,150
            
            
            
            0Reserve
                for Litigation
            
            2,250,000
            
            
            
            2,250,000Total
                Current Liabilities
            
            11,944,188
            
            
            
            4,099,752Long-Term
                Debt
            
            0
            
            
            
            8,934,294Total
                Liabilities
            
            11,944,188
            
            
            
            13,034,046Stockholders’
                Equity:Common
                Stock, $.001 Par Value per Share,250,000,000
                Shares Authorized, 104,908,344and
                86,457,922 Shares Issued and Outstanding atJune
                30, 2007 and December 31, 2006 Respectively
            
            104,909
            
            
            
            86,459Additional
                Paid-in Capital
            
            51,796,193
            
            
            
            46,703,202Subscriptions
                Receivable
            
            (110,000
            )
            
            
            (220,000
            )Minority
                Interest
            
            -
            
            
            
            -Accumulated
                (Deficit)
            
            (50,563,508
            )
            
            
            (44,417,068
            )Total
                Stockholders’ Equity
            
            1,227,594
            
            
            
            2,152,593Total
                Liabilities and Stockholders’ Equity
            $
            13,171,782
            
            
            $
            15,186,639See
                Accompanying Notes to Consolidated Financial Statements










F-1
 Table
          of Contents




**TIDELANDS** **OIL
&
GAS
      CORPORATION**


**CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**


**Three
                Months Ended**
            
            
            **Three
                Months Ended******
            **June
                30, 2007**
            
            
            **June
                30, 2006**Revenues:Gas
                Sales and Pipeline Fees
            $
            405,372
            
            
            $
            392,108Construction
                Services
            
            78,627
            
            
            
            15,016Total
                Revenues
            
            483,999
            
            
            
            407,124Expenses:Cost
                of Sales
            
            206,876
            
            
            
            206,413Operating
                Expenses
            
            92,732
            
            
            
            99,587Depreciation
            
            123,135
            
            
            
            116,038Impairment
                Loss
            
            2,605,061
            
            
            
            2,395,791Interest
                Expense
            
            182,322
            
            
            
            373,950Stock-Based
                Compensation – Related Parties
            
            134,498
            
            
            
            597,500Sales,
                General and Administrative
            
            834,858
            
            
            
            1,002,303Total
                Expenses
            
            4,179,482
            
            
            
            2,395,791(Loss)
                From Operations
            
            (3,695,483
            )
            
            
            (1,988,667
            )Other
                Income (Expense)(Loss)
                on Sale of Assets
            
            (6,888
            )
            
            
            0Interest
                and Dividend Income
            
            7,249
            
            
            
            28,118Miscellaneous
            
            38
            
            
            
            0Total
                Other Income (Expenses)
            
            399
            
            
            
            28,118Net
                (Loss)
            $
            (3,695,084
            )
            
            $
            (1,960,549
            )Net
                (Loss) Per Common Share:Basic
                and Diluted
            $
            (0.04
            )
            
            $
            (0.03
            )Weighted
                Average Number of CommonShares
                Outstanding
            
            101,798,627
            
            
            
            80,080,815See
                Accompanying Notes to Condensed Consolidated Financial
                Statements






F-2
 Table
          of Contents




TIDELANDSOIL
&
GAS
        CORPORATION
 **CONDENSED
          CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**


**Six
                Months Ended**
            
            
            **Six
                Months Ended******
            
            **June
                30, 2007**
            
            
            **June
                30, 2006**Revenues:Gas
                Sales and Pipeline Fees
            
            $
            1,407,254
            
            
            $
            1,064,614Construction
                Services
            
            
            180,716
            
            
            
            144,404Total
                Revenues
            
            
            1,587,970
            
            
            
            1,209,018Expenses:Cost
                of Sales
            
            
            774,597
            
            
            
            583,279Operating
                Expenses
            
            
            176,103
            
            
            
            184,118Depreciation
            
            
            245,744
            
            
            
            231,802Impairment
                Loss
            
            
            2,605,061
            
            
            
            0Interest
                Expense
            
            
            528,426
            
            
            
            485,009Stock-Based
                Compensation – Related Parties
            
            
            1,234,498
            
            
            
            1,187,400Sales,
                General and Administrative
            
            
            2,171,005
            
            
            
            2,255,345Total
                Expenses
            
            
            7,735,434
            
            
            
            4,926,953(Loss)
                From Operations
            
            
            (6,147,464
            )
            
            
            (3,717,935
            )Other
                Income (Expense)(Loss)
                on Sale of Assets
            
            
            (6,888
            )
            
            
            0Interest
                and Dividend Income
            
            
            7,874
            
            
            
            61,739Miscellaneous
            
            
            38
            
            
            
            0Total
                Other Income (Expenses)
            
            
            1,024
            
            
            
            61,739Net
                (Loss)
            
            $
            (6,146,440
            )
            
            $
            (3,656,196
            )Net
                (Loss) Per Common Share:Basic
                and Diluted
            
            $
            (0.06
            )
            
            $
            (0.05
            )Weighted
                Average Number of CommonShares
                Outstanding
            
            
            95,683,133
            
            
            
            79,876,700See
                Accompanying Notes to Condensed Consolidated Financial
                Statements






F-3
 Table
          of Contents






**TIDELANDSOIL
&
GAS
        CORPORATION**
 **STATEMENTS
          OF CONDENSED CONSOLIDATED CASH FLOWS** **(UNAUDITED)**


****
            **Six
                Months Ended**
            
            
            **Six
                Months Ended******
            **June
                30, 2007**
            
            
            **June
                30, 2006**Cash
                Flows Provided (Required) ByOperating
                Activities:Net
                (Loss)
            $
            (6,146,440
            )
            
            $
            (3,656,196
            )Adjustments
                to Reconcile Net (Loss)to
                Net Cash Provided (Required) ByOperating
                Activities:Depreciation
            
            245,744
            
            
            
            231,802Impairment Loss
            
            2,605,061
            
            
            
            0Issuance
                of Common Stock:For
                Services Provided – Related Parties
            
            1,234,498
            
            
            
            1,187,400For
                Services Provided – Other
            
            908,967
            
            
            
            311,900Changes
                in:Accounts
                Receivable
            
            225,316
            
            
            
            161,714Inventory
            
            (31,752
            )
            
            
            57,858Prepaid
                Expenses
            
            (208,854
            )
            
            
            (115,873
            )Deferred
                Charges
            
            565,221
            
            
            
            (1,264,245
            )Deposits
            
            (50
            )
            
            
            (60,000
            )Restricted
                Cash
            
            (1,061
            )
            
            
            25,096Accounts
                Payable and Accrued Expenses
            
            1,100,240
            
            
            
            (89,539
            )Customer
                Deposits
            
            9,150
            
            
            
            0Net
                Cash Provided (Required) By Operating Activities
            
            506,040
            
            
            
            (3,210,083
            )Cash
                Flows Provided (Required)By
                Investing Activities:Proceeds
                from Sale of Assets
            
            2,200
            
            
            
            0Acquisitions
                of Property, Plant and Equipment
            
            (1,483,911
            )
            
            
            (1,383,436
            )Net
                Cash (Required) By Investing Activities
            
            (1,481,711
            )
            
            
            (1,383,436
            )See
                Accompanying Notes to Condensed Consolidated Financial
                Statements








F-4
 Table
          of Contents




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


**Six
                Months Ended**
            
            
            **Six
                Months Ended******
            **June
                30, 2007**
            
            
            **June
                30, 2006**Cash
                Flows Provided (Required)by
                Financing Activities:Proceeds
                from Stock Subscriptions Receivable
            
            0
            
            
            
            110,000Proceeds
                from Exercise of Stock Option
            
            550,000
            
            
            
            0Proceeds
                from Long-Term Loans
            
            0
            
            
            
            6,678,415Proceeds
                from Short-Term Loan
            
            143,996
            
            
            
            0Repayment
                of Loan by Related Party
            
            0
            
            
            
            3,219Net
                Cash Provided by Financing Activities
            
            693,996
            
            
            
            6,791,634Net
                Increase (Decrease) in Cash
            
            (281,675
            )
            
            
            2,198,115Cash
                at Beginning of Period
            
            367,437
            
            
            
            1,113,911Cash
                at End of Period
            $
            85,762
            
            
            $
            3,312,026Supplemental
                Disclosures of Cash Flow Information:Cash
                Payments for Interest
            $
            103,301
            
            
            $
            408,657Cash
                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
            
            
            
            0Legal
                Fee – Retainer
            
            130,566
            
            
            
            0Prepaid
                Legal Fees
            
            54,166
            
            
            
            0Cancellation
                of Common Stock:In
                Payment of Stock Subscription
            
            (110,000
            )
            
            
            0Total
                Non-Cash Investing and Financing Activities
            $
            2,417,976
            
            
            $
            445,000See
                Accompanying Notes to Condensed Consolidated Financial
                Statements








F-5
 Table
          of Contents





**TIDELANDSOIL
&
GAS
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


(UNAUDITED)








NOTE
      1–BASIS OF PRESENTATION





The
        accompanying unaudited condensed consolidated financial statements for the
        six
        month periods ended June 30, 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.  Please note that the prior year’s presentations for
        the Condensed Consolidated Statement of Operations and the Condensed
        Consolidated Statements of Cash Flows were changed to conform to current
        year’s
        presentation.  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 six-month period ended June 30, 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.

















F-6
 Table
          of Contents







**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


(UNAUDITED)








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 June 30, 2007, the Company
      had approximately $85,762 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– IMPAIRMENT CHARGE





The
      Company incurred a non-cash impairment charge as of June 30, 2007, to reflect
      the difference between the carrying value and the market value of the affected
      asset which is its natural gas pipeline between Eagle Pass, Texas and
      Mexico.  The charge taken was $2,605,061 which reduced the gross value
      on the Company’s books to $3,501,194 from $6,106,255 before taking accumulated
      depreciation into account.














F-7
 Table
          of Contents








**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


(UNAUDITED)








NOTE
      4– PROPERTY, PLANT AND EQUIPMENT





A
      summary
      of property, plant and equipment at June 30, 2007 and December 31, 2006 is
      as
      follows:








**June
                  30, 2007**
              ****
              ****
              **December
                  31, 2006**
              ****
              **Estimated
                  Economic Life**Pre-Construction
                  Costs:International
                  Crossings to Mexico
              $
              960,744
              
              
              $
              818,271
              
              N/AMexican
                  Gas Storage Facilityand
                  Related Pipelines
              
              2,679,894
              
              
              
              2,359,451
              
              N/ADomestic
                  LNG System
              
              2,572,852
              
              
              
              1,567,642
              
              N/ATotal
              
              6,213,490
              
              
              
              4,745,364Office
                  Furniture, Equipment andLeasehold
                  Improvements
              
              182,798
              
              
              
              185,174
              
              5
                  YearsPipeline
                  – Eagle Pass, TX to PiedrasNegras,
                  Mexico
              
              3,501,194
              
              
              
              6,106,255
              
              20
                  YearsTanks
                  & Lines – Propane DistributionSystem
              
              1,913,163
              
              
              
              1,908,247
              
              5
                  YearsMachinery
                  and Equipment
              
              75,185
              
              
              
              67,357
              
              5
                  YearsTrucks,
                  Autos and Trailers
              
              126,464
              
              
              
              126,464
              
              5
                  YearsPipeline
                  – South TX Gas Production
              
              490,000
              
              
              
              490,000
              
              15
                  YearsWell
                  Equipment
              
              2,371
              
              
              
              2,060
              
              5
                  YearsLeaseholds
              
              11,700
              
              
              
              10,000
              
              N/ATotal
              
              12,516,365
              
              
              
              13,640,921Less:
                  Accumulated
                  Depreciation
              
              1,521,100
              
              
              
              1,276,562Net
                  Property, Plant and Equipment
              $
              10,995,265
              
              
              $
              12,364,359







Depreciation
      expense for the six months ended June 30, 2007 and for the year ended December
      31, 2006 was $245,744 and $466,241 respectively.








NOTE
      5– LONG-TERM DEBT





A
      summary
      of long-term debt at June 30, 2007 and December 31, 2006 is as
      follows:




**June
                  30,**
              
              **December
                  31,****2007**
              
              **2006**Note
                  Payable, Secured by Reef InternationalPipeline,
                  Interest Bearing at 2% Over PrimeRate,
                  Maturing May 25, 2008
              $
              4,928,999
              
              $
              4,785,003Convertible
                  Debentures, Unsecured,Including
                  Prepaid Interest, MaturingJanuary
                  20, 2008
              
              2,374,291
              
              
              4,374,2917,303,290
              
              
              9,159,294Less:
                  Current
                  Maturities
              
              7,303,290
              
              
              225,000Total
                  Long-Term Debt
              $
              0
              
              $
              8,934,294







F-8
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


(UNAUDITED)








NOTE
      6– COMMON STOCK TRANSACTIONS





On
      April
      2, 2007, the Company issued 246,212 shares of its common stock valued at $54,167
      to law firm for 2007 legal services related to securities law
      matters.





On
      April
      4, 2007, the Company issued 125,000 shares of its restricted common stock valued
      at $25,000 for 2007 investor public relations services.





On
      April
      10, 2007, the Company issued 1,190,476 shares of its common stock to a Director
      for $250,000 as a result of his exercise of stock options at $0.21 per
      share.





On
      April
      16, 2007, the Company issued 53,441 shares of its common stock to a
      Director/Officer valued at $8,551 as compensation for services and related
      costs.





On
      April
      18, 2007, the Company issued 50,000 shares of its common stock to an officer
      valued at $8,000 in accordance with his employment contract.





On
      May 9,
      2007, the Company issued 103,478 shares of its common stock to a
      Director/Officer valued at $10,348 as compensation for services and related
      costs.





On
      May
      10, 2007, the Company issued 476,190 shares of its common stock to a Director
      for $100,000 as a result of his exercise of stock options at $0.21 per
      share.





On
      May
      22, 2007, the Company issued 641,667 shares of its common stock valued at
      $77,000 to a law firm for future services regarding ongoing
      litigation.





On
      May
      30, 2007, the Company issued 2,692,308 shares of its common stock valued at
      $350,000 for future legal services connected with listing its stock on European
      stock exchanges.





On
      June
      1, 2007, the Company issued 40,663 shares of its common stock to a
      Director/Officer valued at $6,099 as compensation for services and related
      costs.





On
      June
      6, 2007, the Company issued a total of 600,000 shares of its restricted common
      stock valued at $90,000 as stock bonuses to two officers and an
      employee.








F-9
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          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


(UNAUDITED)





NOTE
      7– RELATED PARTY TRANSACTION





During
      the quarter, the Company issued 197,582 shares of common stock valued at $24,998
      to one outside Director for Corporate Secretary services and related
      costs.








NOTE
      8– 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.











F-10
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          of Contents








**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


(UNAUDITED)





NOTE
      8– 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. 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.











F-11
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          of Contents







**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007(UNAUDITED)**








NOTE
      8– LITIGATION (CONTINUED)




**Matter
      No. 1: (Continued)**


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
      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.





The
      trial
      date has been extended to January 9, 2008, by mutual agreement of the litigants
      unless a settlement is reached before that date.  The parties are
      continuing with settlement negotiations and the Company is hopeful that an
      agreement will be concluded prior to the end of the year.  Based on
      negotiations, the Company has reserved $2,250,000 as an estimated litigation
      settlement and that amount has been included in this report.








F-12
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          of Contents











**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007(UNAUDITED)**








NOTE
      8– LITIGATION (CONTINUED)





**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.





**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 trial date will likely be reset in September
      2007; however, the Company expects to file a motion for summary judgment prior
      to September 1st.











F-13
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          of Contents








**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007(UNAUDITED)**





NOTE
      8– LITIGATION (CONTINUED)




**Matter
      No. 4:**


Cause
        No.
        2007-CI-07451, Michael R. Ward vs. Tidelands Oil & Gas Corporation, was
        filed on May 17, 2007 in the 224th District
        Court of
        Bexar County, Texas. This case involves two claims by the Plaintiff, Michael
        R.
        Ward, the former President and CEO of Tidelands Oil & Gas Corporation
        against the Company. The first claim is for a breach of the Letter Agreement
        dated December 8, 2006 alleging a failure to pay Ward’s salary for the months of
        March through June 2007 pursuant to the terms of said Letter Agreement. The
        second claim involves an allegation by Ward that the Company prevented Ward
        from
        selling 1,650,000 shares of Company stock during the period of February 20,
        2007
        through April 4, 2007 and that Ward suffered economic damages as a result
        of a
        decline in share price during the relevant time periods. The Company filed
        a
        general denial on June 27, 2007. On July 18, 2007, Plaintiff Ward filed a
        Motion
        for Partial Summary Judgment with respect to the first claim for breach of
        the
        Letter Agreement, a Motion setting the case for trial on the second claim
        for
        September 28, 2007, and discovery notices. On August 7, 2007, the Company
        filed
        an abatement request requesting Court ordered mediation pursuant to the Letter
        Agreement of December 8, 2006. The Company expects that its request for
        mediation will be honored by the Court and that the case will be set for
        mediation in September 2007.








**Matter
        No. 5:**
 Cause
        No.
        2007-CI 11661, Bentley Energy Corp. vs. Tidelands Exploration & Production,
        Inc. *(Please note that the suit was filed with incorrect corporate
        name.  It should be Tidelands Exploration & Production Corp.)*
        was filed on August 7, 2007 in the 407th District
        Court of
        Bexar County, Texas. This case involves a claim for breach of the Joint
        Operating Agreement and Participation Agreement between Tidelands Exploration
        & Production Corp. (“TEP”) and Bentley Energy Corp. (“BENTLEY”), as Assignee
        of Regency Energy, Inc. (“REGENCY”). BENTLEY is majority owned by Michael R.
        Ward, the former President and CEO of Tidelands Oil & Gas Corporation, which
        is the parent company for TEP. REGENCY is majority owned by Royis Ward, a
        former
        director of Tidelands Oil & Gas Corporation and the father of Michael R.
        Ward. Pursuant to the terms of the Joint Operating Agreement, TEP, as
        non-operator, granted REGENCY a lien or security interest in all the oil
        and gas
        leases and pipelines covered by the Joint Operating Agreement. BENTLEY seeks
        foreclosure of these interests due to TEP’s failure to pay joint interest
        billings under the Joint Operating Agreement. TEP has not yet filed an answer
        to
        this lawsuit, but expects to reply in the near future.





F-14
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          of Contents




**TIDELANDS
        OIL & GAS CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        30, 2007(UNAUDITED)**
 
 
 NOTE
        8– LITIGATION (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, 3, 4 and 5
        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.
   F-15
 Table
            of Contents




**Item2.
        Management's Discussion and Analysis of Financial Condition
        and Results of Operations**
  **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, LP and the sale of propane gas to residential customers
        through the assets owned by Sonterra Energy Corporation (“Sonterra”). 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**
  On
        July
        12, 2007, Sonora Pipeline, LLC (“Sonora”), a wholly-owned subsidiary of the
        Company, announced that it had received the following authorizations from
        the
        Federal Energy Regulatory Commission (“FERC”), with respect to the Mission and
        Progreso International Pipelines:
  A
        Presidential Permit and authorization
        to site, construct, operate and maintain two bi-directional border crossing
        natural gas facilities at the international boundary between the United States
        and Mexico; and
  A
        Certificate of public convenience and
        necessity to site, construct, operate and maintain the United States portion
        of
        a pipeline system consisting of approximately 29 miles of 30-inch diameter
        pipeline and appurtenant facilities that will extend into Mexico via two
        border
        crossings, all to be located in Hidalgo County, Texas.
  These
        natural gas pipelines in the United States will interconnect with the pipeline
        system being developed by another wholly-owned subsidiary of the Company,
        Terranova Energia, S. de R.L. de C.V. (“Terranova”). Terranova previously
        received approval from the Comision Reguladora de Energia (“CRE”) for the
        interconnecting pipeline segments in Mexico on May 23, 2006.
  The
        pipeline systems in the United States and Mexico are known as the Burgos
        Hub
        Export/Import Project which is being developed to serve the demand for
        importation of natural gas into Mexico, which is expected to increase
        dramatically beginning in the year 2010. The pipelines will also be
        interconnected with a proposed underground natural gas storage facility being
        developed by Terranova to serve Mexican power generation and industrial customer
        needs for management of swings in demand and seasonal spread in natural gas
        prices. Terranova has previously applied for a permit to construct and operate
        the storage facility with the CRE and is expecting a decision on the application
        in the third quarter of 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 early 2008. 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 atwww.esperanza-energy.com.
  
 1
 Table
            of Contents
  **Results
        of Operations**
 
 THREE
        MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30,
        2006
 
 REVENUES:
        The Company reported revenues of $483,999 for the three months ended June
        30,
        2007 compared to revenues of $407,124 for the three months ended June 30,
        2006
        which is an improvement of 18.9 percent for the three months ended June 30,
        2007
        versus the three months ended June 30, 2006. The revenue increase resulted
        from
        increasing volumes and product prices for propane sold by our Sonterra Energy
        Corporation subsidiary to residential customers.
 
 TOTAL
        COSTS AND EXPENSES: Total Costs and Expenses for the three months ended June
        30,
        2007 were $4,179,482 versus $2,395,791 for the three months ended June 30,
        2006.
        The primary reason for the increase in Total Costs and Expenses was the non-cash
        impairment loss of $2,605,061 incurred during the three months ended June
        30,
        2007 versus no impairment loss for the three months ended June 30,
        2006.
 
 NET
        INCOME (LOSS): Net Loss for the three months ended June 30, 2007 was
        ($3,695,084) versus the Net Loss of ($1,960,548) for the three months ended
        June
        30, 2006. The Impairment Loss of ($2,605,061) materially affected the increase
        in Net Loss but was offset by significant revenue increases and decreases
        in
        other costs and expenses for the three months ended June 30, 2007 versus
        the
        three months ended June 30, 2006.
 
 SIX
        MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30,
        2006
 
 REVENUES:  The
        Company reported revenues of $1,587,970 for the six months ended June 30,
        2007
        as compared with revenues of $1,209,018 for the six months ended June 30,
        2006,
        which is a 31% increase in revenue for the six months ended June 30, 2007
        compared to the six months ended June 30, 2006. Revenues from Reef Ventures,
        LP
        decreased to $78,533 for the six months ended June 30, 2007 compared to $123,076
        for the six months ended June 30, 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 $1,472,492
        for the six months ended June 30, 2007 compared to $ 1,085,942 for the six
        months ended June 30, 2006. Gas sales at Sonterra increased to $1,291,776
        for
        the six months ended June 30, 2007 compared to $941,538 for the six months
        ended
        June 30, 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 increased to $180,716 for the six months ended June
        30,
        2007 compared to $144,404 for the six months ended June 30, 2006. Revenues
        from
        Tidelands Exploration & Production Corporation were $36,945 for the six
        months ended June 30, 2007 compared to $0 for the six months ended June 30,
        2006.
 
 TOTAL
        COSTS AND EXPENSES:  Total costs and expenses increased to $7,735,434
        for the six months ended June 30, 2007 compared to $4,926,953 for the six
        months
        ended June 30, 2006. The most significant increase in costs occurred from
        an
        impairment loss of $2,605,061 incurred with respect to the natural gas pipeline
        owned by Reef Ventures, LP.
 
 COST
        OF
        SALES:  Cost of sales increased to $774,597 for the six months ended
        June 30, 2007 compared to $583,279 for the six months ended June 30, 2006.
        The
        increase was due primarily to increased cost and volume of propane sold through
        our Sonterra Energy Corporation subsidiary. Cost of sales for Tidelands
        Exploration & Production Corporation were $13,740 for the six months ended
        June 30, 2007 compared to $0 for the six months ended June 30,
        2006.
 
 OPERATING
        EXPENSES:  Operating expenses decreased to $176,103 for the six months
        ended June 30, 2007 compared to $184,118 for the six months ended June 30,
        2006.
        This decrease was primarily attributable to reduced operating costs from
        Sonterra Energy Corporation.
 
 DEPRECIATION
        EXPENSE: Depreciation Expense increased to $245,744 for the six months ended
        June 30, 2007 compared to $231,802 for the six months ended June 30, 2006.
        The
        increase in depreciation expense is primarily from the additions of depreciable
        property in the Tidelands Exploration & Production Corporation
        subsidiary.
 
 INTEREST
        EXPENSE:  Interest expense increased to $528,426 for the six months
        ended June 30, 2007 compared to $485,009 for the six months ended June 30,
        2006.
        The increase of $43,417 resulted primarily from additional interest expense
        associated with the promissory note due to Impact International, LLC and
        the
        increased write-off of prepaid interest relating to a 2006 financing
        transaction.
 
 STOCK-BASED
        COMPENSATION – RELATED PARTIES: Stock-based compensation to related parties
        increased to $1,234,498 for the six months ended June 30, 2007 compared to
        $1,187,400 for the six months ended June 30, 2006. The increase resulted
        primarily from Directors’ Fees of $1,100,000 less a reduction of stock-based
        compensation paid to the Chief Executive Officer.
 
 STOCK-BASED
        COMPENSATION – OTHER: Stock-based compensation for services provided by others
        increased to $908,967 for the six months ended June 30, 2007 compared to
        $311,900 for the six months ended June 30, 2006. The increase of $597,067
        was
        primarily due to legal fees paid by issuance of common stock.
 
 SALES,
        GENERAL AND ADMINISTRATIVE:  Sales, General and Administrative Costs
        decreased to $2,171,005 for the six months ended June 30, 2007 compared to
        $2,255,345 for the six months ended June 30, 2006. This decrease resulted
        from
        cumulative cost reductions across many categories of Sales, General and
        Administrative expenses and was offset by an increase in legal fees and costs
        for the three months ended June 30, 2007 as compared with the three months
        ended
        June 30, 2006.. Of the total Sales, General and Administrative Costs of
        $2,171,005 for the six months ended June 30, 2007, $908,917 of these costs
        were
        paid by issuance of common stock and the remaining $1,262,080 of costs were
        paid
        with cash.
 
 2
 Table
            of Contents
  IMPAIRMENT
        LOSS: Impairment Loss increased to $2,605,061 for the six months ended June
        30,
        2007 as compared to $0 for the six months ended June 30, 2006. The increase
        in
        loss resulted from a non-cash impairment charge to reflect the difference
        between the carrying value and the fair value of the natural gas pipeline
        assets
        owned by the Company’s subsidiary operations of Reef Ventures, LP. The amount of
        impairment charge was derived by reference to a third party valuation of
        the
        assets based upon current and expected future cash flows from the operation
        of
        the assets.
 
 INTEREST
        AND DIVIDEND INCOME:  Interest and Dividend income decreased to $7,874
        for the six months ended June 30, 2007 as compared to $61,739 for the six
        months
        ended June 30, 2006 due to lower cash balances held in interest-bearing accounts
        during the six months ended June 30, 2007.
 
 NET
        LOSS:  Net loss of ($6,146,440) for the six months ended June 30, 2007
        represents an increase in loss of ($2,490,244) as compared to net loss of
        ($3,656,196) for the six months ended June 30, 2006. This increased loss
        was
        primarily due to the impairment loss of ($2,605,061) for the period ended
        June
        30, 2007.
 
 LIQUIDITY
        AND CAPITAL RESOURCES: The Notes on our financial statements in this Form
        10-Q
        state that our difficulty in generating sufficient cash flow to meet our
        obligations and sustain operations raises substantial doubts about our ability
        to continue as a going concern.
  With
        regard to liquidity and adequacy of capital resources, the Company will need
        additional equity or debt financing during the third 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 S. de R.L. de C.V., and also to fund operating overhead at the parent
        company level and the possible cost of a litigation settlement or adverse
        verdict if a 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 obtain 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 six months ended June 30, 2007, totaled
        $1,483,911. 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 and equipment for the operation
        of the Sonterra Energy Corporation propane systems. Total debt decreased
        from
        $13,034,046 at December 31, 2006, to $11,944,188 at June 30, 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 six months
        ended June 30, 2007, was ($6,146,440), an increase in net loss of 68.1% from
        the
        net loss of ($3,656,196) for the six months ended June 30, 2006. Basic and
        diluted net loss per common share increased to ($0.06) for the six months
        ended
        June 30, 2007, as compared to ($0.05) for the six months ended June 30, 2006.
        The net loss per share calculation for the six months ended June 30, 2007
        included an increase in actual and equivalent shares outstanding.
  **Item3.
        Quantitative and 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 June 30, 2007, we had
        cash
        and cash equivalents aggregated $85,762.
  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.
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  **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 June 30, 2007 and has concluded that such disclosure controls and
        procedures are effective to ensure that information required to be disclosed
        in
        our periodic reports filed under the Exchange Act is recorded, processed,
        summarized and reported within the time periods specified by the Securities
        and
        Exchange Commission’s rules and forms.
  Changes
        In Internal Control Over Financial Reporting.
  During
        the quarter ended June 30, 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.
  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. However,
        we believe that our disclosure controls and procedures are designed to provide
        reasonable assurance of achieving this objective. 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.
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  **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 and the 10-Q filed with the
        SEC
        on May 18, 2007 (the "Prior Reports"). Other than as set forth below and
        in the
        Prior Reports, 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 8 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 June 30, 2007, the trial date
        was been extended to January 9, 2008, 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
        Nos. 2 and 3 are described in Note 8 above and the Prior Reports.  No
        material updates took place in the quarter ended June 30, 2007.
  Matter
        No. 4
  Cause
        No.
        2007-CI-07451, Michael R. Ward vs. Tidelands Oil & Gas Corporation, was
        filed on May 17, 2007 in the 224th District
        Court of
        Bexar County, Texas. This case involves two claims by the Plaintiff, Michael
        R.
        Ward, the former President and CEO of Tidelands Oil & Gas Corporation
        against the Company. The first claim is for a breach of the Letter Agreement
        dated December 8, 2006 alleging a failure to pay Ward’s salary for the months of
        March through June 2007 pursuant to the terms of said Letter Agreement. The
        second claim involves an allegation by Ward that the Company prevented Ward
        from
        selling 1,650,000 shares of Company stock during the period of February 20,
        2007
        through April 4, 2007 and that Ward suffered economic damages as a result
        of a
        decline in share price during the relevant time periods. The Company filed
        a
        general denial on June 27, 2007. On July 18, 2007, Plaintiff Ward filed a
        Motion
        for Partial Summary Judgment with respect to the first claim for breach of
        the
        Letter Agreement, a Motion setting the case for trial on the second claim
        for
        September 28, 2007, and discovery notices. On August 7, 2007, the Company
        filed
        an abatement request requesting Court ordered mediation pursuant to the Letter
        Agreement of December 8, 2006. The Company expects that its request for
        mediation will be honored by the Court and that the case will be set for
        mediation in September 2007.
  Matter
        No. 5
  Cause
        No.
        2007-CI 11661, Bentley Energy Corp. vs. Tidelands Exploration & Production,
        Inc. was filed on August 7, 2007 in the 407th District
        Court of
        Bexar County, Texas. (Note that the suit was filed with incorrect corporate
        name.  It should be Tidelands Exploration & Production Corp.) This
        case involves a claim for breach of the Joint Operating Agreement and
        Participation Agreement between Tidelands Exploration & Production Corp.
        (“TEP”) and Bentley Energy Corp. (“BENTLEY”), as Assignee of Regency Energy,
        Inc. (“REGENCY”). BENTLEY is majority owned by Michael R. Ward, the former
        President and CEO of Tidelands Oil & Gas Corporation, which is the parent
        company for TEP. REGENCY is majority owned by Royis Ward, a former director
        of
        Tidelands Oil & Gas Corporation and the father of Michael R. Ward. Pursuant
        to the terms of the Joint Operating Agreement, TEP, as non-operator, granted
        REGENCY a lien or security interest in all the oil and gas leases and pipelines
        covered by the Joint Operating Agreement. BENTLEY seeks foreclosure of these
        interests due to TEP’s failure to pay joint interest billings under the Joint
        Operating Agreement. TEP has not yet filed an answer to this lawsuit, but
        expects to reply in the near future.
  **Item
        1A. Risk Factors**
  During
        the quarter ended June 30, 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 June 30, 2007 (not previously reported in a Form
        8-K):
 
 On
        April
        4, 2007, the Company issued 25,000 shares of its restricted common stock
        valued
        at $24,875 for consulting services.
 
 On
        June
        6, 2007, the Company issued 600,000 shares of its restricted common stock
        valued
        at $90,000 as stock bonuses to three employees.
 
 No
        commissions were paid in connection with any of these issuances. 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.
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  **Item3.
        Defaults Upon 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.
  **Item
        5. Other Information**
  None.
  **Item
        6. Exhibits**
  **Exhibit**
              
              **Description**
              
              **Location
                  of Exhibit**31.1
              
              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
  
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  **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 CORPORATION**Date: August
                  20, 2007
              By:
              /s/  James
                  B.
                  SmithJames
                  B. Smith, President and Chief Executive
                  Officer






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