UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    Form 10-Q


(Mark one)

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

                  For the quarterly period ending June 30, 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 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 [ ], Accelerated filer [ ], 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 [ ] No [X]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

As of June 30,  2006,  there were  80,565,815  shares of Common Stock issued and
outstanding.

Transitional Small Business Disclosure Format : Yes [ ] No [X]

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                                    FORM 10-Q


                                      INDEX

                                                                            Page
PART I - Financial Information
Item 1 - Financial Statements
         Condensed Consolidated Balance Sheets as of
         June 30, 2006, and December 31, 2005..........................        3

         Condensed Consolidated Statements of Operations
         For the Three Months Ended June 30, 2006 and 2005.............        4

         Condensed Consolidated Statements of Operations
         For the Six Months Ended June 30, 2006 and 2005...............        5

         Condensed Consolidated Statements of Cash Flows
         For the Six Months Ended June 30, 2006 and 2005...............      6-7

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

Item 2 - Management's Discussion and Analysis or Plan of Operation.....    15-22

Item 3 - Quantitative and Qualitative Disclosures About Market Risk....       22

Item 4 - Controls and Procedures.......................................    22-23


PART II - Other Information

Item 1 - Legal Proceedings.............................................    23-27

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds...       27

Item 3 - Defaults Upon Senior Securities...............................       28

Item 4 - Submission of Matters to a Vote of Security Holdings..........       28

Item 5 - Other Information.............................................       28

Item 6 - Exhibits......................................................       29

Signature..............................................................       29







                                       -2-


<PAGE>

                         PART I - Financial Information

Item 1.       Financial Statements

                         TIDELANDS OIL & GAS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                     June 30,      December 31,
                                                       2006            2005
                                                   ------------    ------------
                                                    (Unaudited)
Current Assets:
    Cash and Cash Equivalents                      $  3,312,026    $  1,113,911
    Accounts and Loans Receivable                       306,744         468,458
    Inventory                                            84,346         142,204
    Prepaid Expenses                                    299,811         183,938
                                                   ------------    ------------
       Total Current Assets                           4,002,927       2,197,017
                                                   ------------    ------------

Property Plant and Equipment, Net                    11,193,722      10,042,088
                                                   ------------    ------------

Other Assets:
   Deposits                                              74,004          14,004
   Restricted Cash                                       51,707          76,803
   Note Receivable                                      285,287         288,506
   Deferred Charges                                   1,264,245               0
   Goodwill                                           1,158,937       1,158,937
                                                   ------------    ------------
      Total Other Assets                              2,834,180       1,249,744
                                                   ------------    ------------

      Total Assets                                 $ 18,030,829    $ 13,488,849
                                                   ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Current Maturities - Notes Payable              $    225,000    $    225,000
   Accounts Payable and Accrued Expenses                691,015       1,225,554
                                                   ------------    ------------
      Total Current Liabilities                         916,015       1,450,554

Long-Term Debt                                       10,950,183       4,271,768
                                                   ------------    ------------

      Total Liabilities                              11,866,198       5,722,322
                                                   ------------    ------------

Commitments and Contingencies                              --              --

Stockholders' Equity:
   Common Stock, $.001 Par Value per Share,
     250,000,000 Shares Authorized, 80,565,815
     and 78,495,815 Shares Issued and
     Outstanding at June 30, 2006
     and December 31, 2005 Respectively                  80,567          78,497
   Paid-in Capital in Excess of Par Value            42,760,404      40,818,174
   Subscriptions Receivable                            (440,000)       (550,000)
   Minority Interest                                       --              --
   Accumulated (Deficit)                            (36,236,340)    (32,580,144)
                                                   ------------    ------------
      Total Stockholders' Equity                      6,164,631       7,766,527
                                                   ------------    ------------

      Total Liabilities and Stockholders' Equity   $ 18,030,829    $ 13,488,849
                                                   ============    ============




      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -3-


<PAGE>

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




                                         Three Months Ended   Three Months Ended
                                           June 30, 2006        June 30, 2005
                                           -------------        -------------
                                                                  (Restated)
Revenues:
   Gas Sales and Pipeline Fees             $     392,108        $     262,541
   Construction Services                          15,016               77,995
                                           -------------        -------------
      Total Revenues                             407,124              340,536
                                           -------------        -------------

Expenses:
   Cost of Sales                                 206,413              130,569
   Operating Expenses                             99,587               62,363
   Depreciation                                  116,038              120,954
   Interest                                      373,950              184,073
   Beneficial Conversion Feature Interes               0           (4,601,054)
   Sales, General and Administrative           1,599,803            2,858,659
   Impairment Losses                                   0            5,200,000
                                           -------------        -------------

      Total Expenses                           2,395,791            3,955,564
                                           -------------        -------------

(Loss) From Operations                        (1,988,667)          (3,615,028)

Derivative Gain (Loss)                                 0            8,062,500
(Loss) on Sale of Asset                                0                    0
Interest and Dividend Income                      28,118               33,659
                                           -------------        -------------

Net Income (Loss)                          $  (1,960,549)       $   4,481,131
                                           =============        =============

Net Income (Loss) Per Common Share:
   Basic and Diluted                       $       (0.03)       $        0.07
                                           =============        =============

Weighted Average Number of Common
   Shares Outstanding                         80,080,815           68,321,251
                                           =============        =============









      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -4-


<PAGE>

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




                                             Six Months Ended   Six Months Ended
                                               June 30, 2006      June 30, 2005
                                               -------------      -------------
                                                                    (Restated)
Revenues:
   Gas Sales and Pipeline Fees                 $   1,064,614      $     849,490
   Construction Services                             144,404            119,121
                                               -------------      -------------
      Total Revenues                               1,209,018            968,611
                                               -------------      -------------

Expenses:
   Cost of Sales                                     583,279            415,248
   Operating Expenses                                184,118            129,137
   Depreciation                                      231,802            236,395
   Interest                                          485,009            393,860
   Beneficial Conversion Feature Interest                  0            135,789
   Sales, General and Administrative               3,442,745          4,677,070
   Impairment Losses                                       0          5,200,000
                                               -------------      -------------

      Total Expenses                               4,926,953         11,187,499
                                               -------------      -------------

(Loss) From Operations                            (3,717,935)       (10,218,888)

Derivative Gain (Loss)                                     0          5,168,000
(Loss) on Sale of Equipment                                0             (3,167)
Interest and Dividend Income                          61,739             69,651
                                               -------------      -------------

Net (Loss)                                     $  (3,656,196)     $  (4,984,404)
                                               =============      =============

Net (Loss) Per Common Share:
   Basic and Diluted                           $       (0.05)     $       (0.07)
                                               =============      =============

Weighted Average Number of Common
   Shares Outstanding                             79,896,700         67,941,251
                                               =============      =============












      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -5-


<PAGE>
<TABLE>
<CAPTION>

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




                                                Six Months Ended   Six Months Ended
                                                  June 30, 2006      June 30, 2005
                                                  -------------      -------------
                                                                      (Restated)
<S>                                               <C>                <C>
Cash Flows Provided (Required) By
  Operating Activities:
     Net (Loss)                                   $  (3,656,196)     $  (4,984,404)
     Adjustments to Reconcile Net (Loss)
      to Net Cash Provided (Required) By
       Operating Activities:
         Depreciation                                   231,802            236,395
         Loss on Disposal of Equipment                        0              3,167
         Change in Derivative Liability                       0         (5,168,000)
         Issuance of Common Stock:
           For Services Provided                      1,499,300          2,677,125
         Beneficial Conversion Feature Interest               0            135,789
         Changes in:
           Accounts Receivable                          161,714            207,064
           Inventory                                     57,858              6,950
           Prepaid Expenses                            (115,873)           184,957
           Deferred Charges                          (1,264,245)           116,250
           Deposits                                     (60,000)            (2,500)
           Restricted Cash                               25,096                  0
           Accounts Payable and
             Accrued Expenses                           (89,539)            82,078
           Impairment Losses                                  0          5,200,000
                                                  -------------      -------------

Net Cash (Required) By Operating Activities          (3,210,083)        (1,305,129)
                                                  -------------      -------------

Cash Flows Provided (Required)
  By Investing Activities:
      Acquisitions of Property, Plant
           and Equipment                             (1,383,436)          (784,640)
      Disposals of Equipment                                  0                800
                                                  -------------      -------------

Net Cash (Required) By Investing Activities          (1,383,436)          (783,840)
                                                  -------------      -------------
</TABLE>









      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -6-


<PAGE>

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

                                   (UNAUDITED)



                                              Six Months Ended  Six Months Ended
                                               June 30, 2006     June 30, 2005
                                               -------------     -------------
                                                                   (Restated)
Cash Flows Provided (Required)
   by Financing Activities:
      Proceeds from Stock Subscriptions
        Receivable                                   110,000                 0
      Proceeds from Long-Term Loans                6,678,415           149,108
      Repayment of Loan to Related Party               3,219               492
                                               -------------     -------------

Net Cash Provided by Financing Activities          6,791,634           149,600
                                               -------------     -------------

Net Increase (Decrease) in Cash                    2,198,115        (1,939,369)

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

Cash at End of Period                          $   3,312,026     $   3,544,685
                                               =============     =============

Supplemental Disclosures of
   Cash Flow Information:
       Cash Payments for Interest              $     408,657     $     266,938
                                               =============     =============

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

Non-Cash Investing and Financing Activities:
   Issuance of Common Stock:
      Repayment of Note                        $           0     $   2,512,500
      Repayment of Convertible Debentures                  0         2,520,000
      Payment of Accrued Expense                     445,000                 0
                                               -------------     -------------

      Total Non-Cash Investing and
         Financing Activities                  $     445,000     $   5,032,500
                                               =============     =============





      See Accompanying Notes to Condensed Consolidated Financial Statements
                                       -7-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


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

         The accompanying  unaudited condensed consolidated financial statements
         for the six month  periods  ended June 30,  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-Q  and  Regulation  S-X.  The  financial
         information  as of December 31, 2005, is derived from the  registrant's
         Form 10-K 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-K for the year ended
         December 31, 2005.

         Operating results for the six-month period ended June 30, 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.









                                       -8-


<PAGE>

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








                                       -9-

<PAGE>

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











                                      -10-


<PAGE>

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


                                      -11-


<PAGE>

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




















                                      -12-


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


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

         On May 10, 2006,  the Company  issued 10,000  shares of its  restricted
         common stock valued at $7,900 to an employee/officer of a subsidiary of
         the Company.

         On May 10, 2006,  the Company  issued 60,000  shares of its  restricted
         common stock valued at $47,400 pursuant to an employment  contract with
         an officer of the Company.

         On June 7, 2006,  the Company  issued  500,000 shares of its restricted
         common stock valued at $542,500 pursuant to an employment contract with
         an officer of the Company.

         On June 27, 2006,  the Company  issued 20,000 shares of its  restricted
         common stock valued at $16,000 to an employee of the Company.

         On June 27, 2006,  the Company  issued 20,000 shares of its  restricted
         common stock valued at $16,000 to an employee of the Company.


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 June 30, 2006,  the loan
         balance was $285,287.

         During 2006,  the  President  acquired the airplane  being  utilized to
         provide  charter air  transportation  for the Company.  The transaction
         includes  assumption  of the  $300,000 5% interest  bearing loan due in
         January 2007 to the Company.














                                      -13-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006


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. During June 2006, the investors billed and were paid $64,566
         liquidated damages for not meeting the required effective date.


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

         On July 9,  2006,  the  Company  acquired a 50%  interest  in a 24-mile
         natural gas pipeline located in Medina,  Atascosa and Bexar Counties in
         the state of Texas. In addition, the Company also acquired an undivided
         50% working interest in two leases with 5 recompleted natural gas wells
         on  approximately  1,000 acres with at least 10 additional  natural gas
         wells for  re-entry.  These  leases are located in Atascosa  and Medina
         counties.  The Company  expects to participate in acquiring  additional
         leases  which  could  be  developed  around  the area  serviced  by the
         pipelines. Total consideration for these transactions is $500,000 which
         is being paid to a related party.












                                      -14-




<PAGE>

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         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.  Additionally,  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 six months ended June 30, 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.


                                      -15-
<PAGE>

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.

We have also agreed to file a  registration  statement on Form S-1 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.


                                      -16-
<PAGE>

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 will
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
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.


                                      -17-
<PAGE>

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.

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,   commercial
counterparties,  financial investors, 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. segments,  the Progreso  International Pipeline and
the  Mission  International  Pipeline.  Sonora  believes it has filed all needed
revisions to the Draft Environmental Report for both pipeline segments with FERC
for purposes of the NEPA  Environmental  Assessment  requirements.  The Progreso
International  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


                                      -18-
<PAGE>

County,  Texas and extend southward to the Arguelles  crossing of the Rio Grande
River into Mexico near the city of Mission, Texas. We anticipate the issuance of
an Environmental Assessment by the staff of FERC in the third quarter of 2006 to
be followed by a complete  application  for a Certificate of Public  Convenience
and Necessity to construct,  own,  operate and maintain the proposed  pipelines.
The current catalog of FERC correspondence for Sonora's activities is located at
www.ferc.gov under Docket No. PF05-15.

On May 23, 2006, Terranova Energia, S. de R.L. de C.V.  ("Terranova"),  a wholly
owned subsidiary of the Company, was awarded a permit by the Comision Reguladora
de Energia de Mexico  ("CRE") to  construct  its 30 inch  diameter  natural  gas
pipeline  segment in Mexico to link to the  Sonora  Pipeline  LLC United  States
pipelines and Terranova's  proposed  underground natural gas storage facility in
the Brasil field (located  approximately 17 miles south of Nuevo Progreso on the
U.S./Mexico  border in  Texas).  Terranova  submitted  the  application  for the
storage  facility  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.  The CRE has
recently  selected GEOSTOCK (an entity owned 50% by Total, 25% by BP, and 25% by
Entrepose  Contracting)  as its  technical  consultant  to  review  the  storage
facility permit application. GEOSTOCK is an international engineering group with
over 40 years experience in the design,  construction and operation of all types
of underground storage facilities for liquid, liquefied or gaseous hydrocarbons.
The technical  review of the permit  application  is expected to be completed by
the end of 2006.  Management  expects the  storage  permit  application  will be
presented for decision by staff to the CRE Commissioners in the first quarter of
2007.

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",


                                      -19-
<PAGE>

"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.

Results of Operations

Three Months Ended June 30, 2006, Compared with Three Months Ended June 30, 2005

REVENUES:  The Company reported revenues of $ 407,124 for the three months ended
June 30, 2006 versus  revenues of $340,536  for the three  months ended June 30,
2005 which is an improvement of 19.5% for the quarter ended June 30, 2006 versus
the quarter ended June 30, 2005. The revenue  increase  resulted from increasing
volumes and product  prices of propane sold by our Sonterra  Energy  Corporation
subsidiary to residential consumers.

TOTAL COSTS AND  EXPENSES:  Total Costs and  Expenses for the three months ended
June 30, 2006 were $2,395,791  versus $3,955,564 for the three months ended June
30, 2005 which is a decrease  of 39% for the quarter  ended June 30, 2006 versus
the quarter  ended June 30, 2005.  The primary  reason for this decrease was the
$1,258,856  decrease  in Sales,  General  and  Administrative  expenses  for the
quarter  ended June 30, 2006 versus the quarter ended June 30, 2005. A secondary
reason for the decrease was the absence of Beneficial Conversion Interest Income
and  Impairment  Losses in the  quarter  ended June 30,  2006 versus the quarter
ended June 30, 2005.

NET  INCOME  (LOSS):  Net Loss for the  three  months  ended  June 30,  2006 was
($1,960,549)  versus a Net Income for the three  months  ended June 30,  2005 of
$4,481,131. The primary reason for this difference was the absence of Derivative
Gain in the quarter  ended June 30, 2006 versus a Derivative  Gain of $8,062,500
for the quarter  ended June 30, 2005.

Six Months Ended June 30, 2006, Compared with Six Months Ended June 30, 2005

REVENUES:  The Company reported  revenues of $1,209,018 for the six months ended
June 30, 2006 as compared with revenues from  continuing  operations of $968,611
for the six months ended June 30, 2005. The revenue increase resulted  primarily
from increasing  revenues of Sonterra  Energy  Corporation due to an increase in
total customers served and product prices in the first six months of 2006 versus
the first six months of 2005.

TOTAL COSTS AND EXPENSES:  Total costs and expenses from  continuing  operations
decreased from  $11,187,489 for the six months ended June 30, 2005 to $4,926,953
for the six months ended June 30, 2006. The principal  reason for this amount of
decrease was the lack of expense for Beneficial  Conversion Feature Interest and
Impairment  Loss in the six  months  ended June 30,  2006  versus the six months
ended June 30, 2005.

COST OF SALES:  Total Cost of Sales  increased  from $415,248 for the six months
ended June 30, 2005 to $583,279  for the six months  ended June 30,  2006.  This
increase resulted from the increased cost and volume of propane sold by Sonterra
Energy Corporation in the six months ended June 30, 2006 versus June 30, 2005.

OPERATING EXPENSES: Operating expenses from continuing operations increased from
$129,137  for the six months  ended June 30, 2005 to $184,118 for the six months
ended June 30, 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  six  months  for  2005.
Depreciation  expense  declined in the first six months of 2006 versus the first
six months of 2005,  decreasing  from $236,395 for the six months ended June 30,
2005 to  $231,802  for the six months  ended June 30,  2006  reflecting  a minor
decrease in  depreciable  assets for the  respective  periods due to  impairment
charges.

INTEREST  EXPENSE:  Interest expense  increased from $393,860 for the six months
ended June 30,  2005 to  $485,009  for the six months  ended June 30,  2006 as a
result  of  interest  rate  increases   related  to  the  note  owed  to  Impact
International  LLC. No expense for Beneficial  Conversion  Feature  Interest was
recorded  for the six months ended June 30, 2006 as compared to $135,789 for the
six months ended June 30, 2005 (as restated). The market price for the Company's
common stock at the relevant  measurement dates during the six months ended June
30, 2006 was less than the conversion price for the debentures issued on January


                                      -20-
<PAGE>

20, 2006. 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
decreased by $1,234,325 during the six months ended June, 2006 to a total amount
of  $3,442,745  as compared  $4,677,070  for the six months ended June 30, 2005.
This decrease was due primarily to the absence of financing costs paid to Impact
International LLC during the period ended June 30, 2006 as compared to financing
costs of  $1,272,500  paid to Impact  International  LLC during the period ended
June 30, 2005.

IMPAIRMENT  LOSS: No expense for impairment loss was recorded for the six months
ended June 30, 2006 compared to $5,200,000 of impairment of goodwill recorded as
a loss for the period ended June 30, 2005.

DERIVATIVE GAIN: Gain from embedded derivative instrument  liabilities decreased
from  ($5,168,000)  for the six months ended June 30, 2005 (as restated) to zero
for the six months ended June 30, 2006. The warrants  issued in connection  with
the January 20, 2006  financing had an exercise  price that was greater than the
fair market value of the  Company's  common  stock at the  relevant  measurement
dates.  Accordingly,  no  derivative  gain or  reduction  in  liability  for the
issuance of the warrants in this financing  transaction was recorded for the six
months ended June 30, 2006.

NET LOSS:  Net loss of  ($4,984,404)  for the six months ended June 30, 2005 (as
restated)  decreased to  ($3,656,196)  for the six months ended June 30, 2006, a
decrease  in the amount of loss of  $1,328,208.  The  principal  reason for this
amount  of  decline  in net  loss  was  the  reduction  in  Sales,  General  and
Administrative  Expenses  achieved in the six months  ended June 30, 2006 versus
the six months ended June 30, 2005. Included in the net loss of ($3,656,196) for
the six months  ended June 30, 2006 is  $1,499,300  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 six months ended June 30, 2006 totaled  $1,383,436.  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 $ 11,866,198 at June 30, 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


                                      -21-
<PAGE>

loss for the six months ended June 30, 2006 was  ($3,656,196)  a decrease in net
loss of 27% from the net loss of ($4,984,404)  for the six months ended June 30,
2005.  Basic and diluted net loss per common share  decreased  28.6% to ($0.05).
The net loss per  share  calculation  for the six  months  ended  June 30,  2006
included an increase in actual and equivalent shares outstanding.

Item 3.  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, 2006,
we had cash and cash equivalents in the aggregate $3,312,026.

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.

Item 4.  Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures.

As of the  end of the  reporting  period,  June  30,  2006,  we  carried  out an
evaluation,  under the supervision and with the participation of our management,
including  the  Company's   Chairman  and  Chief   Executive   Officer/Principal
Accounting  Officer,  of the  effectiveness  of the design and  operation of our
disclosure  controls and procedures pursuant to Rule 13a-15(e) of the Securities
Exchange  Act of 1934  (the  "Exchange  Act"),  which  disclosure  controls  and
procedures are designed to insure that information required to be disclosed by a
company  in the  reports  that it files  under  the  Exchange  Act is  recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms.  Based upon that  evaluation,  the Chairman and the Chief
Financial  Officer  concluded  that our  disclosure  controls and procedures are
effective  in timely  alerting  them to  material  information  relating  to the
Company required to be included in the Company's period SEC filings.


                                      -22-
<PAGE>

(b)  Changes in Internal Control.

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

(c)  Limitations.

Our  management,   including  our  Principal  Executive  Officer  and  Principal
Financial  Officer,  does not expect  that our  disclosure  controls or internal
controls over  financial  reporting  will prevent all errors or all instances of
fraud.  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.

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Matter No. 1:

On January 6,  2003,  we were  served as a third  party  defendant  in a lawsuit
titled  Northern  Natural Gas Company vs. Betty Lou Sheerin vs.  Tidelands Oil &
Gas Corporation,  ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court,  Bexar  County,  Texas,  Cause  Number  2002-C1-16421.  The  lawsuit  was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
to make  payments on a note she  executed  payable to  Northern in the  original
principal amount of $1,950,000.  Northern's suit was filed on November 13, 2002.
Sheerin  answered  Northern's  lawsuit  on January  6,  2003.  Sheerin's  answer
generally  denied  Northern's  claims  and raised the  affirmative  defenses  of
fraudulent inducement by Northern,  estoppel,  waiver and the further claim that


                                      -23-
<PAGE>

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

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


                                      -24-
<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.


                                      -25-
<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.  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.

Matter No. 2:

On May 4, 2005, HBH Development  Company,  LLC,  ("HBH")  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
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.


                                      -26-
<PAGE>

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.

Item 1A. Risk Factors

n/a

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

During this fiscal quarter, we issued the following common stock:

On May 10, 2006, we issued Jason Jones, a Tidelands' subsidiary employee, 10,000
common shares valued at $7,900 pursuant to his employment agreement.

On May 10, 2006, we issued Robert Dowies,  a Tidelands'  officer,  60,000 common
shares valued at $97,400 under the terms of his employment agreement.

On June 7, 2006, we issued  Michael Ward, a Tidelands'  officer,  500,000 common
shares valued at $542,500 under the terms of his employment agreement.

On June 27, 2006, we issued Fran Jenkins, a Tidelands'  employee,  20,000 common
shares valued at $16,000 as employee compensation.

On June 27, 2006, the Company issued 20,000 common shares to Natasha Dempsey,  a
Tidelands' employee, as compensation.

These are restricted  securities and may not be resold absent registration under
the  Securities Act of 1933, as amended (the  "Securities  Act") or an exemption
from the  registration  provisions of the  Securities  Act. We relied on Section
4(2) of the Securities Act as securities transaction exemption.


                                     -27-
<PAGE>

Item 3.  Defaults Upon Senior Securities

None.

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

During the first and second quarters,  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  obtained a 77.5%  majority
shareholder  consent  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

Regency Energy Transaction
--------------------------

On  July 9,  2006,  Tidelands  Exploration  and  Production,  Inc.,  ("TEPI")  a
corporation formed by Tidelands Oil & Gas Corporation  ("TIDE"),  entered into a
Participation  Agreement  (Exhibit 10.1) and Joint Operating  Agreement (Exhibit
10.2) with Regency  Energy,  Inc.  ("Regency"),  a Texas  corporation.  TEPI has
agreed to  participate  and  jointly  operate  natural  gas wells and a pipeline
located in Texas.  When the  agreements  are  performed,  we will  acquire a 50%
interest in a 24-mile natural gas pipeline located in Medina, Atascosa and Bexar
counties,  Texas.  Additionally,  we will acquire a 50% working  interest in two
leases with five  re-completed  natural gas wells located in Medina and Atascosa
counties,  Texas. We have agreed to pay $500,000 to Regency for these interests.
TIDE  deposited the sum of $250,000  with Regency on behalf of TEPI.  Regency is
principally  owned and  controlled  by Royis Ward,  the father of Michael  Ward,
Tidelands Oil & Gas Corporation President and member of the board of directors.

TEPI was recently  organized as a Texas  corporation for this  transaction  with
Regency.  TEPI will be a wholly owned  subsidiary  of TIDE when it completes its
organizational phase. No TEPI operations have commenced and these interests have
not been formally transferred to TEPI as of the date of this report.

Scoot Aviation, LLC Transaction
-------------------------------

Tidelands  Oil &  Gas  Corporation  executed  an  Aircraft  Prepaid  Lease/  Use
Agreement (Exhibit 10.3) in January 2004 with Royis Ward, to provide charter air
transportation in his Beechcraft King Air, for Tidelands'  employees,  customers
and contractors to job sites and other business related destinations. A $300,000
5% interest  bearing  loan  (Exhibit  10.4) due in January  2007 was made by the
Company to Royis Ward regarding the  transaction.  The loan balance was credited
by  airtime  charges at  standard  industry  rates  offset by  interest  charges
computed on the average monthly balance.  At December 31, 2005, the loan balance
was $288,506.  On April 14, 2006,  Michael Ward,  through Scoot  Aviation,  LLC,
acquired the Royis Ward aircraft and the loan  obligation.  As of June 30, 2006,
the outstanding loan balance was $285,287.

Small Business Issuer Ineligibility
-----------------------------------

Tidelands  will commence  filing its periodic  reports with the  Securities  and
Exchange Commission under Regulation S-X instead of S-B due to the fact that the
Company had exceeded the $25,000,000 public float (the aggregate market value of
its outstanding common equity held by non-affiliates)  limitations of Regulation
S-B. As a result of this  limitation  and at the request of the  Securities  and
Exchange Commission,  Tidelands will be re-filing its Annual Report on Form 10-K
for the period ending  December 31, 2005 and  re-filing its Quarterly  Report on
Form 10-Q for the period ending March 31, 2006.


                                      -28-
<PAGE>

Item 6.  Exhibits

a)   Exhibits

     Exhibit No.    Exhibit Name

        10.1        Regency Energy Participation Agreement
        10.2        Regency Energy Joint Operating Agreement
        10.3        Aircraft Prepaid Lease/Use Agreement
        10.4        Promissory Note  for Aircraft Prepaid Lease/Use Agreement
        31.1        Chief Executive  Officer-Section 302 Certification  pursuant
                    to Sarbanes-Oxley Act.
        31.2        Chief Financial Officer- Section 302 Certification  pursuant
                    to Sarbanes-Oxley Act.
        32.1        Chief   Executive   and   Financial    Officer-Section   906
                    Certification pursuant to Sarbanes-Oxley Act.


                                   SIGNATURES

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

                                                TIDELANDS OIL & GAS CORP.


Dated: August 21, 2006                           /s/ Michael Ward
                                                --------------------------------
                                                By: Michael Ward
                                                Title: President, CEO



Dated: August 21, 2006                           /s/ James B. Smith
                                                --------------------------------
                                                By: James B. Smith
                                                Title: CFO, Principal Accounting
                                                Officer