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
  1934For
      the quarterly period ended September 30, 2008ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACTFor
      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)




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




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





Large
accelerated filer o                   Accelerated
filer o                     Non-accelerated
filer o                         Smaller
Reporting Company 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




As of
November 14, 2008, there were 217,754,324 shares of Common Stock issued and
outstanding.


Transitional
Small Business Disclosure Format: Yes  o
     No x








Table of Contents




TIDELANDSOIL & GAS CORPORATION


FORM
10-Q




Table ofContents








PagePART
      I  Financial InformationItem
      1
            Financial
      Statements (Unaudited)
            3Consolidated
      Balance Sheets as of September 30, 2008 and December 31,
      2007
            3Consolidated
      Statements of Operations For the Three Months Ended September 30, 2008 and
      2007
            5Consolidated Statements of
      Operations For the Nine Months Ended September 30, 2008 and 2007
            6Consolidated Statements of Cash
      Flows For the Nine Months Ended September 30, 2008 and 2007
            7Notes to
      Consolidated Financial Statements
            10Item
      2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            20Item
      3
            Quantitative and
      Qualitative Disclosures About Market Risk
            23Item
      4
            Controls and
      Procedures
            24PART
      II   Other InformationItem
      1
            Legal
      Proceedings
            25Item
      1A
            Risk
      Factors
            25Item
      2
            Unregistered Sales
      of Equity Securities and Equity Repurchases
            25Item
      3
            Defaults Upon
      Senior Securities
            26Item
      4
            Submission of
      Matters to a Vote of Security Holders
            26Item
      5
            Other
      Information
            26Item
      6
            Exhibits
            26Signature
            
            27






Table of Contents






PARTI – FINANCIAL INFORMATION




Item
1. Financial Statements




TIDELANDS
      OIL & GAS CORPORATIONCONSOLIDATED
      BALANCE SHEETS(UNAUDITED)
   ASSETSSeptember
      30,
              
              
              December
      31,2008
              
              
              2007Current
      Assets:Cash
              
              $
              8,628
              
              
              $
              5,794Accounts
      and Other Receivable
              
              
              93,222
              
              
              
              7,116Note
      Receivable
              
              
              800,000
              
              
              
              -Prepaid
      Expenses
              
              
              114,599
              
              
              
              177,099Current
      Portion of Assets of Discontinued Operations
              
              
              -
              
              
              
              734,713Total
      Current Assets
              
              
              1,016,449
              
              
              
              924,722Property
      Plant and Equipment, Net of Accumulated Depreciationof
      $95,677 and $81,202, Respectively – Continuing Operations
              
              
              3,152,845
              
              
              
              2,953,661Property
      Plant and Equipment, Net – DiscontinuedOperations-Held
      for Sale
              
              
              -
              
              
              
              4,118,666Total
      Property, Plant and Equipment, Net
              
              
              3,152,845
              
              
              
              7,072,327Investment
      in Affiliate  – Cost Method
              
              
              250,000
              
              
              
              2,809,801Other
      Assets:Deposits
              
              
              146,724
              
              
              
              200,379Cash
      Restricted
              
              
              -
              
              
              
              43,467Deferred
      Charges
              
              
              181,333
              
              
              
              -Goodwill
              
              
              -
              
              
              
              800,428Non-Current
      Portion of Assets of DiscontinuedOperations-Held
      for Sale
              
              
              -
              
              
              
              386,048Total
      Other Assets
              
              
              328,057
              
              
              
              1,430,322Total
      Assets
              
              $
              4,747,351
              
              
              $
              12,237,172
 
 
 
 3
 Table of Contents
  TIDELANDS
      OIL & GAS CORPORATIONCONSOLIDATED
      BALANCE SHEETS(CONTINUED)(UNAUDITED)
 
 LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)September
      30,
                
                
                December
      31,2008
                
                
                2007Current
      Liabilities:Current
      Maturities – Note Payable
                
                $
                1,192,277
                
                
                $
                7,533,039Accounts
      Payable and Accrued Expenses
                
                
                866,333
                
                
                
                1,985,829Accrued
      Expenses – Due to Related Parties
                
                
                1,500,000
                
                
                
                -Reserve
      for Litigation
                
                
                -
                
                
                
                2,250,000Current
      Portion of Liabilities of DiscontinuedOperations
                
                
                -
                
                
                
                743,380Due
      to Related Party
                
                
                172,375
                
                
                
                -Total
      Current Liabilities
                
                
                3,730,985
                
                
                
                12,512,248Long-Term
      Debt
                
                
                1,000,000
                
                
                
                -Total
      Liabilities
                
                
                4,730,985
                
                
                
                12,512,248Commitments
      and Contingencies
                
                
                -
                
                
                
                -Stockholders’
      Equity (Deficit):Common
      Stock, $.001 Par Value per Share,250,000,000
      Shares Authorized, 214,999,909and
      108,226,836 Shares Issued andOutstanding
      at September 30, 2008 andDecember
      31, 2007, Respectively
                
                
                215,001
                
                
                
                108,227Additional
      Paid-in Capital
                
                
                60,964,482
                
                
                
                55,868,098Accumulated
      Deficit
                
                
                (61,163,117
                )
                
                
                (56,251,401
                )Total
      Stockholders’ Equity (Deficit)
                
                
                16,366
                
                
                
                (275,076
                )Total
      Liabilities and Stockholders’ Equity(Deficit)
                
                $
                4,747,351
                
                
                $
                12,237,172
 See
Accompanying Notes to Consolidated Financial Statements
 
 
 4
 Table of Contents
  TIDELANDSOIL & GAS CORPORATIONCONSOLIDATED
      STATEMENTS OF OPERATIONS(UNAUDITED)
  Three
      Months Ended
                
                
                Three
      Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007Revenues:Consulting
      Fees
                
                $
                30,000
                
                
                $
                -Total
      Revenues
                
                
                30,000
                
                
                
                -Costs
      and Expenses:Depreciation
                
                
                6,050
                
                
                
                6,242Selling,
      General and Administrative
                
                
                1,263,816
                
                
                
                638,416Impairment
      – Investment in Affiliate
                
                
                2,559,801
                
                
                
                -Total
      Costs and Expenses
                
                
                3,829,667
                
                
                
                644,658Loss
      From Operations
                
                
                (3,799,667
                )
                
                
                (644,658
                )Other
      Income (Expenses)Gain
      on the Sale of Assets
                
                
                900
                
                
                
                156,480Interest
      Expense
                
                
                (59,029
                )
                
                
                (245,357
                )Interest
      and Dividend Income
                
                
                10,211
                
                
                
                167Reduction
      of Reserve for Litigation
                
                
                2,239,600
                
                
                
                -Miscellaneous
                
                
                (8,803
                )
                
                
                93,390Total
      Other Income
                
                
                2,182,879
                
                
                
                4,680Net
      Loss from Continuing Operations
                
                
                (1,616,788
                )
                
                
                (639,978
                )Net
      Loss from Operations of DiscontinuedSegments
      Including Loss on Disposal ofEquipment
      $179,443 at September 30, 2007
                
                
                -
                
                
                
                (237,797
                )Net
      Loss
                
                $
                (1,616,788
                )
                
                $
                (877,775
                )Loss
      Per Common Share:  Basic and
      DilutedLoss
      from Continuing Operations
                
                $
                (0.01
                )
                
                $
                (0.01
                )Loss
      from Discontinued Operations
                
                
                0.00
                
                
                
                (0.00
                )Total
                
                $
                (0.01
                )
                
                $
                (0.01
                )Weighted
      Average Number of CommonShares
      Outstanding, Basic and
      Diluted
                
                
                196,869,627
                
                
                
                106,425,046
 See
Accompanying Notes to Consolidated Financial Statements
  5
 Table of Contents
 
 TIDELANDSOIL & GAS CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
  Nine
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007Revenues:Consulting
      Fees
                
                $
                105,000
                
                
                $
                -Total
      Revenues
                
                
                105,000
                
                
                
                -Costs
      and Expenses:Depreciation
                
                
                18,152
                
                
                
                18,770Selling,
      General and Administrative–RelatedParties
                
                
                -
                
                
                
                3,638,000Selling,
      General and Administrative
                
                
                5,175,506
                
                
                
                3,766,691Impairment
      – Investment in Affiliate
                
                
                2,559,801
                
                
                
                -Total
      Costs and Expenses
                
                
                7,753,459
                
                
                
                7,423,461Loss
      From Operations
                
                
                (7,648,459
                )
                
                
                (7,423,461
                )Other
      Income (Expenses)Gain
      on Sale of Assets
                
                
                900
                
                
                
                156,480Interest
      Expense
                
                
                (238,425
                )
                
                
                (772,304
                )Interest
      and Dividend Income
                
                
                21,145
                
                
                
                752Reduction
      of Reserve for Litigation
                
                
                2,239,600Miscellaneous
                
                
                7,751
                
                
                
                93,390Total
      Other Income (Expenses)
                
                
                2,030,971
                
                
                
                (521,682
                )Net
      Loss from Continuing Operations
                
                
                (5,617,488
                )
                
                
                (7,945,143
                )Net
      Income (Loss) from Operations ofDiscontinued
      Segments Including Gain onDisposal
      of Equipment of $847,087 atSeptember
      30, 2008 and Loss on Disposalof
      Equipment of $179,443 and an ImpairmentLoss
      – Long Lived Assets of $2,605,061 atSeptember
      30, 2007
                
                
                705,772
                
                
                
                (2,717,072
                )Net
      Loss
                
                $
                (4,911,716
                )
                
                $
                (10,662,215
                )Loss
      Per Common Share:  Basic and
      DilutedLoss
      from Continuing Operations
                
                $
                (0.03
                )
                
                $
                (0.08
                )Loss
      from Discontinued Operations
                
                
                0.00
                
                
                
                (0.03
                )Total
                
                $
                (0.03
                )
                
                $
                (0.11
                )Weighted
      Average Number of CommonShares
      Outstanding, Basic and
      Diluted
                
                
                165,928,519
                
                
                
                97,199,835
  See
Accompanying Notes to Consolidated Financial Statements
   6
 Table of Contents
  TIDELANDSOIL & GAS CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)
  Nine
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007Cash
      Flows From Operating Activities:Net
      Income/(Loss)From
      Continuing Operations
                
                $
                (5,617,488
                )
                
                $
                (7,945,143
                )From
      Discontinued Operations
                
                
                705,772
                
                
                
                (2,717,072
                )Adjustments
      to Reconcile Net Loss To Net CashUsed
      In Operating Activities:DepreciationFrom
      Continuing Operations
                
                
                18,152
                
                
                
                18,770From
      Discontinued Operations
                
                
                43,764
                
                
                
                314,444Impairment
      Loss
                
                
                2,559,801
                
                
                
                2,605,061Reversal
      of Litigation Reserve
                
                
                (2,239,600
                )
                
                
                -(Gain)
      Loss on Disposal of Assets
                
                
                (418,162
                )
                
                
                179,443(Gain)
      on Sale of Subsidiary
                
                
                (429,825
                )
                
                
                (156,480
                )Issuance
      of Common Stock:For
      Services Provided – Related Parties
                
                
                -
                
                
                
                5,011,763For
      Services Provided – Other
                
                
                3,218,963
                
                
                
                1,049,791Changes
      in:Accounts
      Receivable
                
                
                264,183
                
                
                
                (33,708
                )Inventory
                
                
                224,132
                
                
                
                (18,285
                )Prepaid
      Expenses
                
                
                142,613
                
                
                
                (153,974
                )Deferred
      Charges
                
                
                (181,333
                )
                
                
                565,221Deposits
                
                
                54,013
                
                
                
                (65,438
                )Accounts
      Payable and Accrued Expenses
                
                
                840,201
                
                
                
                1,272,791Customer
      Deposits
                
                
                (10,800
                )
                
                
                10,350Net
      Cash (Used) In Operating Activities
                
                
                (825,614
                )
                
                
                (62,466
                )Cash
      Flows From Investing Activities:Proceeds
      – Sale of Subsidiary and Other Assets
                
                
                5,205,595
                
                
                
                1,310,236Investment
      in Affiliate
                
                
                -
                
                
                
                (62,601
                )(Increase)
      Decrease in Restricted Cash
                
                
                70,648
                
                
                
                (1,478
                )Acquisitions
      of Property, Plant and Equipment
                
                
                (217,336
                )
                
                
                (1,774,175
                )Net
      Cash Provided (Used) In Investing Activities
                
                
                5,058,907
                
                
                
                (528,018
                )
 7
 Table of Contents
 
 TIDELANDS
      OIL & GAS CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOWS(CONTINUED)(UNAUDITED)
   Nine
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007Cash
      Flows From Financing Activities:Cost
      of Warrant Buy-Backs
                
                
                (20,714
                )
                
                
                -Proceeds
      from Exercise of Stock Options
                
                
                -
                
                
                
                790,000Proceeds
      from Short-Term Loan
                
                
                -
                
                
                
                251,220Proceeds
      from Long-Term Loan
                
                
                200,000
                
                
                
                -Repayment
      of Convertible Debentures and Loan
                
                
                (4,662,299
                )
                
                
                -Loan
      from Related Party
                
                
                172,375
                
                
                
                -Net
      Cash Provided (Used) by Financing Activities
                
                
                (4,310,638
                )
                
                
                1,041,220Net
      Increase (Decrease) in Cash
                
                
                (77,345
                )
                
                
                450,736Cash
      at Beginning of PeriodFrom
      Continued Operations
                
                
                5,794
                
                
                
                367,437From
      Discontinued Operations
                
                
                80,179
                
                
                
                -Total
                
                
                85,973
                
                
                
                367,437Cash
      at End of PeriodFrom
      Continued Operations
                
                
                8,304
                
                
                
                795,559From
      Discontinued Operations
                
                
                324
                
                
                
                22,614Total
                
                $
                8,628
                
                
                $
                818,173Supplemental
      Disclosures of Cash Flow Information:Cash
      Payments for Interest
                
                $
                165,223
                
                
                $
                125,817Cash
      Payments for Income Taxes
                
                $
                -
                
                
                $
                -
 
 8
 Table of Contents
  TIDELANDS
      OIL & GAS CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOWS(CONTINUED)(UNAUDITED)
   Nine
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007Non-Cash
      Activities:Issuance
      of Common Stock:Operating
      Activities
                
                $
                3,218,963
                
                
                $
                2,423,554Payments
      of Accrued Expenses & Accounts Payable
                
                
                -
                
                
                
                343,244Conversion
      of Debentures
                
                
                -
                
                
                
                2,000,000Payment
      of Note Payable
                
                
                1,994,509
                
                
                
                -Cashless
      Warrant Exercise
                
                
                24,761
                
                
                
                -Conversion
      of Accounts Payable to Notes Payable
                
                
                1,192,277
                
                
                
                -Legal
      Fee – Retainer
                
                
                -
                
                
                
                130,616Prepaid
      Legal Fees
                
                
                -
                
                
                
                27,083Litigation
      Settlement
                
                
                10,400
                
                
                
                -Assumption
      of Note Payable by Third Party
                
                
                876,231
                
                
                
                -Long-Term
      Loan Payable
                
                
                800,000
                
                
                
                -Less
      Related Long-Term Loan Receivable
                
                
                (800,000
                )
                
                
                -Cancellation
      of Common Stock:  In Settlement of StockSubscriptions
                
                
                -
                
                
                
                (220,000
                )Total
      Non-Cash Activities
                
                $
                7,317,141
                
                
                $
                4,704,497
   See
Accompanying Notes to Consolidated Financial Statements
  9
 Table of Contents
  TIDELANDSOIL &
GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
  NOTE 1 –BASIS OF
PRESENTATION
 
 The
accompanying unaudited consolidated financial statements for the nine-month
periods ended September 30, 2008, and 2007, 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 Consolidated Statement of Operations and the Consolidated Statements of Cash
Flows were changed to conform to current year’s presentation.  The
financial information as of December 31, 2007, is derived from the registrant’s
Form 10-K for the year ended December 31, 2007.  Certain information
or footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America that would substantially duplicate the disclosures contained in the
registrant’s Form 10-K for the year ended December 31, 2007, have been condensed
or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
 
 The
preparation of 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, 2007, included in
the registrant’s Form 10-K for the year ended December 31, 2007.
 
 Operating
results for the nine-month period ended September 30, 2008, are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending December 31, 2008.  The accompanying unaudited
consolidated financial statements include the accounts of the registrant and its
wholly-owned subsidiary, Esperanza Energy, LLC.  All significant
inter-company accounts and transactions have been eliminated in
consolidation.  The accounts of Sonterra Energy Corporation, Reef
International, LLC, and Reef Marketing, LLC, are shown up through their dates of
sale.  The accounts of Reef Ventures, LP, and Arrecefe Management,
LLC, its General Partner, are shown up through the sale of their assets with the
exception of continuing incidental expenses.
  NOTE 2 – GOING
CONCERN
 
 The
Company has sustained recurring losses and negative cash flows from
operations.  Over 2007, the Company’s growth had been funded through
issuance of convertible debentures.  As of September 30, 2008, the
Company had approximately $8,628 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 from 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.
 
 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 – SALE OF SONTERRA ENERGY
CORPORATION
 
 On
January 9, 2008, the Company sold its wholly-owned subsidiary, Sonterra Energy
Corporation ("Sonterra”), to Bentley Energy Corporation, a company controlled by
our former CEO.  Sonterra is a propane distribution company operating
in Central Texas.
 
 The sales
price for Sonterra was $3 million of which $2,925,000 was paid at
closing.  The remaining $75,000 is due on or before January 9, 2009,
and is subject to use to defend and pay possible claims from previous legal
actions against Sonterra.  (See NOTE 12 – Litigation)
 
 The
proceeds of the transaction were primarily utilized to repay all the outstanding
principal balance on the Company’s convertible debentures totaling
$2,374,291.
 
 
 
 10
 Table of Contents
  TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 
 NOTE 4 – SALE OF THE ASSETS OF REEF
VENTURES, LP
 
 On March
25, 2008, Reef Ventures, L.P. ("Reef Ventures"), a subsidiary of Tidelands Oil
& Gas Corporation (the "Company"), entered into and consummated a Purchase
and Sale Agreement (the "Purchase and Sale Agreement") with West Texas Gas, Inc.
("WTG") for the sale of all of the issued and outstanding membership interests
of Reef International, LLC ("Reef International") and Reef Marketing, LLC ("Reef
Marketing", and collectively with Reef Ventures and Reef International, the
"Reef Entities"), both of which were wholly-owned subsidiaries of Reef Ventures,
and all the assets of the Reef Entities, which consist of assets related to the
"River Crossing Project", the "Carrizo Springs Pipeline System", the "Peña Creek
Gathering System" and the "Chittim Gas Plant" (collectively referred to as the
"Assets").
 
 The total
purchase price for the Assets, after adjustments required by the Purchase and
Sale Agreement, was $2,484,262 (the "Purchase Price") in cash, and the execution
by WTG of a Throughput Payment Agreement (the "Throughput Payment Agreement")
with Impact International, LLC ("Impact").
 
 The
Company caused Reef Ventures to deliver $2,436,825 of the Purchase Price to
Impact on behalf of the Company, as partial repayment of the outstanding
principal and interest of a promissory note made by the Company to Impact dated
May 25, 2004, in the original principal amount of $6,523,773 (the "Note"). The
Company repaid the remainder of the outstanding principal and interest on the
Note by requiring WTG to enter into the Throughput Payment Agreement with Impact
for which Impact credited the outstanding Note balance $876,231, and by issuing
39,890,180 shares (the "New Shares") of the Company's common stock valued at
$0.05 per share, for a total of $1,994,509, to Impact upon the closing of the
Purchase and Sale Agreement. The total consideration described above of
$5,307,505 liquidated the outstanding Note balance in full. The remaining
$47,437 of the Purchase Price received by Reef Ventures was used to pay legal
fees associated with the transaction and for working capital
purposes.
  NOTE 5 – DISCONTINUED OPERATIONS AND
ASSETS HELD
 
 Sonterra
Energy Corporation
 The sale
of the Company’s wholly-owned subsidiary, Sonterra Energy Corporation, resulted
in gain of $429,825 which was subject to possible future reduction (See NOTE 12
– Litigation) for the fiscal period ended September 30, 2008.
  Reef
Ventures, LP
 The sale
of the assets of Reef Ventures, LP, the Company’s 97% owned subsidiary, resulted
in a gain of $417,262 for the fiscal period ended September 30,
2008.
 
 We have
accounted for the sale of these assets in accordance with FAS 144 – Accounting
for the Impairment or Disposal of Long-Lived Assets.  Pursuant to FAS
144, we have separated the detail of the individual assets, liabilities and
results from operations of these projects from our consolidated balance sheet
and statement of operations at September 30, 2008, as follows:
  September
      30,
                    
                    
                    December
      31,2008
                    
                    
                    2007Assets
      of Discontinued Subsidiaries:Cash
                    
                    $
                    -
                    
                    
                    $
                    80,179Accounts
      and Other Receivables
                    
                    
                    -
                    
                    
                    
                    350,289Inventory
                    
                    
                    -
                    
                    
                    
                    224,132Prepaid
      Expenses
                    
                    
                    -
                    
                    
                    
                    80,113Property,
      Plant and Equipment, Net
                    
                    
                    -
                    
                    
                    
                    4,118,666Other
      Assets
                    
                    
                    -
                    
                    
                    
                    386,048Total
      Assets
                    
                    $
                    -
                    
                    
                    $
                    5,239,427Liabilities
      of Discontinued Subsidiaries:Accounts
      Payable and Accrued Expenses
                    
                    $
                    -
                    
                    
                    $
                    732,580Customer
      Deposits
                    
                    
                    -
                    
                    
                    
                    10,800Total
      Liabilities
                    
                    $
                    -
                    
                    
                    $
                    743,380
  Nine Months
      EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007Revenues
      of Discontinued Subsidiaries
                
                $
                1,397
                
                
                $
                1,992,898Costs
      and Expenses
                
                
                (142,712
                )
                
                
                (2,097,908
                )Impairment
      Loss
                
                
                0
                
                
                
                (2,605,061
                )Gain
      (Loss) on Sale of Reef Ventures, LP’s Assets
                
                
                417,262
                
                
                
                (7,001
                )Gain
      on Sale of Sonterra Energy Corporation
                
                
                429,825
                
                
                
                -Net
      Income from Discontinued Operations
                
                $
                705,772
                
                
                $
                (2.717,072
                )
 
 11
 Table of Contents
  TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 
 NOTE 6 – FINANCING TRANSACTION -
GOLDEN GATE INVESTORS, INC.
 
 On May 9,
2008, the Company completed a financing transaction in which it entered into a
Securities Purchase Agreement ("Purchase Agreement") with Golden Gate Investors,
Inc. ("Golden Gate") which provided for the issuance and sale by the Company of
up to $3 million of 6% convertible debentures, with the initial issuance of a $1
million debenture ("Debenture") and the payment of cash by Golden Gate of
$200,000 and issuance by Golden Gate to the Company of a $800,000 promissory
note ("Note"). The Purchase Agreement provides Golden Gate with the right to
lend, in two separate transactions, an additional $1 million of funding to the
Company, in its sole discretion, through advancing cash of $200,000 and issuing
a note for the balance, similar to the Note. The Company had the right until
August 8, 2008, to redeem, at a price equal to the principal and accrued
interest, the Debenture provided that no event of default had occurred. This
redemption did not occur.
 
 The
Debenture is unsecured and bears interest at the annual rate of 6%, payable
monthly, in cash or, at Golden Gate’s election, in shares of the Company’s stock
valued at the applicable conversion price described further below, with the
principal amount due on May 9, 2011. The Debenture may not be prepaid without
the written consent of Golden Gate.  The Debenture is convertible,
either in whole or in part, at any time at a per share price equal to the lesser
of $.50 or 80% of the average of the three lowest volume weighted average prices
during the twenty trading days prior to Golden Gate's election to convert. If
Golden Gate elects to convert a portion of the Debenture, and on the date of the
election, the volume weighted average price per share of the Company’s common
stock is below $0.07, the Company has the right to prepay the portion of the
Debenture that Golden Gate elected to convert, plus any accrued and unpaid
interest, at 100% of the amount due and the conversion notice will be
withdrawn.
 In the
event the Company’s stock trades at a price that is less than $0.01 per share at
any time during the nine-month period following May 9, 2008, the interest rate
on the Debenture will increase to 9 3⁄4 % for the remaining term of the
Debenture.  In the event this provision is triggered, within three
business days of a written request from Golden Gate, the Company is required to
prepay the amount of interest that would otherwise be due from the date of the
request through the maturity date.  If any portion of the Debenture is
converted into the Company’s common stock prior to maturity, the Company will be
entitled to a refund of the pro rata portion of the interest prepayment
attributable to the portion of the principal amount converted.  On
August 26, 2008, the Company received notice from Golden Gate that effective
July 28, 2008, the interest rate on the Debenture was increased to 9 3⁄4 %
pursuant to the terms of Debenture and that the Interest Prepayment amount of
$270,328.77 was due to Golden Gate within three days of the notice. To date, the
Company has not made such prepayment of interest to Golden Gate and Golden Gate
has not given notice of default on the Debenture to the
Company.
 In
accordance with the terms of the Debenture, the Company has reserved 35,000,000
shares of its common stock for possible conversion.  The Company’s
stock transfer agent has received irrevocable instructions regarding the shares
reserved.
 
 The Note
is secured and bears interest at the annual rate of 6.25%, payable monthly, with
the principal amount due on May 31, 2011. Golden Gate has the option to prepay
this note, subject to the satisfaction of certain conditions.  On
August 26, 2008, Golden Gate gave notice that the interest rate on the Note was
decreased to 43/4%, effective as of July 28, 2008 in accordance with the terms
of the Note which provides for such reduction in the event that the Company’s
common stock trades at a price that is less than $0.01 per share at any time
during the nine-month period after May 9, 2008.
 
 The
Company analyzed the provision of the Debenture in accordance with the
provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in, a Company’s Own Stock” and determined
that the Debenture did not contain any derivative features that would require
separate accounting under this literature.
 
 
 12
 Table of Contents
  TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 
 NOTE 7 – PROPERTY, PLANT AND
EQUIPMENT
 
 A summary
of property, plant and equipment at September 30, 2008 and December 31, 2007 is
as follows:


September
      30,2008
              
              
              December
      31,2007
              
              
              Estimated EconomicLifePre-Construction
      Costs:Domestic
      LNG System
              
              $
              3,115,882
              
              
              $
              2,898,546
              
              
              
              N/ATotal
              
              
              3,115,882
              
              
              
              2,898,546Office
      Furniture, Equipment andLeasehold
      Improvements
              
              
              132,640
              
              
              
              136,317
              
              
              5
      YearsTotal
              
              
              3,248,522
              
              
              
              3,034,863Less:
      Accumulated Depreciation
              
              
              95,677
              
              
              
              81,202Net
      Property, Plant and Equipment
              
              $
              3,152,845
              
              
              $
              2,953,661
 
 Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $18,152, and
$18,770, respectively.
  A summary
of property, plant and equipment at September 30, 2008 and December 31, 2007 for
Discontinued Operations is as follows:
  September
      30,2008
              
              
              December
      31,2007
              
              EstimatedEconomicLifeOffice
      Furniture, Equipment andLeasehold
      Improvements
              
              $
              -
              
              
              $
              55,086
              
              5
      YearsPipeline
      – Eagle Pass, TX to PiedrasNegras,
      Mexico
              
              
              -
              
              
              
              3,501,194
              
              20
      YearsTanks
      & Lines – Propane DistributionSystem
              
              
              -
              
              
              
              1,942,936
              
              5
      YearsMachinery
      and Equipment
              
              
              -
              
              
              
              71,580
              
              5
      YearsTrucks,
      Autos and Trailers
              
              
              -
              
              
              
              126,464
              
              5
      YearsTotal
              
              
              -
              
              
              
              5,697,260Less:
      Accumulated Depreciation
              
              
              -
              
              
              
              1,578,594Net
      Property, Plant and Equipment
              
              $
              -
              
              
              $
              4,118,666


Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $43,764 and
$314,444 respectively, and has been included in Net Income from Operations of
Discontinued Segments.
 
 13
 Table of Contents
  
 TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 NOTE 8 – LONG-TERM
DEBT


A summary
of long-term debt at September 30, 2008 and December 31, 2007 is as
follows:
  September
      30,
                
                
                December
      31,2008
                
                
                2007Note
      Payable, Secured by Reef InternationalPipeline,
      Interest Bearing at 2% Over PrimeRate
      Per Annum, Maturing May 25, 2008
                
                $
                -
                
                
                $
                5,158,748Convertible
      Debentures, Unsecured, IncludingPrepaid
      Interest at 9% Per Annum, MaturingJanuary
      20, 2008
                
                
                -
                
                
                
                2,374,291Convertible
      Debentures, Unsecured, InterestBearing
      at 6% Per Annum, MaturingMay
      9, 2011
                
                
                1,000,000
                
                
                
                -
 
 Note
      Payable, Unsecured, Interest Bearing at10%
      Per Annum, Maturing March 31, 2009(see
      below)
                
                
                1,192,277
                
                
                
                -2,192,277
                
                
                
                7,533,039Less:
      Current Maturities
                
                
                1,192,277
                
                
                
                7,533,039Total Long-Term Debt
                
                $
                1,000,000
                
                
                $
                -
  On
January 21, 2008, the Company issued notes totaling $1,192,277 in payment of
accounts payable and accrued interest due to entities providing various services
to its Port Esperanza LNG Project.  These notes, bearing interest at
10% per annum, were originally due April 30, 2008 and have been extended until
March 31, 2009.  The Company has paid all interest due as of August
31, 2008, a total of $72,516 of which $40,178 was paid on October 15,
2008.
 
 NOTE 9 – COMMON STOCK
TRANSACTIONS
 
 A
summary of common stock transactions for the three months ended March 31, 2008
is as follows:
 
 The
Company issued 245,252 shares of its common stock valued at $15,816 for
preparation of a study of internal controls and procedures.
 
 
 14
 Table of Contents
 
 TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 
 NOTE 9 – COMMON STOCK TRANSACTIONS
(CONTINUED)
 
 The
Company issued 3,083,333 shares each of its common stock to two of its Directors
for Directors Fees valued at $385,417 each.
 
 The
Company issued 3,083,333 shares of its common stock to the President for a
Directors Fee valued at $385,417.
 
 The
Company issued 2,302,217 shares of its common stock for past consulting services
valued at $138,384.66 regarding the Port Esperanza project and in payment of
$27,767 transaction costs.
 
 The
Company issued 5,300,000 shares of its restricted common stock for consulting
services valued at $386,900.
 
 The
Company issued 211,134 shares of its restricted common stock valued at $16,680
to two holders of the Company’s Stock Warrants under cashless exercise
provisions which reduced the total number of warrant shares outstanding by
243,616 for purpose of cancellation (See NOTE 10 – Stock Options...).
 
 The
Company cancelled 2,071,407 Stock Warrants for $20,714, which reduced additional
paid-in capital (See NOTE 10 – Stock Options...).
 
 The
Company issued 2,599,440 shares of its common stock to settle debts of $46,400
and in payment of an $87,471 financing fee.
 
 The
Company issued 39,890,180 shares of its restricted common stock valued at
$1,994,509 in payment of the balance due Impact International, LLC, after
remitting the net proceeds from the sale of its International Pipeline between
the United States and Mexico to West Texas Gas, Inc.
 
 The
Company issued 3,571,429 shares each of its restricted common stock valued at
$250,000 to two of its Directors in payment of consulting fees for the three
months ended March 31, 2008.
 
 The
Company issued 3,571,429 shares of its common stock valued at $250,000 to the
President pursuant to his employment contract.
 
 A
summary of common stock transactions for the three months ended June 30, 2008 is
as follows:
 
 The
Company issued 3,600,689 shares of its common stock for consulting services
valued at $118,133 regarding the Port Esperanza project and in payment of
$23,626 transaction costs.
   15
 Table of Contents
 
 TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 
 NOTE 9 – COMMON STOCK TRANSACTIONS
(CONTINUED)
 
 The
Company issued 217,391 shares of its common stock for consulting services valued
at $7,609 and in payment of $2,391 transaction costs.
 
 The
Company issued 230,905 shares of its restricted common stock valued at $8,082 to
a holder of the Company’s Stock Warrants under cashless exercise
provisions.  There are no further Stock Warrants outstanding (See NOTE
10 – Stock Options...).
 
 The
Company issued 850,000 shares of its common stock for consulting services valued
at $25,000 regarding the Port Esperanza project and in payment of $5,000
transaction costs.
 
 The
Company issued 1,074,695 shares of its common stock for legal services valued at
$30,170 and in payment of $9,205 transaction costs.
 
 The
Company issued 280,715 shares of its common stock for corporate secretary
services and related costs valued at $5,813 and in payment of $1,163 transaction
costs.
 
 The
Company issued 434,706 shares of its common stock to an Officer for salary
valued at $9,196 and in payment of $1,839 transaction costs.
 
 The
Company issued 875,720 shares of its common stock to an Officer for salary
valued at $18,525 and in payment of $3,705 transaction costs.
 
 A
summary of common stock transactions for the three months ended September 30,
2008 is as follows:
 
 The
Company issued 666,667 shares of its common stock for consulting services valued
at $10,000 regarding the Port Esperanza project and in payment of $2,000
transaction costs.
 
 The
Company issued 1,111,111 shares of its common stock for legal services valued at
$6,980 and in payment of $13,020 transaction costs.
 
 The
Company issued 200,000 shares of its common stock for corporate secretary
services and related costs valued at $2,500 and in payment of $500 transaction
costs.
 
 The
Company issued 2,060,577 shares of its common stock to an Officer for salary
valued at $29,056 and in payment of $7,811 transaction costs.
 
 
 16
 Table of Contents
 
 TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 
 NOTE 9 – COMMON STOCK TRANSACTIONS
(CONTINUED)
 
 The
Company issued 2,887,835 shares of its common stock to an Officer for salary
valued at $38,992 and in payment of $8,481 transaction costs.
 
 The
Company issued 3,769,553 shares of its common stock to three employees for
salaries and related expenses valued at $26,665 and in payment of $41,189
transaction costs.
 
 The
Company issued 16,000,000 shares of its common stock to settle debts of $31,598
and in payment of a $108,102 financing fee.
 
 The
Company issued 1,000,000 shares of its restricted common stock valued at $5,200
in partial payment of the settlement of litigation with Betty Sheerin et al
regarding the ZG Pipeline.
 
 The
Company executed a Stop Payment Cancellation which released 1,000,000 shares of
its restricted common stock valued at $5,200 as the final payment of the
settlement of litigation with Betty Sheerin et al regarding the ZG
Pipeline.
 
 
 NOTE 10 – STOCK OPTIONS, STOCK
WARRANTS AND SHARES RESERVED FOR CONVERTIBLE
DEBENTURES
 
 The
following table presents the activity for options, warrants and shares reserved
for issuance upon conversion of outstanding convertible debentures for the nine
months ending September 30, 2008:
 
 Shares
      Reserved
              
              
              
              
              
              WeightedStock
              
              
              Stock
              
              
              for
      Convertible
              
              
              Total
              
              
              AverageOptions
              
              
              Warrants
              
              
              Debentures
              
              
              Shares
              
              
              Exercise
      PriceOutstanding
      – December 31, 2007
              
              
              20,380,953
              
              
              
              2,545,928
              
              
              
              2,729,068
              
              
              
              25,655,949
              
              
              $
              0.324First QuarterGranted
      / Issued
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised/Converted
              
              
              -
              
              
              
              (243,616
              )
              
              
              -
              
              
              
              (243,616
              )
              
              
              0.935Expired
              
              
              -
              
              
              
              -
              
              
              
              (2,729,068
              )
              
              
              (2,729,068
              )
              
              
              0.870Cancelled/Extinguished
              
              
              -
              
              
              
              (2,071,407
              )
              
              
              -
              
              
              
              (2,071,407
              )
              
              
              0.935Outstanding
      – March 31, 2008
              
              
              20,380,953
              
              
              
              230,905
              
              
              
              -
              
              
              
              20,611,858
              
              
              $
              0.183
 
 Second QuarterGranted
      / Issued
              
              
              -
              
              
              
              -
              
              
              
              35,000,000
              
              
              
              35,000,000
              
              
              
              0.285Exercised/Converted
              
              
              -
              
              
              
              (230,905
              )
              
              
              -
              
              
              
              (230,905
              )
              
              
              0.935Expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/Extinguished
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      – June 30, 2008
              
              
              20,380,953
              
              
              
              -
              
              
              
              35,000,000
              
              
              
              55,380,953
              
              
              $
              0.823
 
 There
were no changes in options, warrants and shares reserved for issuance upon
conversion of outstanding convertible debentures for the three months ending
September 30, 2008.
 17
 Table of Contents
 
 
 TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
  NOTE 10 – STOCK OPTIONS, STOCK
WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
(CONTINUED)
 
 Summary
      of Outstanding Stock Options and Stock
Warrants
 
 StockOptions
              
              
              Shares
      Reserved forConvertible
      Debenture
              
              
              ExercisePriceStock
      OptionsExpiration DateFebruary
      28, 2017
              
              
              12,380,953
              
              
              -
              
              
              $
              0.210May
      23, 2017
              
              
              8,000,000
              
              
              -
              
              
              
              0.120Shares
      Reserved for Convertible DebentureExpiration DateMay
      11, 2011
              
              
              -
              
              
              
              35,000,000
              
              
              
              0.286Outstanding
      – September 30, 2008
              
              
              20,380,953
              
              
              
              35,000,000
              
              
              Avg. $ 0.823
 
 Outstanding
stock options had zero intrinsic value at September 30, 2008.
 
 
 NOTE 11 – RELATED PARTY
TRANSACTIONS
 
 Loan
from President
 During
the three months ended March 31, 2008, the Company borrowed $27,258 from its
President.  Subsequently through May 12, 2008, the Company borrowed an
additional $122,742 from its President bringing the total to
$150,000.  The Company executed a promissory note due August 31, 2008,
bearing an 8% annual interest rate.  From May 12, 2008 through
September 30, 2008, the Company borrowed $22,375 from its
President.  The Company executed an additional promissory note due
August 31, 2008, bearing an 8% interest rate.  On October 15, 2008,
the Company paid the notes and all accrued interest.
 
 Consulting
Agreement
 On
January 26, 2008, the Company entered into a consulting agreement with two
directors to provide business development, merger and acquisition capital
raising and other services to the Company.  The term of the agreement
is five years.  Services to be provided are compensated under the
agreement at a rate of $1 million per annum which may be paid in shares of
stock.  During the three months ended September 30, 2008, fees of
$250,000 were accrued for each of the two directors and are included in
‘Accounts Payable and Accrued Liabilities’ at September 30, 2008.
 
 18
 Table of Contents
 
 TIDELANDS
OIL & GAS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)
 
 
 NOTE 12 – 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.
 
 On May 9,
2008, the Company received a Compromise Settlement Agreement and Mutual Release
of All Claims from Betty Lou Sheerin which ended litigation between Mrs. Sheerin
and the Company.
 
 On
February 26, 2008, ZG Gathering, Ltd., which has the sole remaining
non-adjudicated claims in this litigation, filed a Notice of Removal to the
Federal Bankruptcy Court of the remaining claims between Tidelands and ZG
Gathering, Ltd.
 
 Based on
prior negotiations, the Company has reserved $2,250,000 as an estimated
litigation settlement. The Company reached a settlement with all parties on
September 8, 2008.  The Settlement required the Company to lift its
previous stop transfer order on 1,000,000 shares of its restricted common stock
valued at $5,200 and issue an additional 1,000,000 shares of its restricted
common stock similarly valued at $5,200.  These actions occurred on
September 12, 2008.  As a result of the settlements $2,239,600 of the
litigation reserve was reversed.
 
 All
remaining matters regarding litigation against Sonterra Energy Corporation
(“Sonterra”) followed Sonterra when the Company sold the subsidiary on January
9, 2008.  At the closing of the sale, the Company agreed to escrow
$75,000 with the buyer to cover legal costs plus adjudicated and/or settlement
amounts along with other contingencies.  As of September 30, 2008,
$49,365 remained in escrow after deducting $25,635 for legal costs and other
chargeable costs.  All remaining funds as of January 9, 2009, will be
returned to the Company.
 
 
 NOTE 13 - SUBSEQUENT
EVENTS
 
 On
October 14, 2008, the Company sold its 20% interest in Frontera Pipeline, LLC
(“Frontera”) for $250,000.  During this reporting period, the Company
reduced its carry cost of its investment in Frontera by $2,559,801 thereby
reducing the value of its investment to $250,000.







19
 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
primary business operations are focused on the development of the Port Esperanza
liquefied natural gas (“LNG”) receiving facility in the offshore waters of
Southern California.





Given the
large capital requirements for the construction of new midstream energy assets,
we anticipate that funding of any such projects will be derived primarily
through joint ventures with strategic partners or the issuance of stock by the
Company.  Additionally, management will evaluate related acquisition
opportunities that compliment our current business strategy.  The
completion of any such acquisition will be conditioned upon obtaining requisite
financing.





Frontera
Pipeline, LLC and the Burgos Hub Project





Previously,
the Company had been developing a natural gas pipeline system (the “Burgos Hub
Project”) project with its own resources through its subsidiary in the United
States, Sonora Pipeline, LLC (“Sonora”) and its subsidiary in Mexico, Terranova
Energia, S. de R.L. de C.V. (“Terranova”).  In September 2007, the
Company and Terranova entered into an agreement (the “Purchase Agreement”) with
Grand Cheniere Pipeline, LLC (“Cheniere”), pursuant to which the Company
conveyed an 80% interest in the Company’s Burgos Hub Project, which involved the
development and construction of an integrated pipeline project traversing the
United States and Mexico border and the construction of a related subterranean
storage facility in Mexico.  On October 14, 2008, the Company sold its
remaining 20% interest in Frontera Pipeline, LLC (“Frontera”) to Cheniere,
effectively ending its participation in the development of the Burgos Hub
project. Management arrived at the divestment decision based upon a number of
factors, including the increasing perception by both partners in Frontera that
commercial development of the project would not be adequately supported by
capacity commitments from either the Comision Federal de Electricidad (“CFE”) or
Monterrey industrial customers, a lack of clear commitment by PGPB (“Pemex Gas”)
to a timeline or method of utilization of the existing pipeline entitlements or
the proposed storage facility development proposals put forth by Terranova and
Sonora, the financial and operational reorganization occurring within the parent
company of the controlling majority partner of Frontera, a lack of substantive
legal reform within the recent Mexican energy legislation which would have
further enabled Frontera to acquire exclusivity or other valuable contract
rights with Pemex in the development of the proposed storage facility in Mexico,
and the need for working capital to sustain the Company as a going
concern.




Esperanza
Energy, LLC and the Port Esperanza Project





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
LNG receiving and regasification terminal near Long Beach,
California.  The expected timeline for development of the Port
Esperanza project is influenced by the preparation of the application in a form
sufficient to be “deemed complete” by the Maritime Administration and Coast
Guard which are the principal Federal agencies with permit jurisdiction for LNG
terminal development in the offshore United States of America waters. After an
application is deemed complete, the process of obtaining the approvals is often
longer than the statutory time period of approximately one year due to “time
out” or suspension of the running of the clock on the application process due to
issues raised during the review of the permit application or due to resource
constraints present at the Maritime Administration and Coast Guard. California
state and local agency approvals can also impact the permit approval process
beyond the normal time expectations. Progress on the project is also dependent
upon the Company securing additional funding for the permit application process
and complying with state and federal regulations, including environmental
laws.  The Company does not expect to receive any revenues or cash
flow from the Esperanza project in the foreseeable future, if at all, and the
Company will be required to expend additional capital in order to further this
project. For the nine months ended September 30, 2008, the Company incurred
approximately $217,000 of development costs related to the Port Esperanza
project. On January 21, 2008, the Company issued notes totaling $1,192,277 in
payment of accounts payable and accrued interest due to entities providing
various services to its Port Esperanza LNG Project. These notes, bearing
interest at 10% per annum, were originally due April 30, 2008, and were
subsequently extended until August 31, 2008 and then again extended for a new
maturity date of March 31, 2009. The Company has paid all interest due at August
31, 2008.





The
Company has entered into a letter of intent with a California based firm to
provide financing on a best efforts basis for a portion of the development cost
of the Port Esperanza project through the issuance of convertible preferred
stock of the Company in a Regulation D offering to accredited investors.
Management is currently seeking bridge funding for the costs of this offering
and the operations of the Company until the offering minimum is sold and closed.
The Regulation D offering would be subject to the prior approval of the majority
vote of the Company’s common shares and would be highly dilutive to existing
shareholders; thus, there is no assurance that the requisite capital structure
proposed in the offering would be approved by the existing shareholders.
Furthermore, no assurance can be given that bridge funding can be obtained to
initiate the Regulation D offering process, nor can there be any assurance that
the minimum offering amount under the proposed Regulation D private placement
can be sold and closed.





The
Company is also continuing to cooperate with the due diligence process initiated
by two potential industry joint venture investors in the Port Esperanza project.
A decision by these parties to invest or to decline to participate is not
expected until 2009.




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Reef
Ventures, LP International Pipeline




The
assets of this business originally consisted of two different pipelines: (1) an
8-mile twelve-inch diameter natural gas pipeline with metering and dehydration
facilities and (2) a two-mile segment of six-inch diameter pipeline to be used
in a future LPG project. These assets were impaired in 2006 with a significant
charge to earnings and contributed approximately 4 % of the Company’s revenues
in 2007. The Chittim Gas Processing plant, which had been inactive since 2002
and was formerly owned by Rio Bravo Energy, LLC (a 100% owned subsidiary of the
Company), was conveyed to Reef International, LLC in 2007 along with the Carrizo
Springs Pipeline System that was also inactive and formerly held by Sonora.
During 2007, we attempted to negotiate for capacity reservation charges with
potential shippers of natural gas to obtain commitments that would service
existing indebtedness on the Reef Ventures’ International Pipeline, but we were
unsuccessful in obtaining any new commitments. In fact, revenues from this
business unit declined from the prior years. During the quarter ended March 31,
2008, no gas was transported for a fee and no revenues were earned by the Reef
Ventures, LP (“Reef”) business unit. In March 2008, we sold our international
pipeline system, the Chittim Gas Plant and the Carrizo Springs pipeline system
owned by Reef to West Texas Gas, Inc. (“WTG”) and utilized the proceeds of sale
along with an associated issuance of our common stock to retire over $5,300,000
of indebtedness owed to Impact International, LLC (“Impact”).
  Sonterra
Energy Corporation Business
  The
assets of our Sonterra Energy Corporation ("Sonterra") subsidiary consisted of
propane distribution systems, including gas mains, yard lines, meters and
storage tanks, serving certain residential subdivisions in the Austin, Texas
area. During 2007, we attempted to negotiate a restructuring of the existing
convertible debenture indebtedness of $2,374,291 to a group of investors led by
Palisades Master Fund, LP. We were unable to come to mutually acceptable terms
in that restructuring effort and in January 2008, we sold the stock of Sonterra
for $3,000,000 and utilized the proceeds from that sale to retire the
convertible debentures and repurchase certain outstanding warrants. All
remaining matters regarding litigation against Sonterra followed Sonterra when
the Company sold the subsidiary on January 9, 2008.  At the closing of
the sale, the Company agreed to escrow $75,000 with the buyer to cover legal
costs plus adjudicated and/or settlement amounts along with other
contingencies.  As of September 30, 2008, $49,365 remained in escrow
after deducting $25,635 for legal costs and other chargeable
costs.  All remaining funds as of January 9, 2009, will be returned to
the Company pursuant to the escrow agreement.
  Golden
Gate Investors, Inc. Financing
 
 On May 9,
2008, the Company completed a financing transaction in which it entered into a
Securities Purchase Agreement ("Purchase Agreement") with Golden Gate Investors,
Inc. ("Golden Gate") which provided for the issuance and sale by the Company of
up to $3 million of 6% convertible debentures, with the initial issuance of a $1
million debenture ("Debenture") and the payment of cash by Golden Gate of
$200,000 and issuance by Golden Gate to the Company of a $800,000 promissory
note ("Note"). The Purchase Agreement provides Golden Gate with the right to
lend, in two separate transactions, an additional $1 million of funding to the
Company, in its sole discretion, through advancing cash of $200,000 and issuing
a note for the balance, similar to the Note. The Company had the right until
August 8, 2008, to redeem, at a price equal to the principal and accrued
interest, the Debenture provided that no event of default had occurred. This
redemption did not occur.
 
 The
Debenture is unsecured and bears interest at the annual rate of 6%, payable
monthly, in cash or, at Golden Gate’s election, in shares of the Company’s stock
valued at the applicable conversion price described further below, with the
principal amount due on May 9, 2011. The Debenture may not be prepaid without
the written consent of Golden Gate.  The Debenture is convertible,
either in whole or in part, at any time at a per share price equal to the lesser
of $.50 or 80% of the average of the three lowest volume weighted average prices
during the twenty trading days prior to Golden Gate's election to convert. If
Golden Gate elects to convert a portion of the Debenture, and on the date of the
election, the volume weighted average price per share of the Company’s common
stock is below $0.07, the Company has the right to prepay the portion of the
Debenture that Golden Gate elected to convert, plus any accrued and unpaid
interest, at 100% of the amount due and the conversion notice will be
withdrawn.
 
 In the
event the Company’s stock trades at a price that is less than $0.01 per share at
any time during the nine-month period following May 9, 2008, the interest rate
on the Debenture will increase to 9 3⁄4 % for the remaining term of the
Debenture.  In the event this provision is triggered, within three
business days of a written request from Golden Gate, the Company is required to
prepay the amount of interest that would otherwise be due from the date of the
request through the maturity date.  If any portion of the Debenture is
converted into the Company’s common stock prior to maturity, the Company will be
entitled to a refund of the pro rata portion of the interest prepayment
attributable to the portion of the principal amount converted.  On
August 26, 2008, the Company received notice from Golden Gate that effective
July 28, 2008, the interest rate on the Debenture was increased to 9 3⁄4% pursuant
to the terms of Debenture and that the Interest Prepayment amount of $270,328.77
was due to Golden Gate within three days of the notice. To date, the Company has
not made such prepayment of interest to Golden Gate and Golden Gate has not
given notice of default on the Debenture to the Company.
 
 In
accordance with the terms of the Debenture, the Company has reserved 35,000,000
shares of its common stock for possible conversion.  The Company’s
stock transfer agent has received irrevocable instructions regarding the shares
reserved.
 
 The Note
is secured and bears interest at the annual rate of 6.25%, payable monthly, with
the principal amount due on May 31, 2011. Golden Gate has the option to prepay
this note, subject to the satisfaction of certain conditions.  On
August 26, 2008, Golden Gate gave notice that the interest rate on the Note was
decreased to 43/4%, effective as of July 28, 2008 in accordance with the terms
of the Note which provides for such reduction in the event that the Company’s
common stock trades at a price that is less than $0.01 per share at any time
during the nine-month period after May 9, 2008.
 
 The
Company analyzed the provision of the Debenture in accordance with the
provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in, a Company’s Own Stock” and determined
that the Debenture did not contain any derivative features that would require
separate accounting under this literature.
 
 On
November 6, 2008, Golden Gate converted $2,000 of the Debenture into 781,250
shares of common stock pursuant to the terms of the Debenture. On November 13,
2008, Golden Gate converted $5,000 of the Debenture into 1,973,165 shares of
common stock pursuant to the terms of the Debenture.


21
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Results
of Operations





THREE MONTHS ENDED SEPTEMBER
30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2007





REVENUES:
The Company reported revenues of $30,000 for the three months ended September
30, 2008 compared to revenues of $0 for the three months ended September 30,
2007.The revenue increase resulted from the receipt of consulting fees from
Frontera during the period ended September 30, 2008 whereas no such fees were
received during the period ended September 30, 2007.





TOTAL
COSTS AND EXPENSES: Total Costs and Expenses for the three months ended
September 30, 2008 were $3,829,667 versus $644,658 for the three months ended
September 30, 2007 which is an increase of 594% in Total Costs and Expenses for
the three months ended September 30, 2008 versus the three months ended
September 30, 2007. The primary reason for the increase in Total Expenses was
the Impairment – Investment in Affiliate charge to record the write down in
value of the Company’s investment in Frontera during the three months ended
September 30, 2008 versus the absence of an impairment charge during the three
months ended September 30, 2007.





SELLING,
GENERAL AND ADMINISTRATIVE: Selling, General and Administrative costs for the
three months ended September 30, 2008 were $1,263,816 compared to $638,416 for
the three months ended September 30, 2007. Most of the increase in these
expenses was attributable to increases in non-cash compensation paid to
directors and officers.





OTHER
INCOME (EXPENSE): Total Other Income (Expense) for the three months ended
September 30, 2008 was $2,182,879 versus $4,680 for the three months ended
September 30, 2007. The primary reason for the increase in Other Income is the
Reduction of Reserve for Litigation in the amount of $2,239,600 during the three
months ended September 30, 2008 as a result of the settlement of litigation with
Northern Natural Gas (“Northern”), Betty Lou Sheerin (“Sheerin”) and ZG
Gathering, Ltd (“ZG”). A secondary factor in the increase in Total Other Income
was the decrease in Interest Expense to $59,029 for the three months ended
September 30, 2008 versus $245,357 for the three months ended September 30,
2007.





NET LOSS
FROM CONTINUING OPERATIONS: Net Loss from Continuing Operations was ($1,616,788)
for the three months ended September 30, 2008 compared to ($639,978) for the
three months ended September 30, 2007 which is an increase in Net Loss from
Continuing Operations of $976,810. This increase is due primarily to the
impairment loss on the Company’s investment in Frontera combined with increases
in non-cash compensation to directors and officers during the period ended
September 30, 2008 versus the three months ended September 30,
2007.




NET
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENTS: Net Income from Operations of
Discontinued Segments was $0 for the three months ended September 30, 2008
versus ($237,797) for the three months ended September 30, 2007. There were no
discontinued operations originating in the three months ended September 30,
2008.





NET LOSS:
Net Loss for the three months ended September 30, 2008 was ($1,616,788) versus
the Net Loss of ($877,775) for the three months ended September 30, 2007, which
is an increase in Net Loss of $739,013 for the three months ended September 30,
2008 versus the three months ended September 30, 2007.




NINE MONTHS ENDED SEPTEMBER
30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2007





REVENUES:
The Company reported revenues of $105,000 for the nine months ended September
30, 2008 compared to revenues of $0 for the nine months ended September 30,
2007.The revenue increase resulted from the receipt of consulting fees from
Frontera during the period ended September 30, 2008 whereas no such fees were
received during the period ended September 30, 2007.





TOTAL
COSTS AND EXPENSES: Total Costs and Expenses for the nine months ended September
30, 2008 were $7,753,459 versus $7,423,461 for the nine months ended September
30, 2007 which is an increase of 4.45% in Total Costs and Expenses for the nine
months ended September 30, 2008 versus the nine months ended September 30, 2007.
The primary reason for the small increase in Total Expenses was the Impairment –
Investment in Affiliate charge of $2,559,801 in the nine months ended September
30, 2008 versus the nine months ended September 30, 2007.





SELLING,
GENERAL AND ADMINISTRATIVE – RELATED PARTIES: Selling, General and
Administrative  – Related Parties for the nine months ended September
30, 2008 was $0 compared to $3,638,000 for the nine months ended September 30,
2007. The decrease was due to the absence of stock option issuances in the nine
months ended September 30, 2008 versus the nine months ended September 30,
2007.




SELLING,
GENERAL AND ADMINISTRATIVE: Selling, General and Administrative costs for the
nine months ended September 30, 2008 were $5,175,506 compared to $3,766,691 for
the nine months ended September 30, 2007. Most of the increase in these expenses
was attributable to increases in non-cash compensation paid to directors and
officers.





OTHER
INCOME (EXPENSE): Total Other Income (Expense) for the nine months ended
September 30, 2008 was $2,030,971 versus ($521,682) for the nine months ended
September 30, 2007. The primary reasons for the increase in Total Other Income
are: (a) the decrease in interest expense to ($238,425) for the nine months
ended September 30, 2008 versus ($772,304) for the nine months ended September
30, 2007 which reflects the payoff of the convertible debentures in the amount
of $2,374,291 in January 2008, and (b) the Reduction of Reserve for Litigation
income increase in the amount of $2,239,600 which reflects settlement of the
final litigation matter outstanding between the Company and Northern, Sheerin
and ZG.




22
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NET LOSS
FROM CONTINUING OPERATIONS: Net Loss from Continuing Operations was ($5,617,488)
for the nine months ended September 30, 2008 compared to ($7,945,143) for the
nine months ended September 30, 2007 which is a decrease in Net Loss from
Continuing Operations of $2,327,655. This decrease in Net Loss from Continuing
Operations is due primarily to the $2,239,600 of income from Reduction of
Reserve for Litigation during the period ended September 30, 2008 versus the
nine months ended September 30, 2007.





NET
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENTS: Net Income from Operations of
Discontinued Segments was $705,772 for the nine months ended September 30, 2008
versus ($2,717,072) for the nine months ended September 30, 2007 which is an
increase of $3,422,844 in Net Income from Operations of Discontinued Segments.
The increase resulted from Gains on Disposal of the assets and reduction in the
operating losses originating from Reef and Sonterra as further detailed in Note
5 of the Consolidated Financial Statements.





NET LOSS:
Net Loss for the nine months ended September 30, 2008 was ($4,911,716) versus
the Net Loss of ($10,662,215) for the nine months ended September 30, 2007. The
primary reasons for the substantial reduction in loss for the nine months ended
September 30, 2008 versus the nine months ended September 30, 2007 were: (a) the
income from Reduction of Reserve for Litigation in the amount of $2,239,600, and
(b) the income from the difference in Net Income from Operations of Discontinued
Segments as noted above in the amount of $3,422,844.




Liquidity
and Capital Resources





The
Company is not currently generating any revenues and has incurred significant
operating losses.  The Company’s financial statements have been
prepared assuming that the Company will continue as a going
concern.  As discussed in the Company’s financial statements, the
Company’s absence of revenues, recurring losses from operations, and its need
for additional financing in order to fund its working capital needs in 2008
raise substantial doubt about its ability to continue as a going
concern.





At
September 30, 2008, we had current assets of $1,016,449, current liabilities of
$3,730,985 and working capital deficit of $2,714,536.   After
giving effect to the Sonterra transaction in January 2008, the WTG transaction
in March 2008, the financing with Golden Gate and the sale of the Company’s
interest in Frontera, the Company currently has approximately $2,005,000 of
current notes payable, accounts payable and accrued expenses that require
payment or other satisfaction during 2009.  We will need to raise
capital to discharge these obligations.  Additionally, we believe that
after taking into account the recent financing sale of the Company’s interest in
Frontera, we will require approximately $300,000 of additional capital between
the present time and March 31, 2009.   Accordingly, we will be
reliant upon best efforts debt and/or equity financings to fund the payment of
current liabilities and working capital needs.  We cannot give any
assurance that this additional needed financing could be obtained on attractive
terms or at all.  The Company’s viability is contingent upon its
ability to receive external financing.  Failure to obtain sufficient
working capital may result in management resorting to the additional sale of
assets or otherwise curtailing operations.





Contractual
Commitments





A tabular
disclosure of our contractual obligations at September 30, 2008, is as
follows:




Payments
      due by period1
      year or less
            
            
            2
      – 3 Years
            
            
            4
      – 5 Years
            
            
            More
      than 5 YearsCredit
      Facilities
            
            $
            1,192,277
            
            
            $
            1,000,000
            
            
            $
            --
            
            
            $
            --Operating
      Leases
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Employment
      and consulting contracts (1)
            
            
            2,825,000
            
            
            
            5,250,000
            
            
            
            3,200,000
            
            
            
            --Total
            
            $
            4,017,277
            
            
            $
            6,250,000
            
            
            $
            3,200,000
            
            
            $
            --




(1)
Does not include perquisites.




Off
Balance-Sheet Arrangements




As of
September 30, 2008 and 2007, the Company did not have any significant off
balance-sheet arrangements.




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 September 30, 2008,
we had cash of $8,628.




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




23
 Table of Contents




Debt




The
interest rate on our promissory note debt obligations at September 30, 2008
is a fixed rate of 10% per annum. The interest rate on our convertible debenture
obligation at September 30, 2008 is a fixed rate of 93⁄4% per annum.


Item4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Securities Exchange Act of 1934, as
amended (the "Act") is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.  For the quarter ended September 30, 2008, we carried out
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures.  Based on this evaluation, management has
concluded that the Company’s disclosure controls and procedures are not
effective because of the identification of a material weakness in our internal
control over financial reporting which is identified below, which we view as an
integral part of our disclosure controls and procedures. A material
weakness is a deficiency, or a combination of control deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.




The
material weakness relates to certain errors in accounting for equity-based
compensation that were reported for the three month period ended March 31, 2007
and six month period ended June 30, 2007.  The errors were discovered
in connection with the preparation of the Company’s September 30, 2007 unaudited
financial statements. Upon reviewing and updating our accounting and disclosures
related to equity-based compensation for the nine months ended September 30,
2007, the Company discovered its errors. Upon this determination, management and
the Board of Directors were alerted to the facts and circumstances regarding the
errors in accounting for the equity-based compensation.  As a result,
we determined that our disclosure controls were not effective.




Based on
the impact of the aforementioned accounting error, we determined to restate our
consolidated financial statements as of three month period ended March 31, 2007
and six month period ended June 30, 2007.  Subsequent thereto, we
implemented the following remedial measures to address the identified material
weaknesses:





·
            We
      reviewed all equity-based compensation agreements to assure the issuance
      of the equity instruments have been properly accounted for and disclosed
      in our financial statements in accordance with generally accepted
      accounting principles.





·
            We
      have improved the supervision and training of our accounting staff to
      understand and implement accounting requirements, policies and procedures
      applicable to the accounting and disclosure of equity based
      instruments.





This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to the attestation by
the Company’s registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only management’s report in this
annual report.




Changes
in Internal Controls over Financial Reporting





During
the quarter ended September 30, 2008, we did not make any changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




24
 Table of Contents




PART
II - OTHER INFORMATION




Item1. Legal Proceedings





Other
than as set forth below and in the prior reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, the Company
is not a party to any material pending legal proceeding.




Matter
No. 1




As
described in the Company’s prior reports, the Company was 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.  A trial
date was set for January 7, 2008. On December 3, 2007, ZG filed a
Suggestion of Bankruptcy which stayed the case.  On December 13, 2007,
Sheerin non-suited with prejudice all of her claims against Tidelands Oil &
Gas Corporation (“Tidelands”) and Tidelands non-suited with prejudice all of its
claims against Sheerin. On May 9, 2008 the Company received a Compromise
Settlement Agreement and Mutual Release of All Claims from Sheerin ratifying the
actions taken December 13, 2007. The claims between Northern, Sheerin, the
Estate of Kenneth Lay, and the Estate of Charlton Hadden were severed from the
claims between Northern, ZG, and Tidelands.  The claims between
Northern and Sheerin then proceeded to trial on January 7, 2008 in the State
District Court.  The jury in that case concluded, among other things,
that Northern is the owner of the note in question, that Sheerin agreed to be
obligated on the note, that she failed to comply with the note, and that the
unpaid principal and accrued interest on the note  was
$1,950,000.00.   The jury’s complete findings are on file in the
court’s record in Cause No. 2002-CI-16421.  No final Judgment has been
entered in this matter.  On February 26, 2008, ZG filed a Notice of
Removal to the Federal Bankruptcy Court of the remaining claims between
Northern, Tidelands and ZG.  On July 18, 2008, ZG and Tidelands
executed a Compromise Settlement Agreement and Mutual Release of All Claims
under which the Company removed the stop transfer order on 1,000,000 shares of
previously issued common stock of the Company, executed a quit claim deed with
respect to the 225 mile gathering system owned by ZG, and further issued
1,000,000 shares of common stock to ZG in exchange for the settlement of all
claims by ZG. No further legal actions are expected between the Company and any
of the above parties.





Other
Legal Matters





All
remaining matters regarding litigation against Sonterra followed Sonterra when
the Company sold the subsidiary on January 9, 2008.  At the closing of
the sale, the Company agreed to escrow $75,000 with the buyer to cover legal
costs plus adjudicated and/or settlement amounts along with other
contingencies.  As of September 30, 2008, $49,365 remained in escrow
after deducting $25,635 for legal costs and other chargeable
costs.  All remaining funds as of January 9, 2009, will be returned to
the Company.




Item1A. Risk Factors




During
the nine months ended September 30, 2008, 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,
2007.




Item2. Unregistered Sales of Equity Securities and Equity
Repurchases





Set forth
below is certain information concerning issuances of common stock during the
nine months ended September 30, 2008, and to the date of this report, that were
not registered under the Securities Act of 1933 (“Securities Act”):





The
Company issued 5,300,000 shares of its restricted common stock for consulting
services valued at $386,900.





The
Company issued 211,134 shares of its restricted common stock valued at $16,680
to two holders of the Company’s Stock Warrants under cashless exercise
provisions which reduced the total number of warrant shares outstanding by
243,616 for purpose of cancellation.





The
Company issued 39,890,180 shares of its restricted common stock valued at
$1,994,509 in payment of the balance due Impact, after remitting the net
proceeds from the sale of its International Pipeline between the United States
and Mexico to WTG.





The
Company issued 3,571,429 shares each of its restricted common stock valued at
$250,000 to two of its directors in payment of consulting fees for the three
months ended March 31, 2008.





The
Company issued 230,905 shares of its restricted common stock valued at $8,082 to
a holder of the Company’s Stock Warrants under cashless exercise
provisions.





The
Company issued 1,000,000 shares of its restricted common stock valued at $5,200
in partial payment of the settlement of litigation with Northern, Sheerin and
ZG.





The
Company executed s Stop Payment Cancellation which released 1,000,000 shares of
its restricted common stock valued at $5,200 as the final payment required in
settlement of litigation with Northern, Sheerin and ZG.




The
issuances referenced above were consummated pursuant to Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder on the basis
that such transactions did not involve a public offering and the offerees were
sophisticated, accredited investors with access to the kind of information that
registration would provide. The recipients of these securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. No sales commissions were paid.







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Item3. Defaults Upon Senior Securities




None.





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




None.




Item
5. Other Information




None.




Item
6. Exhibits




Exhibit
            
            Description
            
            Location
      of Exhibit31.1
            
            Chief
      Executive Officer and Chief Financial Officer Section 302 Certification
      pursuant to Sarbanes - Oxley Act.
            
            Included
      with this filing.32.1
            
            Chief
      Executive Officer-Section 906 Certification pursuant to Sarbanes-Oxley
      Act
            
            Included
      with this filing.














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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 CORPORATIONDate: November
      19, 2008
            By:
            /s/  James
      B. SmithJames
      B. Smith
              President
      and Chief Executive Officer








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