UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-KSB

            ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                      For the year ended December 31, 2004
                         Commission File Number 0-29613


                         TIDELANDS OIL & GAS CORPORATION
                 (Name of small business issuer in its charter)


            Nevada                                               66-0549380
(State or other jurisdiction of                              (I. R. S. Employer
 incorporation or organization)                              Identification No.)


                  1862 West Bitters Rd., San Antonio, TX 78410
                     (Address of principal executive office)

                                 (210) 764-8642
                           (Issuer's Telephone Number)

        Securities Registered Pursuant of Section 12(b) of the Act: None

           Securities Registered Pursuant of Section 12(g) of the Act:
                         Common Stock, $0.001 Par Value


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act of 1934  during the  preceding  12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes [X] No [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment of
this Form 10-KSB. [ ]

The issuer had operating  revenues of $1,883,838 for the year ended December 31,
2004.

This report contains a total of 51 pages. The Exhibit Index appears on page 24.

As of December 31, 2004,  there were  61,603,359  shares of the issuer's  common
stock  outstanding.  The aggregate market value of the $51,281,153 shares of the
issuer's voting stock held by non-affiliates  was $$56,409,269  based on the low
bid price on that date as reported by the NASD OTC  Electronic  Bulletin  Board.
The sum excludes the shares held by officers,  directors, and stockholders whose
ownership  exceeded 10% of the outstanding  shares at December 31, 2004, in that
such persons may be deemed  affiliates  of the Company.  This  determination  of
affiliate  status  is not  necessarily  a  conclusive  determination  for  other
purposes.

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                                   FORM 10-KSB

                                December 31, 2004                           Page


PART I

ITEM 1.  Business...........................................................   2
ITEM 2.  Properties.........................................................   4
ITEM 3.  Legal Proceedings..................................................   4
ITEM 4.  Submission of Matters to vote of Security Holders..................   5

PART II

ITEM 5.  Market for Common Equity and Related Stockholder Matters
          And Small Business Issuer Purchases of Equity Securities..........   5
ITEM 6.  Management's Discussion and Analysis or Plan of Operation..........   7
ITEM 7.  Financial Statements...............................................  11
ITEM 8.  Changes In and Disagreements with Accounting and
                Financial Disclosure........................................  11
ITEM 8A. Controls and Procedures............................................  11
ITEM 8B. Other Information..................................................  12

PART III

ITEM 9.  Directors, Executive Officers, Promoters, and Control
                Persons: Compliance with Section 16(a) of the Exchange Act..  12
ITEM 10.  Executive Compensation............................................  14
ITEM 11.  Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters................................  16
ITEM 12.  Certain Relationships and Related Transactions....................  19
ITEM 13.  Exhibits..........................................................  20
ITEM 14.  Principal Accounting Fees and Services............................  22

SIGNATURES..................................................................  23
EXHIBIT INDEX...............................................................  24




                                       1
<PAGE>

                                     PART I

ITEM 1.   BUSINESS.

Tidelands  Oil  &  Gas  Corporation  (the  "Company"),   formerly  known  as  C2
Technologies,  Inc., was  incorporated  under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation  on November 19, 1998.  The Company has nine  subsidiaries  which it
directly and indirectly owns as follows:  (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates, L.P. , (4) Terranova Energia, S.de R.L. de
C.V. and (5) Sonterra Energy Corporation.  We also own a 97% limited partnership
interest in Reef  Ventures,  L.P.(6)  Arrecefe  Management LLC owns a 1% general
partner interest in Reef Ventures,  L.P. Rio Bravo Energy,  LLC owns 100% of the
member interest in Sonora Pipeline LLC. (7) Reef Ventures, L.P. owns 100% of the
member interest in Reef International LLC(8) and Reef Marketing LLC(9).

The Company's  products and services are primarily  focused on  development  and
operation of transportation,  processing,  distribution and storage projects for
natural  gas and  natural  gas  liquids  in the  northeastern  states  of Mexico
(Chihuahua, Coahuila, Nuevo Leon and Tamaulipas) and the State of Texas.

Reef Ventures International Pipeline

Until  September  30, 2004,  we derived our revenue from sales of natural gas to
Conagas, the local distribution company in Piedras Negras, Coahuila, through the
pipeline  owned by Reef  Ventures,  L.P. On September 1, 2004,  we converted the
revenue  source for this  pipeline  to a  transportation  fee.  As a reseller of
natural gas we were  obligated to restrict of use of $1,000,000 of cash in order
to fund a credit facility in favor of the seller of natural gas. We believe that
converting  the revenue source to a  transportation  fee that we will double net
revenues  based upon current gas volumes  committed for delivery to the customer
in Piedras Negras, Coahuila. Additionally, Management is evaluating an expansion
of the pipeline in Coahuila to serve new markets  along the state highway No. 57
corridor to Monclova,  Coahuila.  The planned  Liquid  Petroleum Gas ( LPG) line
between Eagle Pass, Texas and Piedras Negras,  Coahuila is being re-evaluated in
light of new supply sources emerging in Nuevo Laredo and Reynosa,  Tamaulipas. A
decision  to  proceed,  modify or abandon  the LPG  project at this  location is
expected in the future.  The above projects were acquired in connection with the
buyout of the Impact general and limited partnership interests in Reef Ventures,
L.P.

Tidelands Oil & Gas Storage Enterprise

In December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
to design,  build and operate an underground natural gas storage facility in the
vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
at other regions in Mexico.  The MOU provides for exclusivity in the development
of the projects and the related transportation and interconnecting  pipelines to
and from the storage facilities.

We have  completed  the  initial  study of the  Burgos  facility  and  expect to
complete final contract  negotiations with the Secretary of Energy and PEMEX for
the  construction and operation of the facility before the end of 2005. A system
of two  interconnecting  pipelines  is also  proposed  to  enhance  the  overall
pipeline grid in Mexico and the operational  efficiency of the proposed  storage
facility. The capital budget for these projects exceeds $700 Million Dollars and
is expected to be funded through issuance of additional  equity of the Company ,
the addition of joint venture partners and/or debt financing.  Marea Associates,
L.P. was formed to own the majority interest in Terranova Energia, S. de R.L. de
C.V., a Mexican  company  which will conduct all business  dealings in Mexico on
behalf of Tidelands.  Rio Bravo Energy LLC, an existing wholly owned  subsidiary
owns the general  partner  interest  in Marea  Associates,  L.P.  and a minority
interest in Terranova Energia, S. de R.L. de C.V.

Rio Bravo Energy, LLC

Rio Bravo  Energy,  LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing  Plant which was  purchased  in 1999 and was  processing  natural gas
primarily from Conoco Oil's Sacatosa Field.  The Sacatosa Field was primarily an
oilfield  which  produced  high BTU  casinghead  gas from  which gas  processing
operations would yield valuable hydrocarbon  components such as propane,  butane
and natural  gasolines.  As the field  depleted  lower volumes of casinghead gas
were being delivered by Conoco,  and other gas producers could not be contracted
with for  processing of additional  replacement  volumes of gas.  Therefore,  in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume  operation of the plant.  Management  plans to reopen
the plant when adequate  volumes of gas from third party  producers  makes plant
operations  economically  attractive.  The  gas  plant  has  the  capability  to
fractionate  natural gas into commercial  grade propane and butane.  The maximum


                                       2
<PAGE>

intake capacity of gas plant is 10 million cubic feet of gas per day. Presently,
we are evaluating  opening the plant for LPG production for our Sonterra  Energy
Corporation  Austin  propane  business.  The  market for the  products  of plant
operation could include our future propane/butane terminal and pipeline crossing
into Mexico, and/or LPG supply to Sonterra's propane business in Austin, Texas.

Sonora Pipeline, LLC

Sonora  Pipeline,  LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering  adequate  volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of  approximately  80 miles of gas pipeline.  This pipeline network was
acquired in conjunction with the Chittim Gas Processing  Plant  acquisition and,
when operational,  could generate revenue from transportation fees to be charged
to third party gas producers  shipping natural gas to the gas plant owned by Rio
Bravo Energy LLC.

Sonterra Energy Corporation Business

On  November  1, 2004,  through  our  subsidiary,  Sonterra  Energy  Corporation
subsidiary,  we entered  into an Asset  Purchase and Sale  Agreement  with Oneok
Propane  Distribution  Company,  a division of ONEOK Propane Company, a Delaware
corporation.   We  purchased  the  assets  of  this  division  for  Two  Million
($2,000,000).  The assets consist of propane distribution systems, including gas
mains, yard lines, meters and storage tanks,  serving the following  residential
13 subdivisions in the Austin, Texas.  Additionally,  we provide gas to Arbolago
and Hills of Lakeway subdivisions. The 15 subdivisions include:

o        Arbolago*
o        Austin's Colony Phase II
o        Costa Bella
o        Hills of Lakeway
o        Jacarandas
o        Lake Pointe
o        La Ventana
o        Lakewinds Estates
o        Northshore on Lake Travis Phase I
o        Riverbend
o        Rob Roy Rim
o        Senna Hills
o        Sterling Acres
o        The Point
o        The Preserve at Barton Creek

These subdivisions  contain 1,333 lots.  Presently,  850 of lots are metered for
use.  There are 483 number of unmetered  lots. As new homes are  constructed  on
these lots our customer base will grow. Presently,  100% of the subdivisions are
metered for propane consumption.

The propane  distribution  system is comprised of  approximately 25 miles of gas
main pipe, 75,000 feet of yard lines, 850 meters,  storage tanks with a combined
capacity  of 156,000  gallons.  Sonterra is the  exclusive  seller of propane in
these subdivisions and is not considered a regulated utility. Sonterra purchases
propane products from a number of distributors in Austin, Texas.

We financed the  purchase of these  assets by selling  Four Million  (4,000,000)
shares to ACH Securities,  S.A., a company domiciled in Geneva, Switzerland, for
Two Million  ($2,000,000)  Dollars.  On October 14, 2004, in connection with the
ACH Securities  transaction,  we issued Margaux  Investment  Group,  S.A. common
stock  warrants to purchase  One Million  (1,000,000)  shares for Fifty  ($0.50)
Cents per share and One Million (1,000,000) shares at $2.50 per share.

The  Texas  Railroad  Commission   regulates  all  aspects  of  the  production,
transportation and processing of petroleum  products,  including propane, in the
State of Texas.


                                       3
<PAGE>

Competition
-----------

Reef Ventures, L.P.  Eagle Pass Pipeline Crossing

Our Eagle Pass international pipeline crossing competes with a pipeline owned by
West Texas Gas, Inc. pipeline crossing which is located two miles north of Eagle
Pass.  We believe that the West Texas Gas crossing  will be able to compete with
us  only  marginally  beginning  in  2006  due  to a very  limited  transmission
capability and marketing efforts currently being undertaken by Management.

Sonterra Energy Corporation Propane Distribution

Our propane  distribution  business  serving the 15 Austin  subdivisions  is not
subject to competition within the existing acquired  subdivisions because we are
the sole propane supplier. The residential subdivisions are subject to a propane
supply  covenant   granting  us  the  exclusive   supply  of  propane  for  each
subdivision.  In the  future,  we will  compete in the  bidding  process for new
propane distribution systems as new residential  subdivisions are developed.  We
may also be able to acquire  additional  existing propane  distribution  systems
from competitors.

Employees
---------

Tidelands has seven full time employees  including our corporate  officers.  Our
Sonterra Energy  subsidiary,  which operates the Austin propane gas distribution
company, has 9 full-time employees.

ITEM 2.   DESCRIPTION OF PROPERTIES

Reef Ventures, L.P. owns and operates the international natural gas pipeline and
related  facilities  located in Maverick  County,  Texas and  Coahuila,  Mexico.
Tidelands owns a 97% limited  partnership  interest in this entity.  We acquired
this interest from Impact  International,  LLC.  Impact financed our purchase of
this system and we owe Impact $ 6,731,883.

Rio Bravo Energy,  LLC owns and operates the Chittim Gas Processing  Plant which
is located in Maverick, County, Texas. The plant is currently shut down. The gas
plant has the  capability  to  fractionate  natural  gas into  commercial  grade
propane and butane.  In the near future,  we may activate this plant and produce
propane for our Sonterra propane business in Austin, Texas.

Sonora   Pipeline,   LLC  owns  the  Sonora  Pipeline   network   consisting  of
approximately  80 miles of  pipeline.  No  significant  encumbrances  exist with
respect to the assets of this  company.  The pipeline is currently  inactive and
will be used  primarily to transport  natural gas from third party  producers to
supply  feedstock for the Chittim Gas Processing Plant owned by Rio Bravo Energy
LLC.

Sonterra Energy Corporation  operates a propane  distribution  systems providing
propane  to  15  residential   subdivisions  in  Austin,   Texas.   The  propane
distribution  system is  comprised of  approximately  25 miles of gas main pipe,
75,000 feet of yard lines, 850 meters and storage tanks with a combined capacity
of 156,000 gallons of LPG.

We lease our San Antonio  executive office. We entered into this office lease on
August 1, 2003. The term expires November 30, 2005. Our monthly lease payment is
$3,400. Our rent expense for 2004 was $43,300.  This figure includes $2,500 rent
paid on behalf of the Sonterra Energy Corporation operations.

ITEM 3.   LEGAL PROCEEDINGS

On January 6,  2003,  we were  served as a third  party  defendant  in a lawsuit
titled  Northern  Natural Gas Company vs. Betty Lou Sheerin vs.  Tidelands Oil &
Gas Corporation,  ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court,  Bexar  County,  Texas,  Cause  Number  2002-C1-16421.  The  lawsuit  was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure


                                       4
<PAGE>

to make  payments on a note she  executed  payable to  Northern in the  original
principal amount of $1,950,000.  Northern's suit was filed on November 13, 2002.
Sheerin  answered  Northern's  lawsuit  on January  6,  2003.  Sheerin's  answer
generally  denied  Northern's  claims  and raised the  affirmative  defenses  of
fraudulent inducement by Northern,  estoppel,  waiver and the further claim that
the not does not comport with the legal requirements of a negotiable instrument.
Sheerin  seeks a judicial  ruling that  Northern  be denied any  recovery on the
note. Sheerin's answer included a counterclaim  against Northern,  ZG Gathering,
and Ken Lay generally alleging, among other things, that Northern, ZG Gathering,
Ltd. and Ken Lay,  fraudulently  induced her execution of the note. Northern has
filed a general denial of Sheerin's  counterclaims.  Sheerin's answer included a
third party cross claim against  Tidelands.  She alleges that Tidelands  entered
into an agreement to purchase the Zavala Gathering System from ZG Gathering Ltd.
and that,  as a part of the  agreement,  Tidelands  agreed to satisfy all of the
obligations  due  and  owing  to  Northern,  thereby  relieving  Sheerin  of all
obligations she had to Northern on the promissory note in question.  She alleges
that  Tidelands  is liable to her for all of her  actual  damages,  costs of the
lawsuit and other  unstated  relief.  Tidelands and Sheerin  agreed to delay the
Tideland's  answer  date in order  to allow  time  for  mediation  of the  case.
Tideland's  participated  in a  mediation  on March 11,  2003.  The case was not
settled at that time.  Tideland's  answered  the Sheerin suit on March 26, 2003.
Tideland's  answer  denies all of Sheerin's  allegations.  No discovery has been
completed  at this time.  Based on  initial  investigation,  however,  Tidelands
appears to have a number of potential  defenses to Sheerin's claims.  Tideland's
intends  to  aggressively  defend  the  lawsuit.  At  this  early  stage  in the
litigation,  and in light of our continuing  investigation  of the facts and the
issues in the case,  we cannot give a more  definitive  evaluation of the extent
Tideland's liability exposure.

On May 24 and June 16, 2004 respectively,  Betty Lou Sheerin filed her first and
second amended original answer,  affirmative  defenses,  special  exceptions and
second  amended  original  counterclaim,  second  amended  original  third party
cross-actions and requests for disclosure.  In these amended pleadings, she sued
Michael Ward, Royis Ward,  James B. Smith,  Carl Hessel and Ahmed Karim in their
individual  capacities.  Her claims  against  these  individuals  are for fraud,
breach of the  Uniform  Commercial  Code,  breach of duty of good faith and fair
dealing and conversion. These claims are being vigorously defended.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters  were brought to a vote of the  security  holders  during the quarter
ended December 31, 2004.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                     ISSUER PURCHASES OF EQUITY SECURITIES

Market For Common Equity And Related Stockholder Matters

Our common stock is traded on the OTC Electronic  Bulletin Board.  The following
table  sets  forth  the high and low bid  prices  of our  common  stock for each
quarter for the years 2003 and 2004.  The  quotations  set forth  below  reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

Common Stock

Our common stock trades  Over-the-Counter  (OTC) on the OTC Bulletin Board under
the symbol TIDE.  Table 1. sets forth the high and low bid  information  for the
past two years. These quotations  reflect  inter-dealer  prices,  without retail
mark-up,  mark-down or  commission  and may not represent  actual  transactions.
These quarterly trade and quote data provided by NASDAQ OTC Bulletin Board.



                                       5
<PAGE>
<TABLE>
<CAPTION>

Table 1.

Bid Information

Fiscal Quarter Ended
                                                 High         Low

December 31, 2004                                1.36         0.60
September 30, 2004                               2.18         0.73
June 30, 2004                                    3.18         1.70
March 31, 2004                                   4.45         1.72

December 31, 2003                                2.57         0.75
September 30, 2003                               1.05         0.24
June 30, 2003                                    0.47         0.20
March 31, 2003                                   0.40         0.15

On December 31,  2004,  the closing bid and closing ask prices for shares of our
common  stock in the  over-the-counter  market,  as reported by NASD OTC BB were
$1.10 and $1.36 per share, respectively.

We believe that there are presently 39 market makers for our common stock.  When
stock is traded in the public market,  characteristics  of depth,  liquidity and
orderliness of the market may depend upon the existence of market makers as well
as the presence of willing buyers and sellers.  We do not know if these or other
market makers will continue to make a market in our common stock.  Further,  the
trading  volume in our common  stock has  historically  been both  sporadic  and
light.

As of December 31, 2004,  we had an  aggregate of 86  stockholders  of record as
reported by our transfer  agent,  Signature  Stock  Transfer Co.,  Inc.  Certain
shares  are held in the  "street"  names of  securities  broker  dealers  and we
estimate the number of stockholders  which may be represented by such securities
broker dealer accounts may exceed 1,500.

Dividends and Dividend Policy

There are no  restrictions  imposed on the  Company  which  limit its ability to
declare  or pay  dividends  on its  common  stock,  except as  limited  by state
corporation  law.  During the year ended  December  31,  2004,  no cash or stock
dividends  were  declared  or  paid  and  none  are  expected  to be paid in the
foreseeable future.

We expect to continue to retain all earnings  generated by our future operations
for the  development  and growth of our  business.  The Board of Directors  will
determine  whether  or not to  pay  dividends  in the  future  in  light  of our
earnings, financial condition, capital requirements and other factors.

Securities Authorized for Issuance under Equity Compensation Plans

The following table  summarizes our equity  compensation  plan information as of
December 31, 2004.  Information  is included for equity  compensation  plans not
approved by our security holders.



                                       6
<PAGE>

Table 1.

Equity Compensation Plan Information

------------------------ ------------------------ ---------------------- ------------------------

Plan Category            Number of Securities to  Weighted-average       Number of Securities
                         be issued upon exercise  Exercise price of      remaining available for
                         of outstanding options,  outstanding options,   future issuance under
                         warrants and rights      warrants, and rights   equity compensation
                                                                         plans (excluding
                                                                         securities reflected in
                                                                         column (a)
<S>                      <C>                      <C>                    <C>
------------------------ ------------------------ ---------------------- ------------------------
                                   (a)                      (b)                    (c)
------------------------ ------------------------ ---------------------- ------------------------
Equity Compensation
Plans approved by
security holders                  None                      None                   None
------------------------ ------------------------ ---------------------- ------------------------
Equity Compensation
Plans not approved by            500,000 (1)             $ 0.125                   None
security holders               5,000,000 (2)             $ 0.287                  210,122
                               5,000,000 (3)             $ 0.87                 4,500,000
------------------------ ------------------------ ---------------------- ------------------------
Total                         10,500,000                 $0.333                 4,710,122
------------------------ ------------------------ ---------------------- ------------------------
</TABLE>

(1) This plan registered  shares issued for legal services rendered on behalf of
the Company and approved by our Board of Directors.  These shares were issued in
lieu of cash legal fees for services rendered during 2002.

(2) On May 27, 2003, the Company adopted the 2003 Non-Qualified  Stock Grant and
Option Plan. The Plan reserved 5,000,000 shares. The Plan is administered by our
Board of Directors.  Directors, officers, employees consultants,  attorneys, and
others  who  provide   services  to  our  Company  are  eligible   participants.
Participants  are  eligible to be granted  warrants,  options,  common  stock as
compensation.

(3) On November 2, 2004, the company adopted the 2004 Non-Qualified  Stock Grant
and Option Plan. The Plan reserved 5,000,000 shares. The Plan is administered by
our Board of Directors.  Directors, officers, employees consultants,  attorneys,
and others who  provide  services  to our  Company  are  eligible  participants.
Participants  are  eligible to be granted  warrants,  options,  common  stock as
compensation.  On November 5, 2004, under the terms of James Smith's  employment
agreement, we granted and issued 500,000 common shares to him under this Plan.

Recent Sales of Unregistered Securities

         All sales of unregistered  securities have been previously  reported in
our filed periodic  reports filed with the  Securities & Exchange  Commission on
Forms 8-K and 10-QSB.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                 OF OPERATIONS.

Business Overview

Our products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects for natural gas
and natural gas liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.

We  previously  derived  our revenue  from sales of natural gas to Conagas,  the
local  distribution  company in Piedras Negras,  Coahuila,  through the pipeline
owned by Reef  Ventures,  L.P. We converted the revenue source for this pipeline
to a  transportation  fee on  September  1,  2004  with the  execution  of a new
agreement with Conagas.  This contract arrangement freed up of use of $1,000,000
of our restricted  cash which we used to fund a credit  facility in favor of the
seller of natural gas to Reef Ventures,  L.P. We believe that as a result of the
conversion of the revenue source to a  transportation  fee, net revenues will be
doubled  based upon current gas volumes  committed  for  delivery to Conagas.  .
Management  is  evaluating an expansion of the pipeline in Coahuila to serve new
markets  along the state  highway  No. 57 corridor to  Monclova,  Coahuila.  The
planned  natural gas liquid line between Eagle Pass,  Texas and Piedras  Negras,
Coahuila is being  re-evaluated in light of new supply sources emerging in Texas
and Mexico.  The above  projects were acquired in connection  with the buyout of
the Impact  general and limited  partnership  interests in Reef  Ventures,  L.P.
which is described in further  detail in Note 14 to the  Consolidated  Financial
Statements for the periods ended December 31, 2004 and December 31, 2003 below.



                                       7
<PAGE>

In December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
to design,  build and operate an underground natural gas storage facility in the
vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
at other regions in Mexico.  The MOU provides for exclusivity in the development
of the projects and the related transportation and interconnecting  pipelines to
and from the storage facilities.

We have  completed  the  initial  study of the  Burgos  facility  and  expect to
complete final contract  negotiations with the Secretary of Energy and PEMEX for
the  construction  and  operation  of the  facility  shortly.  A  system  of two
interconnecting  pipelines is also proposed to enhance the overall pipeline grid
in  Mexico  and the  operational  efficiency  of the  storage  facility.  Permit
applications  for all  these  projects  will be filed in 2005  with the  Mexican
Energy Regulatory Commission. The capital budget for these projects exceeds $700
Million Dollars.  We anticipate funding these projects with additional equity of
the Company, the addition of joint venture partners and/or debt financing. Marea
Associates, L.P. was formed during the fiscal quarter ended June 30, 2004 to own
the  majority  interest in  Terranova  Energia,  S. de R.L.  de C.V.,  a Mexican
company  which will  conduct  all  business  dealings in Mexico on behalf of the
Tidelands.  Rio Bravo Energy LLC, an existing  wholly owned  subsidiary owns the
general partner interest in Marea  Associates,  L.P. and a minority  interest in
Terranova Energia, S. de R.L. de C.V.

We are in the preliminary design phase for an LNG regasification  terminal to be
located  in  offshore  Mexican  waters  of the Gulf of  Mexico  near  Matamoros,
Tamaulipas.  The  Dorado  LNG  Terminal  would  provide  additional  supply  for
Northeast Mexico natural gas markets which are currently importing approximately
1.0 BCF per day  from the U.S.  The  capital  cost to  build  the  terminal  and
interconnecting  pipeline to the planned storage facility is expected to be over
$200  million  USD.  Management  estimates a cumulative  capital  investment  of
approximately $1 billion USD for the LNG regasification  terminal, the pipelines
in the U.S.  and Mexico and the Mexican  storage  facility.  These  projects are
targeted to address the  critical  infrastructure  needs for the natural gas and
power  markets  in  Northeast   Mexico  through  the  year  2013.  A  collateral
opportunity  to import  natural gas into the U.S.  via the  project's  route and
facilities is also  contemplated.  Management is in active  negotiations for LNG
supply,  U.S.  supply  and off take gas  contracts  in Mexico  and the U.S.  The
projects  will be developed and operated  with a tolling  business  model as the
revenue premise,  however, joint venture or contractual relationships with third
parties  may allow the Company to  participate  in  merchant  operations  in the
energy supply business for Mexican and U.S. customers.

The  Company has engaged  Sanders  Morris  Harris,  Inc.,  an energy  investment
banking firm in Houston, Texas, as its primary financial advisor with respect to
the  capital  raise  requirements  for the  above  projects.  We have  also  had
substantive and ongoing  discussions  with interested  third parties for private
equity and debt and will  continue  those  discussions  in the upcoming  year as
further development of the projects occurs.

Rio Bravo  Energy,  LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing  Plant which was  purchased  in 1999 and was  processing  natural gas
primarily from Conoco Oil's Sacatosa Field.  The Sacatosa Field was primarily an
oilfield  which  produced  high BTU  casinghead  gas from  which gas  processing
operations would yield valuable hydrocarbon  components such as propane,  butane
and natural  gasolines.  As the field  depleted  lower volumes of casinghead gas
were being  delivered by Conoco and other gas producers  could not be contracted
with for  processing of additional  replacement  volumes of gas.  Therefore,  in
October 2002, the plant was temporarily shut down due to the declining economics
associated  with low volume  operation of the plant. We plan to reopen the plant
in 2005 when adequate  volumes of LPG  feedstock  from third parties makes plant
operations economically attractive. We are evaluating the feasibility of opening
the gas plant for LPG production for our Sonterra LPG business in Austin, Texas.
Additionally,  the market for the products of the Chittim plant  operation could
include our future propane/butane terminal and pipeline crossing into Mexico. As
noted  above,  Rio Bravo  Energy LLC owns a general  partner  interest  in Marea
Associates,  L.P. and the minority interest in Terranova Energia,  S. de R.L. de
C.V.

Sonora  Pipeline,  LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering  adequate  volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network



                                       8
<PAGE>

consists of approximately 80 miles of gas pipeline.  Presently,  the line is not
in use. The pipeline was acquired in conjunction with the Chittim Gas Processing
Plant   acquisition.   When   operational,   it  would  generate   revenue  from
transportation fees charged to third party gas producers shipping natural gas to
the Chittim Gas Plant owned by Rio Bravo  Energy LLC.  Sonora  Pipeline LLC will
also own and operate the U.S.  (Texas)  pipeline  segments to be  constructed in
connection  with the  Mexican  pipeline,  LNG  regasification  terminal  and gas
storage  projects  which will  interconnect  to the U.S.  via two  international
pipeline crossings near McAllen, Texas. The estimated capital cost of these U.S.
segments is approximately $60 million USD.

Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the  residential  propane  distribution  business  on  November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin,  Texas.  Sonterra's  existing and future market area includes several
central  Texas  locations  that do not have  access to natural gas as a fuel for
home heating and appliance usage.  Current expansion of over 400 lots within the
existing  subdivisions  is  possible.  Sonterra  has  also  entered  into  a new
agreement  with the  developer  of  Northshore  on Lake  Travis  to  expand  the
currently  serviced lots by an additional  1,000 units.  Up to 2,625  additional
lots may be  available  for  installation  of  residential  propane  delivery in
developments  currently  in the  planning  stages in the  nearly  central  Texas
vicinity.

Results of Operations

REVENUES:  The Company  reported  revenues of  $1,883,838  for the twelve months
ended December 31, 2004 as compared with revenues from continuing  operations of
$178,856 for the twelve  months ended  December 31, 2003.  The revenue  increase
resulted  primarily  from the  acquisition of an additional 73% interest in Reef
Ventures,  L.P.  which owns and  operates a natural  gas  pipeline  serving  the
Piedras   Negras,   Coahuila   market.   Natural  gas  sold   ($1,323,459)   and
transportation  fees ($76,767) charged from these operations  totaled $1,400,227
for the twelve  months ended  December  31,  2004.  Sales of propane by Sonterra
Energy  Corporation to its residential  customer base  ($363,413),  service call
income for its customers  ($34,373),  and installation income for new yard lines
and meter sets ($2,850) totaled to $400,636 for the twelve months ended December
31, 2004. A new revenue source from Sonterra Energy Corporation was construction
services  related to propane  main lines and tank sites for  subdivisions  under
development,  which  resulted in $82,975 of revenues for the twelve months ended
December 31, 2004.  Other  Revenues  decreased by $178,856 for the twelve months
ended  December  31, 2004 as compared to the twelve  months  ended  December 31,
2003.

TOTAL COSTS AND EXPENSES:  Total costs and expenses from  continuing  operations
increased  from  $3,061,068  for the twelve  months  ended  December 31, 2003 to
$8,451,280 for the twelve months ended December 31, 2004.  Each category of cost
and  expense  increased  significantly  due to the rapid  growth  in assets  and
operating  expenses  experienced  by the Company  during the twelve months ended
December 31, 2004.  Cost of Sales  increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891  for the twelve months ended  December 31, 2004.
Operating  Expenses  increased from $27,767 for the twelve months ended December
31, 2003 to $99,665 for the twelve months ended December 31, 2004.  Depreciation
Expense  increased from $43,006 for the twelve months ended December 31, 2003 to
$244,889  for the twelve  months  ended  December  31,  2004.  Interest  Expense
increased from $53,163 for the twelve months ended December 31, 2003 to $300,566
for the twelve months ended December 31, 2004. Each of these increases  resulted
primarily  from  growth  related to the  acquisition  of 98% of the  partnership
interest in the Reef Ventures,  L.P.  international  pipeline operations and the
acquisition  of the  residential  propane sales  business near Austin,  Texas by
Sonterra Energy Corporation. Officers & Directors Salaries & Fees increased from
$313,000 for the twelve  months ended  December 31, 2003 to  $1,331,848  for the
twelve months ended December 31, 2004. This increase  resulted from the addition
of additional  directors  and officers  combined with the increased use of stock
based  compensation  in the  employment  agreements  of  officers.  General  and
Administrative  Expenses  increased from  $2,624,132 for the twelve months ended
December 31, 2003 to $4,965,421  for the twelve  months ended  December 31, 2004
due to the results  from the startup and  initial  operation  of the  additional
business units mentioned above and the expenses for expanded Company  operations
associated with the development of new midstream energy projects in the U.S. and
Mexico during that period.



                                       9
<PAGE>

COST OF SALES: Total Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891  for the twelve months ended  December 31, 2004.
Cost of sales  increased  by  $1,299,518  for the  purchase  cost of natural gas
resold thru our international  pipeline  operated by Reef Ventures,  L.P. and by
$209,373  for the  purchase  cost of propane,  meter sets and yard lines sold to
residential customers by Sonterra Energy Corporation.

OPERATING  EXPENSES:  Operating  expenses from continuing  operations  which are
expenses  related  to the  operation  of  Company  assets in an active  business
segment  increased from $27,767 for the twelve months ended December 31, 2003 to
$99,665 for the twelve months ended  December 31, 2004 which is a total increase
of $71,898.  This  increase was due to the operating  expenses  incurred for the
international  pipeline  crossing  operated  by  Reef  Ventures,  L.P.  and  the
operating expenses incurred by Sonterra Energy Corporation. Depreciation expense
increased by $201,883  during the twelve  months ended  December 31, 2004 due to
the acquisition of the natural gas pipeline owned by Reef Ventures, L.P. and the
depreciable  assets acquired by Sonterra Energy Corporation for the operation of
the residential propane distribution systems in Austin,  Texas. Interest expense
increased by $247,403  during the twelve  months ended  December 31, 2004 due to
the debt  incurred to acquire the natural gas pipeline  owned by Reef  Ventures,
L.P.  and the  issuance  of  convertible  debt to entities  associated  with the
Mercator  Advisory  Group,  LLC,  now  known as MAG  Capital,  LLC.  Officers  &
Directors Salaries & Fees increased by $1,018,848 during the twelve months ended
December  31, 2004 as a result of the  addition of one director and two officers
to the Company  combined with the increased use of stock based  compensation  in
the employment agreements of officers.

GENERAL AND  ADMINISTRATIVE:  General &  Administrative  Expenses  increased  by
$2,341,289  during the twelve months ended December 31, 2004.  Consulting  fees,
legal fees,  and financing  fees  increased by $1,822,414  for the twelve months
ended  December 31, 2004.  The remaining  increase in G & A costs of $518,875for
the twelve  months ended  December 31, 2004 was from  increases in travel costs,
office rent, insurance premiums,  entertainment, and payroll plus other expenses
associated with additional employees.  The significant expansion of scope in the
business plan for the Company and the need to conserve cash working  capital for
certain project  predevelopment costs required the use of significant  issuances
of stock for general and administrative  expenses during the twelve months ended
December 31, 2004.

NET LOSS FROM  OPERATIONS:  Net loss of ($1,348,481) for the twelve months ended
December 31, 2003 increased to ($6,517,182) for the twelve months ended December
31, 2004, an increase in the amount of loss of  $5,168,701.  Included in the net
loss from operations is $4,603,066 of expenses for financing  costs,  consulting
fees, legal fees, and employee compensation paid by issuance of common stock.

LIQUIDITY AND CAPITAL RESOURCES:  Direct capital  expenditures during the twelve
months ended December 31, 2004 totaled  $8,727,010 as compared with $134,505 for
the twelve months ended  December 31, 2003. The increased  capital  expenditures
were composed of the  acquisition of the assets of Reef Ventures,  L.P.  natural
gas pipeline ($5,933,442),  increased office furniture,  equipment and leasehold
costs ($26,550), higher pre-construction costs regarding potential international
pipeline crossings and storage facilities in Mexico ($822,525), pre-construction
costs related to propane distribution systems ($207,415),  machinery, equipment,
trucks,  autos and trailers  from the  Sonterra  asset  acquisition  ($120,355),
storage  tanks  and  main  lines  for  propane  distribution   ($1,596,439)  and
additional  equipment for our gas processing plant  ($20,000).  The Company also
paid  $1,158,937  for  goodwill  associated  with  the  acquisition  of the Reef
Ventures, L.P. and Sonterra Energy Corporation assets. Total debt increased from
$1,138,905  at  December  31, 2003 to  $12,306,107  at December  31,  2004.  The
increase in total debt is  primarily  due to: (1) the  acquisition  indebtedness
created in the acquisition of the Reef Ventures, L.P. partnership interests from
Coahuila  Pipeline LLC and Impact  International  LLC as described in Note 5 and
Note 14 to the Consolidated  Financial  Statements for the period ended December
31, 2004,  and (2) the issuance of  Convertible  Debentures  to the MAG Capital,
LLC,  formerly Mercator Advisory Group, LLC, funds as described in Note 5 of the
Consolidated  Financial Statements for the period ended December 31, 2004. Total
debt as of December 31, 2004 and December 31, 2003  expressed as a percentage of
the  sum  of  total  debt  and  shareholders'   equity  was  71.45%  and  70.15%
respectively.



                                       10
<PAGE>

On June 4, 2004,  the Company  entered into a SBC Center  Terrace  Suite License
Agreement with the San Antonio Spurs, LLC, commencing July 1, 2004, for a period
of five years.  The annual  license  fee is $159,000  for that first year and is
subject to a 6% per annum price escalation thereafter. The annual fee is payable
in  installments  as  indicated  in the  agreement.  Future  annual  license fee
commitments total $737,296. (See Note 4 of the Audit Report below).

Net loss for the twelve  months  ended  December  31, 2004 was  ($6,517,182)  an
increase  in net loss of 483% from the net loss of  ($1,348,481)  for the twelve
months ended December 31, 2003. Diluted net loss per common share increased 300%
to  ($0.09).  The net loss per share  calculation  for the twelve  months  ended
December  31,  2004  included  an  increase  in  actual  and  equivalent  shares
outstanding. In addition, the period ended December 31, 2003 included a one time
gain  of  partial  sale  of a  subsidiary  in the  amount  of  $1,533,731  which
influenced  the difference in net income (loss) per share for the periods ending
December 31, 2003 versus December 31, 2004.

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

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

ITEM 7.  FINANCIAL STATEMENTS

Index to Financial Statements

Independent Accountant's Report.....................................         F-3
Financial Statements
       Balance Sheets...............................................         F-4
       Statements of Operations.....................................         F-4
       Statements of Stockholder's Equity...........................         F-6
       Statements of Cash Flows.....................................   F-7 - F-8
       Notes to Financial Statements................................  F-9 - F-25

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                              FINANCIAL DISCLOSURE.

           None.

ITEM 8A. CONTROLS AND PROCEDURES.

(a)      Evaluation of Disclosure Controls and Procedures.



                                       11
<PAGE>

         As of the end of the  reporting  period,  December 31, 2004, we carried
out an  evaluation,  under the  supervision  and with the  participation  of our
management, including the Company's Chairman and Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure  controls and procedures pursuant to Rule 13a-15(e) of the Securities
Exchange  Act of 1934  (the  "Exchange  Act"),  which  disclosure  controls  and
procedures are designed to insure that information required to be disclosed by a
company  in the  reports  that it files  under  the  Exchange  Act is  recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms.  Based upon that  evaluation,  the Chairman and the Chief
Financial  Officer  concluded  that our  disclosure  controls and procedures are
effective  in timely  alerting  them to  material  information  relating  to the
Company required to be included in the Company's period SEC filings.

(b)      Changes in Internal Control.

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

(c)      Limitations.

         Our management, including our Principal Executive Officer and Principal
Financial  Officer,  does not expect  that our  disclosure  controls or internal
controls over  financial  reporting  will prevent all errors or all instances of
fraud. A control system,  no matter how well designed and operated,  can provide
only reasonable,  not absolute,  assurance that the control system's  objectives
will be met. Further,  the design of a control system must reflect the fact that
there are resource constraints,  and the benefits of controls must be considered
relative to their  costs.  Because of the  inherent  limitations  in all control
systems,  no  evaluation  of controls can provide  absolute  assurance  that all
control  issues and  instances  of fraud,  if any,  within our company have been
detected.  These  inherent  limitations  include the realities that judgments in
decision-making  can be faulty,  and that breakdowns can occur because of simple
error or mistake.  Controls can also be  circumvented  by the individual acts of
some persons,  by collusion of two or more people, or by management  override of
the controls. The design of any system of controls is based in part upon certain
assumptions  about the  likelihood  of future  events,  and any  design  may not
succeed in achieving  its stated goals under all  potential  future  conditions.
Over time,  controls may become  inadequate  because of changes in conditions or
deterioration  in the degree of compliance with policies or procedures.  Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.

ITEM 8B.   OTHER INFORMATION:

None

                                    PART III

ITEM  9.  DIRECTORS,   EXECUTIVE  OFFICERS,   PROMOTERS,  AND  CONTROL  PERSONS:
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

                                                            Date became director
Name                     Age  Position                      or officer
--------------------------------------------------------------------------------

Michael Ward             49      Director, President         October 21, 1998
James B. Smith, C.P.A.   51      Chief Financial Officer,    August 16, 2003
                                 Sr. V.P.
Ahmed Karim              33      Director, Vice President    October 21, 1998
Robert Dowies            54      V.P.                        October 18, 2004
Carl Hessel              41      Director                    January 28, 2004




                                       12
<PAGE>

MICHAEL WARD: Mr. Ward is the President, Chief Executive Officer and Chairman of
our Board of Directors.  Michael Ward has served in his present capacities since
October 21, 1998. He is Vice President and Chief Executive  Officer of Tidelands
Gas Corporation.  He is a Manager and Vice President of Development of Rio Bravo
Energy, LLC. Mr. Ward has more than 25 years of diversified experience as an oil
and gas professional.  He was educated in business management and administration
at Southwest  Texas State  University and the  University of Texas.  He has wide
experience in the capacity in which he successfully  served in operating oil and
gas  companies  in the  United  States.  During  the past 20 years,  he has been
associated with Century Energy Corporation where his duties and responsibilities
were production and drilling  superintendent  and supervised 300  re-completions
and new drills in Duval County, Texas. In association with Omega Minerals, Inc.,
where he was vice president and part owner,  he operated 65 wells in 23 counties
in South and West Texas: 17 wells in Seminole and Osage Counties,  Oklahoma,  44
wells in Neosho  and  Wilson  Counties,  Kansas  and 125  wells in Brown,  Pike,
Schuyler  and Scott  Counties.  Illinois.  He was  president  and owner of Major
Petroleum Company. He drilled, completed and produced 42 wells in South and West
Texas counties. The company was sold. With Tidelands Oil Corporation, his duties
included supervising and performing remedial well work,  work-overs and economic
evaluation  of the  corporate  properties.  The primary  area of interest was in
Maverick  County,  Texas.  He  has  performed  project  financing  analysis  and
consulting of refinery acquisitions for the Yemen government.

JAMES B.  SMITH:  On August 16,  2003,  we  employed  James B. Smith to act as a
Senior Vice President and Chief Financial Officer. Mr. Smith received a Bachelor
of Science from Texas A&M  University  and a Master of  Professional  accounting
degree from the McCombs School of Business at the  University of Texas,  Austin.
He is licensed as a Certified Public Accountant in Texas and Colorado. From 1996
through  2001,  he directed the  financial  affairs and tax planning for several
closely held  corporations  engaged in land  development in Colorado.  From 2000
through 2003, he served as Chief Financial Officer for Starr Produce Company,  a
major produce company with significant  subsidiaries in real estate  development
and agri-business.

AHMED KARIM:  Mr.  Karim Vice  President  and  director of the Company.  He is a
graduate   of  Simon   Fraser   University.   He  holds  a  degree  in  Business
Administration, specializing in marketing and international business. Since 1995
his  business   experience  includes  work  with  Quest  Investments  Group  and
Interworld  Trade and Finance  where his  responsibilities  included  marketing,
finance and investor relations.

ROBERT W. DOWIES:  On October 18, 2004, we employed Robert W. Dowies as our Vice
President of Gas Markets and Supply.  Mr. Dowies has 30 years  experience in the
energy marketing. Ten years as the owner of a natural gas trading company and 20
years with a public  utility.  Until his  employment  with  Tidelands  Oil & Gas
Corporation,  since 1998, Mr. Dowies worked for Trebor Energy Resources, Inc. in
Houston, Texas. His principal responsibilities were the development of financial
alliances  with various energy  merchants and producers  providing a $50 million
dollar credit support for gas marketing activities,  financial trading accounts,
pipeline transportation agreements,  storage strategies and capital projects. He
developed and  implemented  marketing  strategies  which resulted in $40 million
dollars of annual  revenue.  He designed and coordinated  the  construction  and
implementation  of a natural gas gathering  system. We entered into a three year
employment  contract  paying him an annual salary of $100,000  which includes an
annual stock grant of 100,000 shares.

CARL HESSEL: On January 28, 2004, Mr. Hessel joined our board of directors.  Mr.
Hessel founded Margaux  Investment  Management  Group,  S.A. which is located in
Geneva,  Switzerland  in 2001.  Prior to 2001,  he served as Vice  President  of
Merrill  Lynch  were he was  responsible  for  creating  global  high net  worth
management  platform.  He began his career at  Goldman  Sachs and help build the
Scandinavian  ultra-high net worth market.  Mr. Hessel received his M.B.A.  from
Wharton  Business  School  and a  degree  in  Finance  and  Management  from the
University of Pennsylvania.  He was awarded the Marcus  Wallenberg  Foundation's
Scholarship.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors  and  executive  officers,  and  persons  who own more than 10% of the
Company's  Common Stock,  to file with the  Securities  and Exchange  Commission


                                       13
<PAGE>

initial  reports of  beneficial  ownership  and reports of changes in beneficial
ownership of Common Stock of the Company.  Officers,  directors and greater than
10%  shareholders  are required by the  Securities  and Exchange  Commission  to
furnish the Company with copies of all section  16(a)  reports they file.  Based
solely  on  copies  of such  forms  furnished  as  provided  above,  or  written
representations that no Forms 5 were required,  the Company believes that during
the fiscal year ended December 31, 2004,  all Section 16(a) filing  requirements
applicable to its executive  officers,  directors and beneficial  owners of more
than 10%of its Common Stock were complied with, except as follows:

Michael Ward failed to file one Form 5, Statement of Annual Beneficial Ownership
due February 14, 2004,  and three Form's 4  representing  two stock grants under
his employment agreement and one option exercise,  (2)Ahmed Karim failed to file
one Form 5, Statement of Annual Beneficial Ownership, due February 14, 2004.


ITEM 10. EXECUTIVE COMPENSATION

         The  following  sets  forth the  compensation  of the  officers  of the
Company in the year ended December 31, 2004.

Summary Compensation.

The  following  table sets forth the  compensation  paid by the  Company  during
fiscal year 2004 to its officers.  This information includes the dollar value of
base  salaries,  bonus awards and number of stock options  granted,  and certain
other compensation, if any.

Table 1.
                                                       Stock
                                                       Underlying    Stock
Name and Position        Year     Salary     Bonus     Options       Grants

Michael Ward, Pres.      2004     $252,000   $28,550   500,000(1)    1,000,000
James Smith, V.P,CFO     2004     $168,000   $11,996   552,800(1,2)    500,000
Ahmed Karim, V.P.(3)     2004        -0-       -0-     500,000(1)        -0-
Robert Dowies (4)        2004     $100,000   $ 4,167     -0-          100,000(3)

(1) These stock options were  exercised on September 14, 2004 by the delivery of
one-year promissory notes in the amount of $110,000 each.
(2) Mr. Smith received a stock grant of 52,800 shares which was issued under the
2003 Stock Grant and Option Plan.
(3)Mr. Karim received compensation as a director.
(4) Mr. Dowies joined the company on October 18, 2004. His employment  agreement
entitles him to an annual stock grant of 100,000 shares. The first 50,000 shares
will vest and be  payable  April 18,  2005.  Thereafter,  stock  grants  will be
payable every six months, October 18 and April 18 for the term of the employment
agreement.

Executive Officer Compensation

During 2004, the Company had four  executive  officers,  Michael Ward,  James B.
Smith,  Ahmed Karim and Robert Dowies.  Michael Ward's was paid $252,000  salary
and a bonus of $28,550. James B. Smith was paid $130,200,  plus an $11,996 bonus
.. Messrs. Ward and Smith have new and different  employment  agreements for 2004
discussed below in the Employment Agreement paragraph. During 2004, Michael Ward
received  1,000,000  shares of common  stock as his annual stock grant under the
terms of his employment  agreement.  Mr. Smith received 552,800 shares of common
stock as his annual stock grant under the terms of his employment agreement.

We hired Robert  Dowies on October 18, 2004 as Vice  President.  He will work in
the area of gas marketing,  supply and distribution.  We paid Mr. Dowies $19,444
during 2004.  We entered  into a three year  employment  contract  paying him an
annual  salary of  $100,000  which  includes  an annual  stock  grant of 100,000
shares. Mr. Dowies employment agreement stock grant will vest on April 18, 2005.
Mr. Karim did not receive any officer salary during 2004.



                                       14
<PAGE>

Director Compensation

On April 11, 2001, the Company agreed to compensate Ahmed Karim, a director, for
services provided at the rate of $5,000 per month until June 30, 2003 and $3,000
per month thereafter. For the year ended December 31, 2004, we incurred $36,000
for director compensation. There are no other formal or informal understandings
or arrangements relating to director compensation.

On February  5, 2003,  we granted  Michael  Ward and Ahmed  Karim  common  stock
options to purchase 500,000 shares each at $0.22 per share.  These stock options
were  exercised  on September  14, 2004 and the  exercise  price was paid by the
delivery of $110,000  promissory  notes bearing interest at an annual rate of 5%
due, on or before September 14, 2005.

Committees of the Board of Directors

Tidelands does not have a Compensation committee. The Board of Directors acts as
the  Compensation  Committee.  Tidelands has no  compensation  written  policies
outlining  factors  and  criteria  underlying  awards or payments in relation to
executive  officers.  Michael  Ward  abstained  from  voting  on his  Employment
Agreement.

Employment and Consulting Agreements with Management

The Company has entered into employment agreements with the following officers:

MICHAEL WARD - Under the terms of Mr. Ward's  employment  agreement,  commencing
January 1, 2004, he was employed as the Company's  President and Chief Executive
Officer for a term of five (5) years.  His base annual  salary is $252,000.  The
annual salary may be increased  from year to year, as determined by our board of
directors acting as the Compensation  Committee,  by at least the Consumer Price
Index. As additional compensation,  Mr. Ward will be entitled to an annual stock
grant of One  Million  (1,000,000)  shares.  Stock  grant  dates are June 30 and
December 31 each year. As incentive  compensation,  Mr. Ward will be entitled to
additional  compensation equal to two percent of our net profits and one percent
of the increase in sales over a previous year's sales, effective with the fiscal
year ending 2004.  Mr. Ward is entitled to all employee  benefits as provided by
the Company. He is entitled to four weeks paid vacation and an annual automobile
allowance of $12,000.

JAMES B. SMITH: Under the terms of Mr. Smith's employment agreement,  commencing
October 1, 2004,  he was employed as the  Company's  Senior Vice  President  and
Chief Financial  Officer for a term of four (4) years. His base annual salary is
$168,000. The annual salary may be increased from year to year, as determined by
our board of directors  acting as the  Compensation  Committee,  by at least the
Consumer Price Index. As additional compensation,  Mr. Smith will be entitled to
an annual stock grant of Five Hundred  (500,000)  shares.  Stock grant dates are
October 1 during the four year term. The first year stock grant was paid October
1, 2004.  As incentive  compensation,  Mr. Smith will be entitled to  additional
compensation  equal to two  percent of our net  profits  and one  percent of the
increase in sales over a previous year's sales,  effective  October 1, 2004. Mr.
Smith is entitled to all  employee  benefits as provided by the  Company.  He is
entitled  to four weeks paid  vacation  and an annual  automobile  allowance  of
$12,000.

ROBERT W.  DOWIES:  We  employed  Mr.  Dowies on  October  26,  2004 as our Vice
President of Gas Markets and Supply.  His employment  agreement is for a term of
three (3) years.  His annual  salary is  $100,000.  He is  entitled to an annual
stock grant of 100,000 common  shares.  The first 50,000 shares will vest and be
payable  April 18,  2005.  Thereafter,  stock  grants will be payable  every six
months,  October 18 and April 18 for the term of the employment  agreement.  Mr.
Dowies is entitled to two (2) weeks paid  vacation and all employee  benefits as
provided by the Company.



                                       15
<PAGE>
<TABLE>
<CAPTION>

Code of Ethical Conduct

Our board of directors  adopted a Code of Ethical  Conduct  which applies to all
our Company directors, officers and employees, including our principal executive
officer  and  principal  financial  officer,  principal  accounting  officer  or
comptroller, or other persons performing similar functions.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             PRINCIPAL SHAREHOLDERS


The  following  table sets forth the Common Stock  ownership  information  as of
December  31,  2004,  with respect to (i) each person known to the Company to be
the beneficial  owner of more than 5% of the Company's  Common Stock;  (ii) each
director  of the  Company;  and  (iii) all  directors,  executive  officers  and
designated  stockholders  of the  Company  as a group.  This  information  as to
beneficial ownership was furnished to the Company by or on behalf of the persons
named.  Unless  otherwise  indicated,  we believe  that each has sole voting and
investment power with respect to the shares  beneficially owned. The percentages
are based on 61,603,359  shares of our common stock issued and outstanding as of
December 31, 2004.

(a)      Beneficial Ownership of more than 5% based on 61,603,359 common shares.

Beneficial Ownership of 5%.

Table 1.

    (1)                  (2)                              (3)                  (4)
Title of Class     Name and Address                Amount and Nature     Percent of Class
Common Stock
<S>                <C>                             <C>                   <C>
Common             Mercator Momentum
                   Fund, LP (1)                    2,789,372 (2)(7)      4.53%(8)
                   555 S. Flower St.               Shared Voting and
                   Suite 4500                      Dispositive Power
                   Los Angeles, CA 90071

Common             Mercator Momentum               1,921,811(3)(7)       3.12%
                   Fund III, LP(1)                 Shared Voting and
                   555 S. Flower St.               Dispositive Power
                   Suite 4500
                   Los Angeles, CA 90071

Common             Monarch Pointe                  6,270,597 (4)(7)      9.99%(8)
                   Fund, Ltd. (1)                  Shared Voting and
                   c/o Bank of Ireland             Dispositive Power
                   Securities Services Ltd.
                   New Century House
                   International Fin. Ser.Ctr.
                   Mayor Street Lower
                   Dublin 1
                   Republic of Ireland

Common             MAG Capital, LLC(1)             6,558,009 (5)         9.99%(8)
                   555 S. Flower St.               Shared Voting and
                   Suite 4500                      Dispositive Power
                   Los Angeles, CA 90071


Common             David F. Firestone (1)          6,558,009  (6)(7)     9.99% (8)
                   555 S. Flower St                Shared Voting and
                   Suite 4500                      Dispositive Power
                   Los Angeles, CA 90071



                                       16
<PAGE>

Common             ACH Securities, S.A.            4,000,000  (9)        6.49%
                   30 Quai Gustave Ador
                   P.O. Box 6235
                   Geneva, Switzerland

Common             Margaux Investment              3,988,889 (14)        6.47%
                   Management Group
                   9 Rue de Commerce
                   CH 1211 Geneva 11
                   Switzerland

Common             Impact International, LLC (1)   9,829,500(10)         15.95%
                   111 W. 5th St. Ste.720
                   Tulsa, OK 74103

Common             Michael Ward                    6,317,038(11)         10.25%
                   1862 W. Bitters Rd.
                   San Antonio, TX78248
Total                                                                    49.15%(12)
</TABLE>

Notes:

(1) Mercator  Momentum Fund, LP, Mercator  Momentum Fund III, LP, Monarch Pointe
Fund, Ltd., MAG Capital, LLC., formerly,  Mercator Advisory Group, LLC and David
F. Firestone are referred to "Reporting  Persons".  Mr. Firestone has voting and
investment  control over the shares held by Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Monarch Pointe Fund, Ltd. and the MAG Capital,  LLC. Each
Mercator  entity own warrants to purchase  shares of our common stock.  Mercator
Momentum Fund,  LP,  Mercator  Momentum Fund III, LP, Monarch Pointe Fund,  Ltd.
each own 7% Convertible  Debentures  (the  "Debentures")  issued by us which are
convertible into our common stock. Each Debenture is convertible into the number
of shares of common stock  determined by dividing the  principal  balance of the
Debenture by the Conversion Price at the time of the conversion.  The Conversion
Price is defined as 85% of the "Market  Price",  which is defined as the average
of the lowest four  intra-day  trading prices of our common stock during the ten
trading days preceding the conversion,  however, the Conversion Price may not be
less than  $0.45 or more than  $0.76,  adjusted  for stock  splits  and  similar
events.  Upon the  occurrence  of certain  events  specified in the  Debentures,
including any Event of Default,  as defined in the  Debentures,  the  Conversion
Price will be reduced from 85% of the Market  Price to 75% of the Market  Price,
but  in no  event  higher  than  $0.76  or  lower  than  $0.45  per  share.  The
documentation  governing  the  terms of the  warrants  and  Debentures  contains
provisions  prohibiting  any  exercise  of the  warrants  or  conversion  of the
Debentures that would result in the Reporting  Persons owning  beneficially more
than 9.99% of the outstanding  common stock as determined under Section 13(d) of
the  Securities  Exchange  Act of 1934.  The  Reporting  Persons  have never had
beneficial ownership of more than 9.99% of our outstanding common stock.

(2) Mercator  Momentum  Fund,  LP is a private  investment  limited  partnership
organized under California law. MAG Capital, LLC, a California limited liability
company,  is its general  partner.  David F. Firestone is the Managing Member of
the MAG Capital,  LLC. Mr. Firestone has voting and investment  control over the
Mercator  Momentum Fund, L.P.  Mercator Momentum Fund, LP owns Debentures with a
principal balance of $1,270,000 and warrants to purchase up to 835,526 shares of
our common stock. The number of shares  beneficially  owned have been determined
using a Conversion Price of $0.65 with respect to the Debentures.

(3) Mercator Momentum Fund III, LP is a private investment  limited  partnership
organized under California law. MAG Capital, LLC, a California limited liability
company,  is its general  partner.  David F. Firestone is the Managing Member of
MAG  Capital,  LLC. Mr.  Firestone  has voting and  investment  control over the
Mercator  Momentum Fund III, L.P. Mercator Momentum Fund III, LP owns Debentures
with a  principal  balance of  $835,000  and  warrants to purchase up to 575,658
shares of our common stock.  The number of shares  beneficially  owned have been
determined using a Conversion Price of $0.65 with respect to the Debentures.

(4) Monarch Pointe Fund,  Ltd. is a corporation  organized  under of the British
Virgin  Islands.  MAG Capital,  LLC controls the  investments  of Monarch Pointe
Fund. Mr.  Firestone has voting and  investment  control over the Monarch Pointe
Fund,  Ltd..  Monarch Pointe Fund owns  Debentures  with a principal  balance of
$2,855,000 and warrants to purchase up to 1,878,290  shares of our common stock.
The number of shares  beneficially owned have been determined using a Conversion
Price of $0.65 with respect to the Debentures.



                                       17
<PAGE>

(5) MAG Capital, LLC, formerly,  Mercator Advisory Group, LLC., owns warrants to
purchase up to 3,289,474  shares of our common stock.  Mr.  Firestone has voting
and investment control over MAG Capital, LLC.

(6) David F. Firestone does not own any of our securities.

(7) The right to vote and the right to dispose of the shares  beneficially owned
by Mercator  Momentum  Fund,  LP,  Mercator  Momentum  Fund III, LP, and Monarch
Pointe Fund, Ltd. are, in each case,  shared among either of the three funds, as
applicable, and both MAG Capital, LLC and David F. Firestone.

(8) The  agreements  governing the terms of the 7%  Debentures  and the warrants
contain  provisions  prohibiting any conversion of the Debentures or exercise of
the warrants that would result in the Mercator  Momentum  Fund, LP, the Mercator
Momentum  Fund III,  LP; the Monarch  Pointe Fund,  Ltd. , or MAG Capital,  LLC;
collectively  owning  beneficially more than 9.99% of the outstanding  shares of
our common stock as determined  under Section 13(d) of the  Securities  Exchange
Act of 1934. As a result of these provisions,  the entities disclaim  beneficial
ownership in excess of 9.99% of the outstanding shares of our common stock.

(9) Represents  4,000,000 common shares issued and outstanding.  Peter Andersson
has voting and  dispositive  power with respect to the  securities  owned by ACH
Securities.

(10) Represents  8,000,000  shares issuable upon the exercise of warrants at the
exercise price of $0.335 per share and 1,829,500 shares of common stock.  Robert
S. May has voting and dispositive  power with respect to the securities owned by
Impact International, LLC.

(11) Mr. Ward is the  President,  Chief  Executive  officer and  Chairman of our
Board of Directors.

(12) This total does not reflect the summation of the  percentages of beneficial
ownership of Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch
Pointe Fund,  Ltd.,  MAG Capital,  LLC and David F. Firestone for the reason set
forth in  footnote  8. We have  included  9.99%  once in the  summation  for all
Mercator related entities.

(13) Mercator Group totals only include 9.99%.

(14)  Represents   1,988,889   shares  of  common  stock  presently  issued  and
outstanding    and   2,000,000    shares   of   common   stock   issuable   upon
exercise(a)1,000,000  shares at $0.50 per share,  and 1,000,000  shares at $2.50
per share.  Carl  Hessel has voting and  dispositive  power with  respect to the
securities owned by Margaux Investment Management Group.

(b)      Security  Ownership of  Management.  Based on 61,603,359  shares as set
         forth in (a) above as of December 31, 2004.

         Table 2.
                                                                      Percent of
Title of Class     Name and Address               Amount and Nature   Class

Common             Michael Ward                   6,317,038           10.25%
                   1862 W. Bitters Rd.
                   San Antonio, TX 78248

Common             James B. Smith                 1,042,668(1)        1.69%
                   1862 W. Bitters Rd.
                    San Antonio, TX 78248

Common             Ahmed Karim                    502,500             0.815%
                   1532 Woods Dr.
                   N. Vancouver, B.C.
                   Canada V7R 1A9

Common             Robert W. Dowies               30,000              0.048%
                   1862 W. Bitters Rd.
                   San Antonio, TX 78248

Common             Carl Hessel (2)                4,442,221            7.21%
                   c/o Margaux Investment
                   Management Group, S.A.
                   9 Rue de Commerce
                   CH 1211 Geneva 11
                   Switzerland

   Total                                          12,334,427          20.02%


                                       18
<PAGE>

Notes:
(1) Includes  500,000  shares in the name of Aigle  Partners,  Ltd. in which Mr.
Smith  has a  partnership  interest  and  500,000  shares in the name of du Midi
Trust, in which Mr. Smith has a beneficial interest.
(2) Mr. Hessel is a partner in Margaux  Investment  Management  Group,  S.A. Mr.
Hessel also exercises voting and dispositive control over the Margaux securities
and as such beneficial  ownership reflects 2,000,000 common stock warrants owned
by  Margaux,  1,988,889  shares  owned  by  Margaux  and  453,332  shares  owned
personally by Mr. Hessel.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On November 9, 2004,  we issued  500,000  common  shares to James B. Smith which
represents the annual stock grant under the terms of his employment agreement.

On October 18, 2004 we entered into an employment  agreement with Robert Dowies.
Mr .Dowies  became a Company  Vice  President.  His  annual  salary is $ 100,000
including an annual stock grant of 100,000 shares.

On October 13, 2004, we sold Four Million (4,000,000) Tidelands Oil & Gas common
shares to ACH Securities,  S.A., a company domiciled in Geneva, Switzerland, for
Two Million  ($2,000,000)  Dollars.  On October 14, 2004, in connection with the
ACH Securities  transaction,  we issued Margaux  Investment  Group,  S.A. common
stock  warrants to purchase One Million  (1,000,000)  Tidelands Oil & Gas common
shares for Fifty ($0.50) Cents per share and One Million  (1,000,000) shares for
$2.50 per share.  Mr. Carl Hessel, a company  director,  is a partner in Margaux
Investment  Management  Group,  S.A.  and, as such he has an indirect  financial
interest in the common stock warrants.

On September 14, 2004, we issued  500,000 shares of common stock to Michael Ward
as a stock  grant  under his  employment  agreement.  The shares  were valued at
$106,875.

On September 14, 2004, the following individuals exercised common stock options:

Michael Ward, the Company's  President and Director,  exercised his common stock
option to purchase  500,000  common shares for $110,000  payable on a promissory
note bearing  interest at the rate of 5% payable in full on, or before September
14, 2005. The shares are subject to a security agreement.

Ahmed Karim,  the Company's  Vice  President and Director,  exercised his common
stock  option to  purchase  500,000  common  shares  for  $110,000  payable on a
promissory note bearing interest at the rate of 5% payable in full on, or before
September 14, 2005. The shares are subject to a security agreement.

James Smith, the Company's Chief Financial  Officer,  exercised his common stock
option to purchase  500,000  common shares for $110,000  payable on a promissory
note bearing  interest at the rate of 5% payable in full on, or before September
14, 2005. The shares are subject to a security agreement.

On June 30, 2004, we issued 3,322 common shares to Carl Hessel for $ 4,983. Carl
Hessel was a member of our board of directors at the time of issuance.

On January 29, 2004, the Company executed an agreement with Royis Ward, a former
officer and director and the father of Michael  Ward,  our President and CEO, to
provide  charter air  transportation  for our Company  employees,  customers and
contractors to job sites and other business related destinations.  A $300,000 5%


                                       19
<PAGE>
<TABLE>
<CAPTION>

interest bearing loan due January 2007 was advanced by the Company regarding the
transaction.  The loan  balance  is  credited  by airtime  charges  at  standard
industry  rates  offset by interest  charges  computed  on the  average  monthly
balance. As of December 31, 2004, the loan balance was $286,606.

On January 8, 2004, we authorized the issuance of 300,000 common shares to Carl
Hessel for services valued at $450,000. These shares were issued before Mr.
Hessel joined our Board of Directors.

During 2004, the Company had four  executive  officers,  Michael Ward,  James B.
Smith, Robert Dowies and Ahmed Karim.  Michael Ward's annual salary is $252,000.
James B.  Smith's  annual  salary was  $168,000.  Mr.  Dowies  annual  salary is
$100,000.

On February 5, 2003, we granted Michael Ward,  Royis Ward and Ahmed Karim common
stock options to purchase  500,000 shares each at $0.22 per share. On August 16,
2003, we granted James B. Smith common stock options to purchase  500,000 shares
at $0.22 per share. The options were exercised on September 14, 2004.

On February 18, 2003,  effective  January 1, 2003,  the Company sold 100% of the
issued and  outstanding  common  stock of  Tidelands  Oil  Corporation,  a Texas
corporation and Tidelands Gas Corporation,  a Texas  corporation,  to Royis Ward
for a total price of $48,471. This amount was offset against his officer loan of
$117,492.

On June 30, 2003, we paid Mr. Karim all of his accrued director  compensation by
issuing him 340,909 shares in lieu of $75,000.

ITEM 13. EXHIBITS

Exhibit  Description                                                            Location of Exhibit
<S>      <C>                                                                    <C>

2.0      Amendment No. 2 to the Asset Purchase and Sale  and between            Incorporated by reference
         Sonterra Energy Corporation and Oneok Propane Distribution             to Exhibit 10.1
         Company.                                                               8-K filed November 15, 2004
2.1      Amendment No. 1 to the Asset Purchase and Sale  and between            Incorporated by reference to
         Sonterra Energy Corporation and Oneok Propane Distribution             Exhibit 10.2
         Company.                                                               8-K filed November 15, 2004

2.3      Asset Purchase and Sale Agreement by and between Sonterra Energy       Incorporated by reference to
         Corporation and Oneok Propane Distribution Company.                    Exhibit 10.3
                                                                                8-K filed November 15, 2004
2.4      Purchase and Sale Agreement for Reef Ventures, L.P. by and             Incorporated by reference
         between Impact International, LLC ("Impact") and Coahuila              Exhibit 10 to 8-K filed
         Pipeline, LLC, ("Coahuila"), (jointly "Seller") and Tidelands          June 25, 2004
         Oil & Gas Corporation ("Tidelands") and Arrecefe
         Management, LLC ("Arrecefe"), (jointly "Buyer") dated
         May 25, 2004 with Exhibits.
2.5      Purchase and Sale Agreement for Reef Marketing, L.L.C.                 Incorporated by reference
         and  Reef International, L.L.C. by and between Tidelands               Exhibit 10.1 to 8-K filed
         Oil & Gas Corporation and Impact International, L.L.C.                 May 8, 2003
         and Coahuila Pipeline, L.L.C. dated April 16, 2003.
2.6      Agreement of Limited Partnership of Reef Ventures, L.P.                "
2.7      Stock Purchase Warrant Impact                                          "
2.8      Registration Rights Agreement Impact                                   "
3.0      Restated Articles of Incorporation of Tidelands Oil                    Included with this filing
         & Gas Corporation., a Nevada corporation.


                                       20
<PAGE>

3.1      Restated Bylaws of Tidelands Oil & Gas Corporation.                    Included with this filing
4.0      7% Convertible Debenture Mercator Momentum Fund, LP                    Incorporated by reference to
                                                                                Exhibit 10.2 to 8-K filed on
                                                                                December 3, 2004
4.1      7% Convertible Debenture Mercator Momentum Fund III, LP                Incorporated by reference to
                                                                                Exhibit 10.3 to 8-K filed on
                                                                                December 3, 2004
4.2      7% Convertible Debenture Monarch Pointe Fund, LP                       Incorporated by reference to
                                                                                Exhibit 10.4 to 8-K filed on
                                                                                December 3, 2004
10.0     Employment Agreement with Michael Ward                                 Incorporated by reference to
                                                                                Exhibit 10.0 to SB-2
                                                                                filed December 17, 2004.
10.1     Employment Agreement with James B. Smith                               Incorporated by reference to
                                                                                Exhibit 10.1 to SB-2 filed
                                                                                December 17, 2004
10.2     Employment Agreement with Robert Dowies                                Incorporated by reference to
                                                                                Exhibit 10.2 to SB-2 filed
                                                                                December 17, 2004
10.3     2003 Non-Qualified Stock Grant and Option Plan                         Incorporated by reference to
                                                                                Form S-8 filed on June 11, 2003
10.4     Securities Purchase Agreement                                          Incorporated by reference to
10.5     Warrant Margaux                                                        Incorporated by reference to
                                                                                Exhibit 10.5 to SB-2 filed
                                                                                December 17, 2004
10.6     Warrant Margaux                                                        Incorporate by reference to
                                                                                Exhibit 10.6 to SB-2 filed
                                                                                December 17, 2004
10.7     Amended Stock Purchase Warrant Impact International                    Incorporated by reference
                                                                                Exhibit 10 to 8-K filed
                                                                                June 25, 2004
10.8     Registration Rights Agreement with Mercator Group                      Incorporated by reference to
                                                                                Exhibit 10.5 to 8-K filed on
                                                                                December 3, 2004
10.9     Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
         Fund, LP. $0.87                                                        Exhibit 10.6 to 8-K filed on
                                                                                December 3, 2004
10.10    Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
          Fund, LP $0.80                                                        Exhibit 10.7 to 8-K filed on
                                                                                December 3, 2004
10.11    Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
         Fund, III, LP $0.87                                                    Exhibit 10.8 to 8-K filed on
                                                                                December 3, 2004
10.12    Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
         Fund III, LP $0.80                                                     Exhibit 10.9 to 8-K filed on
                                                                                December 3, 2004
10.13    Warrant to Purchase Common Stock Monarch Pointe                        Incorporated by reference to
         Fund, LP $0.87                                                         Exhibit 10.10 to 8-K filed on
                                                                                December 3, 2004


                                       21
<PAGE>

10.14    Warrant to Purchase Common Stock Monarch Pointe                        Incorporated by reference to
         Fund, LP $0.80                                                         Exhibit 10.11 to 8-K filed on
                                                                                December 3, 2004
10.15    Warrant to Purchase Common Stock Mercator Advisory                     Incorporated by reference to
         Group, LLC. $0.87                                                      Exhibit 10.12 to 8-K filed on
                                                                                December 3, 2004
10.16    Warrant to Purchase Common Stock Mercator Advisory                     Incorporated by reference to
         Group, LLC $0.80                                                       Exhibit 10.13 to 8-K filed on
                                                                                December 3, 2004
10.17    SBC Center Terrace Suite License Agreement                             Included with this filing
21       List of Subsidiaries                                                   Included with this filing
31.1     Chief Executive Officer-Section 302 Certification pursuant             "
         to Sarbanes- Oxley Act.
31.2     Chief Financial Officer- Section 302 Certification pursuant            "
         to Sarbanes-Oxley Act.
32.1     Chief Executive Officer-Section 906 Certification pursuant             "
         to Sarbanes-Oxley Act.
32.2     Chief Financial Officer- Section 906 Certification pursuant            "
         to Sarbanes-Oxley Act.
</TABLE>


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

         The Company paid or accrued the following fees in each of the prior two
fiscal years to its principal  accountant,  Baum & Co.,  P.A. of Coral  Springs,
Florida.

                                         Year End         Year End
                                         12-31-04         12-31-03

(1)      Audit Fees                      $53,860          $49,324
(2)      Audit-related Fees                  -0-              -0-
(3)      Tax Fees                            -0-              -0-
(4)      All other fees                      -0-              -0-
                                         -------          -------
Total Fees                               $53,860          $49,324
                                         =======          =======

The Company has no formal audit committee. However, as defined in Sarbanes-Oxley
Act of 2002,  the entire  Board of  Directors  is the  Company's  defacto  audit
committee.

The Company's  principal  accountant,  Baum & Co., P.A. did not engage any other
persons or firms  other than the  principal  accountant's  full-time,  permanent
employees.




                                       22
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) to the Securities  Exchange
Act of 1934,  the Company has duly caused this Form 10-KSB Report for the period
ending  December  31,  2004  to be  signed  on its  behalf  by the  undersigned,
thereunto duly authorized on this 15th day of April, 2005.

                                      TIDELANDS OIL & GAS CORPORATION


                                      BY: /s/ Michael Ward
                                      ------------------------------------------
                                      Michael Ward, President, CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.

Date: April 15, 2005                   /s/ Michael Ward
                                      ------------------------------------------
                                      Michael Ward, President, Director


                                       /s/ James B. Smith
                                      ------------------------------------------
                                      James B. Smith, Senior Vice President, CFO


                                       /s/ Ahmed Karim
                                      ------------------------------------------
                                      Ahmed Karim
                                      Vice President, Director






                                       23
<PAGE>
<TABLE>
<CAPTION>

                                 EXHIBIT INDEX

Exhibit  Description                                                            Location of Exhibit
<S>      <C>                                                                    <C>

2.0      Amendment No. 2 to the Asset Purchase and Sale  and between            Incorporated by reference
         Sonterra Energy Corporation and Oneok Propane Distribution             to Exhibit 10.1
         Company.                                                               8-K filed November 15, 2004
2.1      Amendment No. 1 to the Asset Purchase and Sale  and between            Incorporated by reference to
         Sonterra Energy Corporation and Oneok Propane Distribution             Exhibit 10.2
         Company.                                                               8-K filed November 15, 2004
2.3      Asset Purchase and Sale Agreement by and between Sonterra Energy       Incorporated by reference to
         Corporation and Oneok Propane Distribution Company.                    Exhibit 10.3
                                                                                8-K filed November 15, 2004
2.4      Purchase and Sale Agreement for Reef Ventures, L.P. by and             Incorporated by reference
         between Impact International, LLC ("Impact") and Coahuila              Exhibit 10 to 8-K filed
         Pipeline, LLC, ("Coahuila"), (jointly "Seller") and Tidelands          June 25, 2004
         Oil & Gas Corporation ("Tidelands") and Arrecefe
         Management, LLC ("Arrecefe"), (jointly "Buyer") dated
         May 25, 2004 with Exhibits.
2.5      Purchase and Sale Agreement for Reef Marketing, L.L.C.                 Incorporated by reference
         and  Reef International, L.L.C. by and between Tidelands               Exhibit 10.1 to 8-K filed
         Oil & Gas Corporation and Impact International, L.L.C.                 May 8, 2003
         and Coahuila Pipeline, L.L.C. dated April 16, 2003.
2.6      Agreement of Limited Partnership of Reef Ventures, L.P.                "
2.7      Stock Purchase Warrant Impact                                          "
2.8      Registration Rights Agreement Impact                                   "
3.0      Restated Articles of Incorporation of Tidelands Oil                    Included with this filing
         & Gas Corporation., a Nevada corporation.
3.1      Restated Bylaws of Tidelands Oil & Gas Corporation.                    Included with this filing
4.0      7% Convertible Debenture Mercator Momentum Fund, LP                    Incorporated by reference to
                                                                                Exhibit 10.2 to 8-K filed on
                                                                                December 3, 2004
4.1      7% Convertible Debenture Mercator Momentum Fund III, LP                Incorporated by reference to
                                                                                Exhibit 10.3 to 8-K filed on
                                                                                December 3, 2004
4.2      7% Convertible Debenture Monarch Pointe Fund, LP                       Incorporated by reference to
                                                                                Exhibit 10.4 to 8-K filed on
                                                                                December 3, 2004
10.0     Employment Agreement with Michael Ward                                 Incorporated by reference to
                                                                                Exhibit 10.0 to SB-2
                                                                                filed December 17, 2004.
10.1     Employment Agreement with James B. Smith                               Incorporated by reference to
                                                                                Exhibit 10.1 to SB-2 filed
                                                                                December 17, 2004
10.2     Employment Agreement with Robert Dowies                                Incorporated by reference to
                                                                                Exhibit 10.2 to SB-2 filed
                                                                                December 17, 2004
10.3     2003 Non-Qualified Stock Grant and Option Plan                         Incorporated by reference to
                                                                                Form S-8 filed on June 11, 2003
10.4     Securities Purchase Agreement                                          Incorporated by reference to
10.5     Warrant Margaux                                                        Incorporated by reference to
                                                                                Exhibit 10.5 to SB-2 filed
                                                                                December 17, 2004
10.6     Warrant Margaux                                                        Incorporate by reference to
                                                                                Exhibit 10.6 to SB-2 filed
                                                                                December 17, 2004
10.7     Amended Stock Purchase Warrant Impact International                    Incorporated by reference
                                                                                Exhibit 10 to 8-K filed
                                                                                June 25, 2004
10.8     Registration Rights Agreement with Mercator Group                      Incorporated by reference to
                                                                                Exhibit 10.5 to 8-K filed on
                                                                                December 3, 2004


                                       24

<PAGE>

10.9     Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
         Fund, LP. $0.87                                                        Exhibit 10.6 to 8-K filed on
                                                                                December 3, 2004
10.10    Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
          Fund, LP $0.80                                                        Exhibit 10.7 to 8-K filed on
                                                                                December 3, 2004
10.11    Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
         Fund, III, LP $0.87                                                    Exhibit 10.8 to 8-K filed on
                                                                                December 3, 2004
10.12    Warrant to Purchase Common Stock Mercator Momentum                     Incorporated by reference to
         Fund III, LP $0.80                                                     Exhibit 10.9 to 8-K filed on
                                                                                December 3, 2004
10.13    Warrant to Purchase Common Stock Monarch Pointe                        Incorporated by reference to
         Fund, LP $0.87                                                         Exhibit 10.10 to 8-K filed on
                                                                                December 3, 2004
10.14    Warrant to Purchase Common Stock Monarch Pointe                        Incorporated by reference to
         Fund, LP $0.80                                                         Exhibit 10.11 to 8-K filed on
                                                                                December 3, 2004
10.15    Warrant to Purchase Common Stock Mercator Advisory                     Incorporated by reference to
         Group, LLC. $0.87                                                      Exhibit 10.12 to 8-K filed on
                                                                                December 3, 2004
10.16    Warrant to Purchase Common Stock Mercator Advisory                     Incorporated by reference to
         Group, LLC $0.80                                                       Exhibit 10.13 to 8-K filed on
                                                                                December 3, 2004
10.17    SBC Center Terrace Suite License Agreement                             Included with this filing
21       List of Subsidiaries                                                   Included with this filing
31.1     Chief Executive Officer-Section 302 Certification pursuant             "
         to Sarbanes- Oxley Act.
31.2     Chief Financial Officer- Section 302 Certification pursuant            "
         to Sarbanes-Oxley Act.
32.1     Chief Executive Officer-Section 906 Certification pursuant             "
         to Sarbanes-Oxley Act.
32.2     Chief Financial Officer- Section 906 Certification pursuant            "
         to Sarbanes-Oxley Act.
</TABLE>


                                       25
<PAGE>




                         TIDELANDS OIL & GAS CORPORATION
                        CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 2004 AND 2003














<PAGE>


                         TIDELANDS OIL & GAS CORPORATION
                        CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 2004 AND 2003




                                TABLE OF CONTENTS





INDEPENDENT AUDITOR'S REPORT ....................................            F-3

CONSOLIDATED FINANCIAL STATEMENTS:

     Consolidated Balance Sheets.................................            F-4

     Statements of Consolidated Stockholders' Equity.............            F-5

     Statements of Consolidated Operations ......................            F-6

     Statements of Consolidated Cash Flows.......................      F-7 - F-8

     Notes to Consolidated Financial Statements .................     F-9 - F-25
















                                      F-2

<PAGE>

                              BAUM & COMPANY, P.A.
                        1515 UNIVERSITY DRIVE, SUITE 209
                          CORAL SPRINGS, FLORIDA 33071







                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
Tidelands Oil & Gas Corporation
San Antonio, Texas

We have audited the accompanying  consolidated balance sheets of Tidelands Oil &
Gas  Corporation as of December 31, 2004 and 2003, and the related  consolidated
statements of stockholders' equity (deficit), operations, and cash flows for the
years ended December 31, 2004 and 2003. These consolidated  financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Tidelands  Oil & Gas  Corporation  as of  December  31,  2004 and 2003,  and the
results of their  consolidated  operations and their consolidated cash flows for
the  years  ended  December  31,  2004 and 2003 in  conformity  with  accounting
principles generally accepted in the United States of America.



Baum & Company, P.A.
Coral Springs, Florida
April 13, 2005




                                      F-3

<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   YEARS ENDED

                                     ASSETS
                                     ------

                                                             December 31,    December 31,
                                                                 2004            2003
                                                             ------------    ------------
<S>                                                          <C>             <C>
Current Assets:
   Cash                                                      $  5,459,054    $    894,457
   Cash Restricted (Note 2)                                        25,000               0
   Accounts and Loans Receivable                                  516,387             228
   Inventory                                                       82,523               0
   Prepaid Expenses (Note 3)                                      487,488          22,209
                                                             ------------    ------------
      Total Current Assets                                      6,570,452         916,894
                                                             ------------    ------------

Property Plant and Equipment, Net (Notes 1, 4)                  9,086,313         604,192
                                                             ------------    ------------

Investment - Reef Ventures, L.P.  (Note 14)                          --            98,629
                                                             ------------    ------------

Other Assets:
   Deposits                                                         4,108           3,800
   Deferred Charges                                               116,250               0
   Note Receivable (Note 10)                                      286,606               0
   Goodwill                                                     1,158,937               0
                                                             ------------    ------------
      Total Other Assets                                        1,565,901           3,800
                                                             ------------    ------------

      Total Assets                                           $ 17,222,666    $  1,623,515
                                                             ============    ============

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

Current Liabilities:
   Accounts Payable and Accrued Expenses                     $    574,224    $    813,905
   Notes Payable                                                        0         325,000
                                                             ------------    ------------

      Total Current Liabilities                                   574,224       1,138,905

Long-Term Debt (Note 5)                                        11,731,883            --
                                                             ------------    ------------

      Total Liabilities                                        12,306,107       1,138,905
                                                             ------------    ------------

Commitments and Contingencies (Notes 9, 11, 12)                      --              --

Stockholders' Equity:
   Common Stock, $.001 Par Value per Share,
     100,000,000 Shares Authorized, 61,603,359
     and 44,825,302 Shares Issued and
     Outstanding at 2004 and 2003 Respectively                     61,604          44,826
   Paid-in Capital in Excess of Par Value                      22,537,340      11,072,987
   Subscriptions Receivable                                      (550,000)        (18,000)
   Accumulated (Deficit)                                      (17,132,385)    (10,615,203)
                                                             ------------    ------------
      Total Stockholders' Equity                                4,916,559         484,610
                                                             ------------    ------------

      Total Liabilities and Stockholders' Equity             $ 17,222,666    $  1,623,515
                                                             ============    ============
</TABLE>



           See Accompanying Notes to Consolidated Financial Statements
                                       F-4


<PAGE>
<TABLE>
<CAPTION>

                        TIDELANDS OIL AND GAS CORPORATION
            STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
                     YEARS ENDED DECEMBER 31, 2004 AND 2003

                                                                                                                      Total
                                                                Additional         Stock                          Stockholders'
                                  Common           Stock          Paid-In       Subscription      Accumulated        Equity/
                                  Shares           Amount         Capital        Receivable        (Deficit)        (Deficit)
                               -------------   -------------   -------------    -------------    -------------    -------------
<S>                            <C>             <C>             <C>              <C>              <C>              <C>
Balance -
  December 31, 2002               33,683,329   $      33,684   $   6,715,108    $     (18,000)   $  (9,266,722)   $  (2,535,930)

Common Stock Issued
  for Cash                           781,395             781       1,049,219             --               --          1,050,000

Common Stock Issued
  for Services Regarding
  $1,000,000 Sale of
  Common Stock                       300,000             300         335,700             --               --            336,000

Fee for Services re: Sale
  of Common Stock                       --              --          (336,000)            --               --           (336,000)

Issuances of Common Stock
  for Services                     4,323,500           4,324       2,187,273             --               --          2,191,597

Issuances of Common
  Stock for Conversion of
  Deferred Officers'
  Salaries                         3,596,169           3,596         787,561             --               --            791,157

Issuance of Common Stock
  for Conversion of Deferred
  Director's Fees                    340,909             341          74,659             --               --             75,000

Issuance of Common
  Stock for Conversion of
  Accrued Legal Fees                 500,000             500          62,000             --               --             62,500

Issuance of Common Stock
  for Conversion of Notes
  Payable                          1,300,000           1,300         197,467             --               --            198,767

Net Loss                                --              --              --               --         (1,348,481)      (1,348,481)
                               -------------   -------------   -------------    -------------    -------------    -------------
Balance -
  December 31, 2003               44,825,302   $      44,826   $  11,072,987    $     (18,000)   $ (10,615,203)   $     484,610

Common Stock Issued
  for Cash                         6,725,545           6,725       6,081,592             --               --          6,088,317

Common Stock Issued
  for Services Regarding
  $4,083,335 Sale of Stock           300,000             300         449,700             --               --            450,000

Fee for Services
  Regarding Sale of
  Common Stock                          --              --          (450,000)            --               --           (450,000)

Issuance of Common
  Stock for Services               6,602,800           6,603       4,596,463             --               --          4,603,066

Issuance of Common
  Stock for Subscription           2,500,000           2,500         547,500         (550,000)            --               --

Issuance of Common
  Stock for Conversion of
  Note Payable and
  Accrued Interest                    75,000              75         113,236             --               --            113,311

Write Off Stock
  Subscription Receivable               --              --              --             18,000             --             18,000

Issuance of Common Stock
  to Acquire 50% of
  Sonterra Energy Corp.              574,712             575         125,862             --               --            126,437

Net Loss                                --              --              --               --         (6,517,182)      (6,517,182)
                               -------------   -------------   -------------    -------------    -------------    -------------
Balance
  December 31, 2004               61,603,359   $      61,604   $  22,537,340    $    (550,000)   $ (17,132,385)   $   4,916,559
                               =============   =============   =============    =============    =============    =============
</TABLE>

           See Accompanying Notes to Consolidated Financial Statements
                                       F-5
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                      STATEMENTS OF CONSOLIDATED OPERATIONS
                                   YEARS ENDED

                                                   December 31,    December 31,
                                                       2004            2003
                                                   ------------    ------------
Revenues:
   Gas Sales and Pipeline Fees                     $  1,800,863    $          0
   Construction Service                                  82,975               0
   Other                                                      0         178,856
                                                   ------------    ------------
        Total Revenues                                1,883,838         178,856
                                                   ------------    ------------

Expenses:
   Cost of Sales                                      1,508,891            --
   Operating Expenses                                    99,665          27,767
   Depreciation                                         244,889          43,006
   Interest                                             300,566          53,163
   Officers & Directors Salaries & Fees               1,331,848         313,000
   General and Administrative                         4,965,421       2,624,132
                                                   ------------    ------------

        Total Expenses                                8,451,280       3,061,068
                                                   ------------    ------------

Loss from Operations                                 (6,567,442)     (2,882,212)
Gain on Sale of Subsidiary                                 --         1,533,731
Interest Income                                          50,260            --
                                                   ------------    ------------

Net (Loss)                                         $ (6,517,182)   $ (1,348,481)
                                                   ============    ============

Net (Loss) Per Common Share:
   Basic and Diluted
   -----------------
   (Loss) from Continuing Operations               $      (0.12)   $      (0.07)
   Gain on Sale of Subsidiary                              0.00            0.04
                                                   ------------    ------------
        Total                                      $      (0.12)   $      (0.03)
                                                   ============    ============
Weighted Average Number of Common
   Shares Outstanding                                53,214,230      39,254,316
                                                   ============    ============





           See Accompanying Notes to Consolidated Financial Statements
                                       F-6


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                      STATEMENTS OF CONSOLIDATED CASH FLOWS
                                   YEARS ENDED


                                                   December 31,    December 31,
                                                       2004            2003
                                                   ------------    ------------

Cash Flows Provided (Required) By
  Operating Activities:
    Net (Loss)
      Continuing Operations                        $ (6,517,182)   $ (1,348,481)
      Discontinued Operations                              --              --
    Adjustments to Reconcile Net (Loss)
         to Net Cash Provided (Required) By
         Operating Activities:

    Depreciation                                        244,889          43,006
    Issuance of Common Stock:
      for Services Provided                           4,603,066       2,191,597
    Officers' Salaries                                     --           185,000
      Changes in:
        Accounts Receivable                            (516,159)         16,078
        Stock Subscriptions Receivable                 (532,000)              0
        Inventory                                       (82,523)         12,155
        Prepaid Expenses                               (465,279)         21,392
        Other Assets                                   (116,558)         (1,805)
        Accounts Payable and Accrued Expenses          (201,370)       (677,815)
                                                   ------------    ------------
Net Cash Provided (Required)
   by Operating Activities                           (3,583,116)        441,127
                                                   ------------    ------------

Cash Flows Provided (Required)
  By Investing Activities:
    (Increase) in Investments                          (933,871)        (98,629)
    Acquisitions of Property, Plant & Equipment      (8,727,010)       (134,505)
    Disposals of Oil
    and Gas Properties                                     --           598,924
                                                   ------------    ------------

        Net Cash Provided (Required)
          by Investing Activities                    (9,660,881)        365,790
                                                   ------------    ------------











           See Accompanying Notes to Consolidated Financial Statements
                                       F-7

<PAGE>

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



                                                   December 31,    December 31,
                                                       2004            2003
                                                   ------------    ------------

Cash Flows (Required) Provided
   by Financing Activities:
      Proceeds from Issuance of Common Stock          6,638,317       1,050,000
      Proceeds from Long-Term Loans                   6,731,883            --
      Proceeds from Issuance of
        Convertible Debentures                        5,000,000            --
      Repayment of Short-Term Loans                    (250,000)           --
      Repayment of Loans Due to Related Parties            --          (933,554)
      Proceeds of Loans from Related Parties               --            80,349
      Loan to Related Party                            (286,606)           --
      Repayment of current Maturities of
        Long-Term Debt                                     --          (302,924)
                                                   ------------    ------------

Net Cash (Required) Provided by
  Financing Activities                               17,833,594        (106,129)
                                                   ------------    ------------

Net Increase in Cash                                  4,589,597         700,788
Cash at Beginning of Period                             894,457         193,669
                                                   ------------    ------------
Cash at End of Period                              $  5,484,504    $    894,457
                                                   ============    ============

Supplemental Disclosures of
  Cash Flow Information:
    Cash Payments for Interest                     $     38,320    $     38,773
                                                   ============    ============

    Cash Payments for Income Taxes                 $          0    $          0
                                                   ============    ============
Non-Cash Financing Activities:
  Issuance of Common Stock:
    Operating Activities                           $  4,603,066    $  2,191,597
    Repayment of Loans                                   75,000         198,767
    Payment of Accounts Payable                          38,311          62,500
    Repayment of Loans from Related Parties               --           866,157
    Acquisition Cost                                   126,437            --
                                                  ------------    ------------

    Total Non-Cash Financing Activities           $  4,842,814    $  3,319,021
                                                  ============    ============





           See Accompanying Notes to Consolidated Financial Statements
                                       F-8


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------   ------------------------------------------

         This summary of significant  accounting policies is presented to assist
         in  understanding   these  consolidated   financial   statements.   The
         consolidated  financial  statements  and notes are  representations  of
         management who is responsible for their integrity and objectivity.  The
         accounting  policies  used conform to accounting  principles  generally
         accepted  in the United  States of America  and have been  consistently
         applied in the preparation of these consolidated financial statements.

         Organization
         ------------

         Tidelands  Oil  and  Gas  Corporation  (the  Company  and  formerly  C2
         Technologies,  Inc.),  was  incorporated  in the  state  of  Nevada  on
         February  25,  1997.  On December 1, 2000,  the Company  completed  its
         acquisition of Rio Bravo Energy, LLC and their related entities thereby
         making Rio Bravo Energy, LLC a wholly-owned  subsidiary of the Company.
         During 2004, the Company  acquired all of the stock of Sonterra  Energy
         Corporation  (Sonterra) and through this wholly-owned  subsidiary,  the
         Company purchased all of the assets of a gas distribution  organization
         (see Note  14-Acquisitions).  The Company also, during 2004,  increased
         its ownership  interest from 25% to 98% in Reef Ventures,  LP and their
         wholly-owned  subsidiaries  (Reef  International LLC and Reef Marketing
         LLC) (see Note 14-Acquisitions).

         Nature of Operations
         --------------------

         The Company  currently  operates a natural gas pipeline  between  Eagle
         Pass,  Texas and  Piedras  Negras,  Mexico  and a propane  distribution
         system  serving  residential  customers in the Austin,  Texas area.  In
         addition,  the company is planning the reopening of its gas  processing
         plant  and  pipeline  in Texas and is  engaged  in the  development  of
         natural gas storage facilities in Mexico.

         Principles of Consolidation
         ---------------------------

         The  consolidated  financial  statements  include  the  accounts of the
         Company   and   its   wholly-owned   subsidiaries.    All   significant
         inter-company accounts and transactions have been eliminated.

         Fair Value of Financial Instruments
         -----------------------------------

         Statement of Financial  Accounting  Standards No. 107 "Disclosure About
         Fair Value of Financial  Instruments,"  requires the  disclosure of the
         fair value of off-and-on  balance sheet financial  instruments.  Unless
         otherwise  indicated,  the fair  values  of all  reported  consolidated
         assets  and  consolidated   liabilities,   which  represent   financial
         instruments (none of which are held for trading purposes),  approximate
         the carrying values of such amounts.




                                       F-9
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003




NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------   ------------------------------------------------------

         Use of Estimates
         ----------------

         The preparation of consolidated financial statements in accordance with
         accounting  principles  generally  accepted  in the  United  States  of
         America  requires  management to make  estimates and  assumptions  that
         affect certain reported amounts and  disclosures.  Accordingly,  actual
         results could differ from those estimates.

         Property, Plant and Equipment
         -----------------------------

         Property,   plant  and  equipment  are  recorded  at  historical  cost.
         Depreciation  of  property,  plant and  equipment  is  provided  on the
         straight-line  method over the  estimated  useful  lives of the related
         assets.  Maintenance  and repairs are charged to operations.  Additions
         and  betterments,  which  extend the useful  lives of the  assets,  are
         capitalized.  Upon  retirement or disposal of the  property,  plant and
         equipment,  the cost and accumulated  depreciation  are eliminated from
         the  accounts,   and  the  resulting  gain  or  loss  is  reflected  in
         operations.


         Long-Lived Assets
         -----------------

         Statement of Financial  Accounting Standards 144 (SFAS 144) "Accounting
         for the  Impairment  or disposal of  long-lived  assets"  requires that
         long-lived  assets to be held and used by the Company be  reviewed  for
         impairment  whenever events or changes in  circumstances  indicate that
         the related  carrying  amount may not be  recoverable.  When  required,
         impairment losses on assets to be held and used are recognized based on
         the fair value of the asset,  and  long-lived  assets to be disposed of
         are reported at the lower of carrying amount or fair value less cost to
         sell.

         The  requirements of SFAS 144 and the evaluation by the Company did not
         have a significant  effect on the  consolidated  financial  position or
         results of consolidated operations.









                                      F-10

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------   ------------------------------------------------------

         Income Taxes
         ------------

         The Company  accounts for income taxes in accordance  with Statement of
         Financial  Accounting  Standards 109 (SFAS 109)  "Accounting for Income
         Taxes,"  which  requires the  establishment  of a deferred tax asset or
         liability for the  recognition of future  deductions of taxable amounts
         and operating  loss  carryforwards,  Deferred tax expense or benefit is
         recognized as a result of the change in the deferred asset or liability
         during the year. If necessary,  the Company will  establish a valuation
         allowance  to reduce any  deferred  tax asset to an amount  which will,
         more likely than not, be realized.

         Net (Loss) Per Common Share
         ---------------------------

         The  Company  accounts  for net  (loss)  per share in  accordance  with
         Statement of Financial  Accounting  Standard 128 ("SFAS 128") "Earnings
         per  Share".  Basic  (loss)  per  share  is based  upon the net  (loss)
         applicable to the weighted average number of common shares  outstanding
         during the period.  Diluted (loss) per share reflects the effect of the
         assumed  conversions  of  convertible  securities and exercise of stock
         options  only in the  periods  in which  such  affect  would  have been
         dilutive.

         Goodwill
         --------

         Goodwill represents the excess of purchase price and related costs over
         the value  assigned  to the net  tangible  and  identifiable  assets of
         businesses  acquired.  Statement of Financial  Accounting Standards No.
         142 (SFAS142), "Goodwill and other Intangible Assets" requires Goodwill
         to be tested for impairment on an annual basis and between annual tests
         in certain circumstances,  and written down when impaired,  rather than
         being amortized as previous accounting standards required. Furthermore,
         SFAS 142 requires purchased intangible assets other than goodwill to be
         amortized  over their useful lives unless these lives are determined to
         be indefinite. In management's opinion, there has been no impairment to
         the value of the  value of  recorded  goodwill  during  the year  ended
         December 31, 2004.

         New Accounting Standards
         ------------------------

         In June 2001,  Statement of  Financial  Accounting  Standards  No. 143,
         "Accounting  for Asset  Retirement  Obligations",  (SFAS  No.  143) was
         issued and is effective for fiscal years beginning after June 15, 2002.
         SFAS  No.  143  addresses   financial   accounting  and  reporting  for
         obligations  associated  with the  retirement  of  tangible  long-lived
         assets and the associated asset retirement  costs. The adoption of SFAS
         143 does not  have a  material  effect  on our  consolidated  financial
         statements.





                                      F-11

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------   ------------------------------------------------------


         New Accounting Standards (Continued)
         ------------------------------------

         In July 2002,  Statement of  Financial  Accounting  Standards  No. 146,
         "Accounting  for Costs  Associated  with Exit or Disposal  Activities",
         (SFAS No. 146) was issued and is effective for periods  beginning after
         December 31, 2002.  SFAS No. 146  requires,  among other  things,  that
         costs  associated with an exit activity  (including  restructuring  and
         employee  and  contract  termination  costs)  or  with  a  disposal  of
         long-lived  assets be  recognized  when the liability has been incurred
         and can be measured at fair  value.  Companies  must record in earnings
         from continuing  operations  costs  associated with an exit or disposal
         activity  that  does  not  involve  a  discontinued  operation.   Costs
         associated  with an activity  that  involves a  discontinued  operation
         would be  included  in the  results  of  discontinued  operations.  The
         implementation  of the  provisions  of SFAS  No.  146  does  not have a
         material effect on the consolidated financial statements.

         In December 2002,  Statement of Financial Accounting Standards No. 148,
         Accounting for Stock-Based Compensation,  (SFAS No. 148) was issued and
         is effective for fiscal years  beginning  after December 15, 2002. SFAS
         No. 148 amends the disclosure  requirements of SFAS No. 123, Accounting
         for  Stock-Based  Compensation,  (SFAS No.  123) to  require  prominent
         disclosures in both interim and annual  financial  statements about the
         method of accounting  for  stock-based  employee  compensation  and the
         effect of the method used on reported results. SFAS No. 148 also amends
         SFAS  No.  123 to  provide  alternative  methods  of  transition  for a
         voluntary  change to the fair  value  based  method of  accounting  for
         stock-based  employee  compensation.  The  Company  had  decided not to
         voluntarily  adopt the SFAS No. 123 fair value method of accounting for
         stock-based  employee  compensation.   Therefore,  the  new  transition
         alternatives  allowed in SFAS No. 148 will not affect the  consolidated
         financial statements.

NOTE 2 - RESTRICTED CASH
------   ----------------

         Restricted cash consists of a certificate of deposit to secure a letter
         of credit issued to the Railroad Commission of Texas.








                                      F-12

<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 3 - PREPAID EXPENSES
------   ----------------

         A summary of prepaid  expenses at December  31, 2004 and  December  31,
         2003 is as follows:

                                                     December 31,   December 31,
                                                         2004           2003
                                                     ------------   ------------

         Prepaid Expenses                            $      4,802   $     16,000
         Prepaid Insurance                                 82,318          6,139
         Prepaid License Fee                               79,500              0
         Prepaid Financing                                310,000              0
         Prepaid Rent                                       8,301              0
         Prepaid Interest                                   2,567             70
                                                     ------------   ------------
                                                     $    487,488   $     22,209
                                                     ============   ============

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
------   -----------------------------

         A summary of  property,  plant and  equipment  at December 31, 2004 and
         December 31, 2003 is as follows:


                                                                                  Estimated
                                                    December 31,   December 31,    Economic
                                                        2004           2003           Life
                                                   ------------   ------------   ------------
          <S>                                      <C>            <C>            <C>
          Pre-Construction Costs:
            International Crossings to Mexico      $     27,601   $     20,600   N/A
             Mexican Gas Storage Facility
               and Related Pipelines                    928,232       112,708    N/A
             Propane Distribution Systems               207,415             0    N/A
                                                   ------------   ------------
                Total                                 1,163,248        133,308
         Office Furniture, Equipment and
           Leasehold Improvements                        46,141         19,449    5 Years
         Pipelines - Domestic                           431,560        431,560   15 Years
         Pipeline - Eagle Pass, TX to Piedras
           Negras, Mexico                             6,106,255              0   20 Years
         Gas Processing Plant                           186,410        166,410   15 Years
         Tanks & Lines - Propane Distribution
           System                                     1,596,439              0    5 Years
         Machinery and Equipment                         57,180              0    5 Years
         Trucks, Autos and Trailers                      63,175              0    5 Years
                                                   ------------   ------------

                Total                                 9,650,408        750,727
         Less:  Accumulated Depreciation                564,095        146,535
                                                   ------------   ------------

                Net Property, Plant and Equipment  $  9,086,313   $    604,192
                                                   ============   ============
         </TABLE>

         Depreciation expense for the years ended December 31, 2004 and December
         31, 2003 was $244,889 and $43,006 respectively.





                                      F-13

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 5 - LONG-TERM DEBT
------   --------------

         A summary of long-term  debt at December 31, 2004 and December 31, 2003
         is as follows:

                                                     December 31,   December 31,
                                                         2004           2003
                                                     ------------   ------------


         Note Payable, Unsecured, 10% Interest
           Bearing, Maturing December 31, 2004       $          0   $    250,000

         Note Payable, Unsecured, 10% Interest
           Until April 17, 2001, 18% Interest
             Thereafter, Payable on Demand                      0         75,000

         Note Payable, Secured, Interest Bearing
           at 2% Over Prime Rate, Maturing
              May 25, 2008                              6,731,883              0

         Convertible Debentures, Unsecured,
            7% Interest Bearing,
               Maturing May 18, 2006                    5,000,000              0
                                                     ------------   ------------
                                                       11,731,883        325,000

         Less:  Current Maturities                              0        325,000
                                                     ------------   ------------

                   Total Long-Term Debt              $ 11,731,883   $          0
                                                     ============   ============

         Summary of Terms of Convertible Debenture and Warrants:
         -------------------------------------------------------

         On November 18, 2004,  the Company  entered into a Securities  Purchase
         Agreement with Mercator  Momentum Fund, LP, Mercator Momentum Fund III,
         LP, Monarch Pointe Fund, LP,  (collectively,  "the Funds") and Mercator
         Advisory  Group,  LLC  ("Mercator").  In exchange for  $5,000,000,  the
         Company  issued  to  the  "Funds"  and  Mercator   Advisory  Group,  7%
         convertible  debentures with a maturity date of May 18, 2006. Under the
         terms of the  agreement,  the  Company  is  obligated  to make  monthly
         interest payments until maturity of $29,166.67.


                                      F-14

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 5 - LONG-TERM DEBT (CONTINUED)
------   --------------------------


         The 7% Convertible Debentures are convertible into the Company's common
         stock at a 15% discount to the market price at the time of  conversion,
         subject to a $0.45 floor and a $0.76 ceiling.

         The Company has granted the Funds and Mercator  registration  rights on
         these  securities.  If the  Company  does  not  have  its  registration
         statement  effective  within 90 days from  filing,  or extend  its best
         efforts to do so, the  discount  will be increased to 25% of the market
         price at the time of conversion.

                  o        In connection  with this financing the Company issued
                           6,578,948 common stock warrants which expire November
                           18,  2007.  The warrants  are  exercisable  at prices
                           ranging from $.80 to $.87.

NOTE 6 - INCOME TAXES
------   ------------

         The Company files a consolidated federal income tax return. At December
         31,  2004,  the  Company  had a net  operating  loss  carry  forward of
         approximately  $16,330,000  available to offset future federal  taxable
         income through 2024.

         The components of the deferred tax assets and  liabilities  accounts at
         December 31, 2004 are as follows:

                     Total Deferred Tax Assets                        $5,517,000
                     Less:  Valuation Allowance                        5,517,000
                                                                      ----------
                     Deferred Tax Asset (Liability)                   $        0
                                                                      ==========










                                      F-15

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

NOTE 7 - COMMON STOCK TRANSACTIONS
------   -------------------------

         During January and February 2004, the Company issued  2,722,223  shares
         of restricted common stock for $4,083,335

         On January 8, 2004,  the  Company  authorized  the  issuance of 200,000
         shares of its common stock for 2004 legal fees valued at $344,000 under
         the Stock Grant and Option Plan.

         On January 8, 2004, the Company issued 300,000 shares of its restricted
         valued at $450,000  regarding  the private  placement of the  Company's
         common stock.

         On January 8, 2004,  the  Company  authorized  the  issuance of 700,000
         shares of its restricted common stock for consulting services valued at
         $1,050,000. These shares were issued during January and February 2004.

         On January 8, 2004,  the  Company  issued  52,800  shares of its common
         stock valued at $90,816 to a Company  officer under the Stock Grant and
         Option Plan.

         On January 8, 2004, the Company  approved the issuance of 75,000 shares
         of its restricted common stock in payment of a $75,000  promissory note
         and $38,311 of accrued  interest.  These shares were issued February 3,
         2004.

         During the second  quarter 2004, the Company issued 3,322 shares of its
         restricted common stock for $4,983.

         On April 12, 2004,  the Company issued 500,000 shares of its restricted
         common stock valued at $497,000 to Impact International,  Inc. pursuant
         to the terms of the purchase of Reef Venture, L.P. described above.

         On April 15, 2004,  the Company issued 700,000 shares of its restricted
         common stock for consulting services valued at $728,000.

         On April 15, 2004,  the Company issued 450,000 shares of its restricted
         common stock for consulting services valued at $468,000.

         On July 2, 2004,  the Company  issued  500,000 shares of its restricted
         common stock valued at $250,625 to Impact International,  Inc. pursuant
         to the terms of purchase of Reef Ventures, L.P. described above.

         On  August  1,  2004,  the  Company  issued  1,000,000  shares  of  its
         restricted  common  stock  valued at  $383,750  pursuant  to a one-year
         contract to provide consulting services.


                                      F-16

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 7 - COMMON STOCK TRANSACTIONS (CONTINUED)
------   -------------------------------------

         On  September  14, 2004,  the Company  issued  4,000,000  shares of its
         restricted  common  stock  for  $2,000,000  which was  received  during
         October 2004.

         On  September  14,  2004,  the  Company  issued  500,000  shares of its
         restricted  common stock valued at $106,875  pursuant to an  employment
         contract with an officer of the Company.

         On September 14, 2004,  three current  officers and directors,  a prior
         officer/director  and an  employee  of the  Company  each  exercised  a
         warrant  to  acquire  500,000  shares of  restricted  common  stock for
         $110,000.  The parties also executed a one-year promissory note bearing
         5% P.A.  interest  in favor of the  Company  and a  security  agreement
         against the newly issued stock until full payment has been remitted.

         On October 14, 2004, the Company approved issuance of 500,000 shares of
         its  restricted  common stock valued at $160,000 for legal  services in
         connection with the preparation of a SB-2 registration  statement filed
         on December 17, 2004.

         On  November  1, 2004,  the Company  approved  the  issuance of 500,000
         shares of its common stock valued at $435,000 pursuant to an employment
         contract with an officer of the Company.

         On  November  1,  2004,  the  Company  issued  500,000  shares  of  its
         restricted  common  stock  valued at $110,000 to Impact  International,
         Inc. pursuant to the terms of purchase of Reef Ventures, L.P. described
         above.

         On  November  1,  2004,  the  company  issued  574,712  shares  of  its
         restricted  common  stock  valued at  $126,437 in  connection  with the
         acquisition of 50% of the  outstanding  common stock at Sonterra Energy
         Corporation, now a wholly-owned subsidiary of the Company.

         On  November  3,  2004,  the  Company  issued  500,000  shares  of  its
         restricted  common stock valued at $151,000  pursuant to an  employment
         contract with an officer of the Company.









                                      F-17

<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 8 - 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:

                                                              Shares Reserved      Weighted
                                     Stock          Stock     for Convertible       Average
                                    Options        Warrants      Debentures      Exercise Price
                                   ----------     ----------     ---------      --------------
<S>                                <C>            <C>            <C>            <C>
Outstanding - December 31, 2003     2,500,000      8,516,807             0          $0.31
Granted / Issued                      250,000     10,562,141     1,111,111           0.69
Exercised                          (2,500,000)    (1,500,000)            0           0.14
                                   ----------     ----------     ---------          -----

Outstanding - December 31, 2004       250,000     17,578,948     1,111,111          $0.60
                                   ==========     ==========     =========          =====
</TABLE>


         Note:    The  11,111,111  shares  represents  the maximum  shares which
                  could be issued upon conversion of the convertible  debentures
                  at the minimum  stock price  level of $.45;  6,578,948  shares
                  represents  the  minimum  shares  which  could be issued  upon
                  conversion of the convertible  debentures at the maximum stock
                  price  level  of  $.76.   (See  NOTE  5-Summary  of  Terms  of
                  Convertible Debentures and Warrants)

         The 2003  Non-Qualified  Stock Grant and Option Plan has 210,122 shares
         remaining  available for future  issuance while the 2004  Non-Qualified
         Stock Grant and Option Plan has 4,500,000  shares  remaining  available
         for future issuance.

                     Accounting for Stock Based Compensation

         As allowed by  Statement  of Financial  Accounting  Standards  No. 123,
         Accounting  for  Stock-Based  Compensation,  the Company has elected to
         apply  the  intrinsic-value-based  method  of  accounting.  Under  this
         method, the Company measures stock based compensation for option grants
         to employees  assuming that options granted at market price at the date
         of grant have no intrinsic  value.  Restricted stock awards were valued
         based on the discounted market price of a share of non-restricted stock
         on the date earned.  No  compensation  expense has been  recognized for
         stock-based  incentive  compensation  plans  other than for  restricted
         stock awards pursuant to executive employment agreements.

NOTE 9 - COMMITMENT FOR SUITE LICENSE AGREEMENT
------   --------------------------------------

         On June 4, 2004,  the Company  entered into a Suite  License  Agreement
         with the San Antonio Spurs, L.C.C. commencing July 1, 2004 for a period
         of five  years.  The annual  license fee for the first year is $159,000
         and is  subject  to a 6% per annum  price  escalation  thereafter.  The
         annual fee is payable in installments as indicated in the agreement.




                                      F-18

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 9 - COMMITMENT FOR SUITE LICENSE AGREEMENT (Continued)
------   --------------------------------------------------

         The future annual license fee commitments are as follows:

                2005                             $  168,540
                2006                                178,652
                2007                                189,371
                2008                                200,733
                                                 ----------
                                                 $  737,296
                                                 ==========

NOTE 10 - RELATED PARTY TRANSACTION
-------   -------------------------

         The Company  executed an agreement in January 2004 with a related party
         to provide charter air transportation for its employees,  customers and
         contractors to job sites and other  business  related  destinations.  A
         $300,000 5% interest  bearing  loan due in January 2007 was made by the
         Company  regarding  the  transaction.  The loan  balance is credited by
         airtime charges at standard  industry rates offset by interest  charges
         computed on the average monthly balance. At December 31, 2004, the loan
         balance was $286,606.

 NOTE 11 - LEASES
 -------   ------

         The Company  entered into an operating  lease on August 1, 2003 for the
         rental of its  executive  office at a monthly rent of $3,400,  expiring
         November 30, 2005.

         The Company's  wholly owned  subsidiary,  Sonterra Energy  Corporation,
         entered into an  operating  lease on October 1, 2004 for a propane tank
         site at an annual rent of $10,000 expiring September 30, 2019.

         Future commitments under the operating lease are as follows:

                Year Ending                        Total
                -----------                      ----------
                   2005                          $   47,400
                 2006-2019                          137,500
                                                 ----------
         Total Minimum Lease Payments            $  184,900
                                                 ==========

         Rent expense for the years ended December 31, 2004 and 2003 was $43,300
         and $28,100, respectively.







                                      F-19

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 12 - COMMITMENTS AND CONTINGENCIES
-------   -----------------------------

         The  Company  is subject to the laws and  regulations  relating  to the
         protection  of the  environment.  The  Company's  policy  is to  accrue
         environmental and related cleanup costs of a non-capital nature when it
         is both probable that a liability has been incurred and when the amount
         can be  reasonably  estimated.  Although it is not possible to quantify
         with any degree of  certainty  the  financial  impact of the  Company's
         continuing   compliance   efforts,   management   believes  any  future
         remediation or other compliance  related costs will not have a material
         adverse  effect on the  consolidated  financial  condition  or reported
         results of consolidated operations of the Company.

NOTE 13 - LITIGATION
--------  ----------

         On January 6, 2003,  the Company was 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 others, in
         the 150th Judicial District Court,  Bexar County,  Texas,  Cause Number
         2002-C1-16421.  The  lawsuit  was  initiated  by  Northern  Natural Gas
         Company  (Northern)  when it sued Betty Lou  Sheerin for her failure to
         make  payments  on a note  she  executed  payable  to  Northern  in the
         original  principal amount of $1,950,000.  Northern's suit was filed on
         November 13, 2002.  Sheerin answered  Northern's  lawsuit on January 6,
         2003.  Sheerin's answer generally denied  Northern's  claims and raised
         the  affirmative   defenses  of  fraudulent   inducement  by  Northern,
         estoppel,  waiver and the further  claim that the note does not comport
         with the legal requirements of a negotiable instrument.

         Sheerin seeks a judicial ruling that Northern be denied any recovery on
         the note. Sheerin's answer included a counterclaim against Northern, ZG
         Gathering,  and others  generally  alleging,  among other things,  that
         Northern,  ZG  Gathering,  Ltd.  and others,  fraudulently  induced her
         execution of the note. Northern has filed a general denial of Sheerin's
         counterclaims.  Sheerin's  answer  included a third  party  cross claim
         against  Tidelands Oil & Gas  Corporation.  She alleges that  Tidelands
         entered into an agreement to purchase the Zavala  Gathering System from
         ZG  Gathering,  Ltd. and that,  as a part of the  agreement,  Tidelands
         agreed to satisfy  all of the  obligations  due and owing to  Northern,
         thereby relieving Sheerin of all obligations she had to Northern on the
         promissory note in question.








                                      F-20


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 13 - LITIGATION (CONTINUED)
--------  ----------------------

         She  alleges  that  Tidelands  is liable  to her for all of her  actual
         damages, costs of the lawsuit and other unstated relief.  Tidelands and
         Sheerin  agreed to delay the  Tidelands'  answer date in order to allow
         time for mediation of the case. Tidelands  participated in mediation on
         March  11,  2003.  The case was not  settled  at that  time.  Tidelands
         answered the Sheerin suit on March 26, 2003.  Tidelands'  answer denies
         all of Sheerin's  allegations.  No discovery has been completed at this
         time. Based on initial  investigations,  however,  Tidelands appears to
         have a number of potential  defenses to Sheerin's  claims and Tidelands
         intends to aggressively defend the lawsuit.

         In September  2002, as a pre-closing  deposit to the purchase of the ZG
         pipelines,  the Company executed a $300,000 promissory note to Betty L.
         Sheerin,  a partner of ZG  Gathering,  Ltd.  In  addition,  the Company
         issued  1,000,000  shares of its  restricted  common  stock to  various
         partners  of  ZG  Gathering,   Ltd.  The  company   believes  that  the
         aforementioned  promissory  note and shares of restricted  common stock
         will be cancelled  based upon the outcome of the  litigation  described
         above.  Accordingly,  the Company's  financial  statements reflect that
         position.

NOTE 14 - ACQUISITIONS
-------   -------------

         Reef Ventures, L.P. Transaction
         -------------------------------

         On May 25, 2004, the Company entered into a Purchase and Sale Agreement
         for Reef  Ventures,  L.P.  by and  between  Impact  International,  LLC
         ("Impact") and Coahuila Pipeline, LLC. ("Coahuila"), (jointly "Seller")
         and  Tidelands  Oil  &  Gas  Corporation   ("Tidelands")  and  Arrecefe
         Management, LLC ("Arrecefe"), (jointly "Buyer"). The transaction closed
         on June 18, 2004.

         Purchase and Sale Agreement - Background
         ----------------------------------------

         Reef  Ventures,  L.P. was formed in Texas on April 16,  2003.  Coahuila
         owned one  percent  (1%) of Reef  Ventures,  L.P.  Impact was a limited
         partner of Reef  Ventures and owned  seventy-two  percent (72%) of Reef
         Ventures,  L.P. Tidelands formed Arrecefe  Management,  L.L.C., a Texas
         limited  liability  company,  to act as the  general  partner  for Reef
         Ventures, L.P. Tidelands had already owned twenty-five percent (25%) of
         Reef Ventures, L.P.



                                      F-21

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 14 - ACQUISITIONS (CONTINUED)
-------   ------------------------

         Summary of Purchase and Sale Agreement

         The Company and Arrecefe  purchased  Impact's and  Coahuila's  units of
         interest in Reef Ventures, L.P., respectively. Impact financed the sale
         of the Reef interests by taking back a promissory  note (the "Tidelands
         Note") in the amount of $6,523,773 payable as follows:

         (a) The "Tidelands Note" bears interest at prime plus two (2%) percent.
         The note calls for quarterly interest payments during the first fifteen
         (15)  months,  and  thereafter,  principal  and  interest  would be due
         quarterly amortized over twenty (20) years, but not to exceed an amount
         equal to One Hundred (100%) percent of Reef's net cash flow. The unpaid
         balance of the note would be due at the end of the fourth year.

         (b) The Tidelands' note is secured by (i) a deed of trust (the "Deed of
         Trust")  from the  Partnership  to Impact,  covering  the  pipeline and
         related  facilities,  easements,  rights-of-way  and the Gas  Contracts
         which  comprise the project,  being that 12-inch  pipeline  Project for
         transporting  natural  gas from Eagle  Pass  Texas to  Piedras  Negras,
         Mexico, defined in the Partnership Agreement.

         The Deed of Trust would  include a present  assignment of Reef's rights
         to receive cash flow from the Gas Project which would be exercisable by
         Impact only upon default under the Tidelands' Note, Reef guarantee,  or
         Reef Deed of Trust. (ii) a guaranty of payment and performance from the
         Partnership (the "Partnership Guaranty"),  and (iii) a pledge agreement
         whereby the Partnership  pledges to Impact its 98% membership  interest
         in Reef.

         Summary of Amendment to Warrant and Registration Rights Agreements

         During 2004, the Stock Purchase Warrant  Agreement dated April 16, 2003
         was amended.  The amended  Agreement  provides that the total number of
         shares  which  Impact is entitled  to receive  under the warrant is Ten
         Million  (10,000,000)  shares of  Tidelands'  common  stock,  plus such
         additional  shares  of  common  stock  which  may be  issued  upon  the
         occurrence of an untimely  registration  event, less the 500,000 shares
         previously  issued to Impact on April 13, 2004.  The exercise  price is
         $0.335 per share.  The  expiration  date of the  warrant is extended to
         April 16, 2006.






                                      F-22

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 14 -  ACQUISITIONS (CONTINUED)
-------    ------------------------

         The Company has agreed to use its best  efforts to register  the shares
         under the warrant with the Securities  and Exchange  Commission so that
         Impact  will  be  permitted  to  publicly  resell  the  common  shares.
         Tidelands  agreed  to use its best  efforts  to keep  the  registration
         statement  effective as long as it is necessary  for Impact to sell the
         shares.

         If the  registration  statement is declared  effective  (i) by April 7,
         2005, if the  registration is on Form S-3, or (ii) July 7, 2005, if the
         registration  statement is on Form SB-2 or any other registration form,
         the   registration   statement   will  be  deemed   timely  (a  "Timely
         Registration").  In the  event of a Timely  Registration,  Impact  will
         exercise the warrant for all of the remaining  shares under the warrant
         on a cash basis payable by Impact through the execution of a promissory
         note payable to Tidelands (the "Impact Note"), as of the effective date
         of the registration  statement.  In the event that the Company does not
         accomplish a Timely Registration,  then Impact may exercise the warrant
         at  anytime  after  the  date  which  is the  last  date  for a  Timely
         Registration,  at its option on a cash basis or pursuant to Section 1.2
         of the warrant  agreement on a net exercise  cashless basis for all the
         remaining  shares under the warrant.  If Impact  elects to exercise the
         warrants on a net exercise  cashless basis, we will increase the number
         of shares  available  for  issuance  under the warrant,  regardless  of
         whether issued for cash or on a net exercise  basis,  so that the total
         number of shares issued would total 10,000,000 shares.

         If the registration  statement is not filed or declared effective on or
         before July 14, 2004,  the Company  will be obligated to issue  500,000
         common  shares under the cashless  exercise  provisions  of the amended
         Stock Purchase  Warrant.  For each 90 day period that the  registration
         statement  was not  filed or  declared  effective,  the  Company  would
         continue to issue 500,000 share blocks of common stock,  until declared
         effective.  Accordingly,  the Company issued 500,000  restricted common
         shares during July and 500,000 restricted common shares during November
         since the registration statement was not filed by October 14, 2004.










                                      F-23
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 14 - ACQUISITIONS (CONTINUED)
-------   ------------------------

         The unaudited pro-forma condensed consolidated results of operations of
         the  Company  have  been  prepared  as  if  the   acquisition   of  the
         seventy-three percent (73%) of Reef Ventures, L.P. had occurred January
         1, 2004:

                              Tidelands Oil & Gas Corporation
                      Condensed Consolidated Statement of Operations
                               Year Ended December 31, 2004
                                        "Proforma"
                                        (Unaudited)


         Revenues                                                 $   4,526,340
         Net (Loss)                                               $  (6,577,712)
         Net (Loss) Per Common Share - Basic                      $       (0.12)
         Weighted Average Shares Outstanding - Basic                 53,214,230
         Net (Loss) Per Common Shares - Diluted                   $       (0.09)
         Weighted Average Shares Outstanding - Diluted               73,192,763

         Stock Purchase Warrant

         On April 16, 2003, the Company issued a stock purchase  warrant for the
         purchase of common  shares of the  Company's  outstanding  stock at the
         time of  exercise,  which as of December  31,  2003 would be  8,516,807
         shares.  This number  represents common stock available under the terms
         and conditions of a Stock Purchase  Warrant  Agreement where Impact has
         the right to acquire 19% of the issued and outstanding  common stock of
         the  Company.  The  warrant  agreement  is subject to an  anti-dilution
         provision.  Impact  has  given  the  Company  notice  of its  intent to
         exercise the warrant.  The Company has not issued any common  shares to
         date.

         This sale included the commitment of Impact Energy Services and related
         entities  to  construct  and  fund,  up  to  $8,000,000,  for  multiple
         international pipelines from South Texas to Mexico.

         Pursuant to contractual obligation for these transactions,  the maximum
         exercise price is $.335 which could be reduced to zero depending on the
         market price at time of exercise.








                                      F-24


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE 14 - ACQUISITIONS (CONTINUED)
-------   ------------------------

         ONEOK PROPANE DISTRIBUTION COMPANY
         ----------------------------------

         On November 1, 2004, through the Company's subsidiary,  Sonterra Energy
         Corporation,  we entered into an Asset Purchase and Sale Agreement with
         ONEOK  Propane  Distribution  Company,  a  division  of  ONEOK  Propane
         Company,  a Delaware  corporation.  The Company purchased the assets of
         this  division  for Two  Million  ($2,000,000).  The assets  consist of
         propane distribution  systems,  including gas mains, yard lines, meters
         and storage tanks,  serving  thirteen  residential  subdivisions in the
         Austin, Texas, Area.

         The propane  distribution system is comprised of approximately 25 miles
         of gas main pipe,  75,000 feet of yard lines,  850 meters,  and storage
         tanks with a combined capacity of 156,000 gallons.

         The purchase price was allocated as follows:

         Gas mains, yard lines, meters and storage tanks              $1,708,786
         Inventory of propane and construction materials                  76,415
         Goodwill                                                        219,799
                                                                      ----------
                                                                      $2,000,000
                                                                      ==========





                                      F-25