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

                                  FORM 10-KSB/A
                                 Amendment No. 1

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

                      For the year ended December 31, 2005
                         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 78248
                     (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. [ ]

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

The issuer had operating  revenues of $1,725,756 for the year ended December 31,
2005.

This report contains a total of 31 pages. The Exhibit Index appears on page 33.

As of June 15, 2006,  there were 80,525,815  shares of the issuer's common stock
outstanding.

The aggregate  market value of the issuer's voting stock held by  non-affiliates
was $58,827,842  based on the low bid price on that date as reported by the NASD
OTC  Electronic  Bulletin Board April 14, 2006. The sum excludes the shares held
by officers,  directors,  and stockholders  whose ownership  exceeded 10% of the
outstanding  shares at December  31,  2005,  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>

EXPLANATORY NOTE:

We have amended our Annual Report on Form 10-KSB for the year ended December 31,
2005, filed on April 17, 2006. This amendment  replaces the Company's "Report of
Independent  Registered  Public Accounting Firm" (the Audit Report) contained in
the  original  filing with a revised  Audit  Report.  The revised  Audit  Report
includes  disclosure  in the Notes to the  Financial  Statements  regarding  the
Company's revenue recognition policy as well as separately disclosing impairment
charges  associated with long-lived assets and goodwill.  Additionally,  we have
revised  Item  12  titled,  "Certain  Relationships  and  Related  Transactions"
correcting stock issuance dates.



                         TIDELANDS OIL & GAS CORPORATION
                                  FORM 10-KSB/A

                                December 31, 2005

                                                                            Page


PART I

ITEM 7.  Financial Statements..............................................

PART III

ITEM 12.  Certain Relationships and Related Transactions...................
ITEM 13.  Exhibits.................................

SIGNATURES.................................................................
EXHIBIT INDEX..............................................................



















<PAGE>

ITEM 7.  FINANCIAL STATEMENTS


                         TIDELANDS OIL & GAS CORPORATION
                        CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 2005 AND 2004




                                TABLE OF CONTENTS





INDEPENDENT AUDITOR'S REPORT..............................................     3

CONSOLIDATED FINANCIAL STATEMENTS:

     Consolidated Balance Sheets..........................................     4

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

     Statements of Consolidated Operations ...............................     6

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

     Notes to Consolidated Financial Statements...........................  9-31










<PAGE>



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




             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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, 2005 and 2004, and the related  statements of
consolidated  stockholders'  equity,  operations,  and cash  flows for the years
ended December 31, 2005 and 2004. 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,  2005 and 2004,  and the
results of their  consolidated  operations and their consolidated cash flows for
the  years  ended  December  31,  2005 and 2004 in  conformity  with  accounting
principles generally accepted in the United States of America.

As more fully described in Note 2 to the financial statements,  the accompanying
consolidated balance sheets and related statements of consolidated shareholders'
equity,  operations  and cash flows  have been  restated  to reflect  the proper
accounting  for  certain  transactions  which  occurred  during  the year  ended
December 31, 2004. In our original  report dated April 13, 2005, we expressed an
unqualified opinion on the consolidated financial statements, and our opinion on
the revised statements, as expressed herein, remains unqualified.

Baum & Company, P.A.
Coral Springs, Florida
April 14, 2006


                                       -3-

<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   YEARS ENDED

                                     ASSETS
                                     ------

                                                             December 31,    December 31,
                                                                 2005            2004
                                                             ------------    ------------
                                                                              (Restated)
<S>                                                          <C>             <C>
Current Assets:
   Cash                                                      $  1,113,911    $  5,459,054
   Accounts and Loans Receivable                                  468,458         516,387
   Inventory                                                      142,204          82,523
   Prepaid Expenses                                               183,938         487,488
                                                             ------------    ------------
      Total Current Assets                                      1,908,511       6,545,452
                                                             ------------    ------------

Property Plant and Equipment, Net                              10,042,088       9,086,313
                                                             ------------    ------------

Other Assets:
   Deposits                                                        14,004           4,108
   Cash Restricted                                                 76,803          25,000
   Deferred Charges                                                     0         116,250
   Note Receivable                                                288,506         286,606
   Goodwill                                                     1,158,937       6,358,937
                                                             ------------    ------------
      Total Other Assets                                        1,538,250       6,790,901
                                                             ------------    ------------

      Total Assets                                           $ 13,488,849    $ 22,422,666
                                                             ============    ============

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

Current Liabilities:
   Current Maturities - Note Payable                         $    225,000    $          0
   Accounts Payable and Accrued Expenses                        1,225,554         574,224
                                                             ------------    ------------

      Total Current Liabilities                                 1,450,554         574,224

Long-Term Debt                                                  4,271,768      11,731,883
                                                             ------------    ------------

      Total Liabilities                                         5,722,322      12,306,107
                                                             ------------    ------------

Commitments and Contingencies
   Derivative Liability                                                 0       5,168,000
                                                             ------------    ------------


Stockholders' Equity:
      Common Stock, $.001 Par Value per Share,
       100,000,000 Shares Authorized, 78,495,815
       and 61,603,359 Shares Issued and
       Outstanding at 2005 and 2004 Respectively                   78,497          61,604
      Additional Paid-in Capital                               40,818,174      30,354,195
      Subscriptions Receivable                                   (550,000)       (550,000)
      Minority Interest                                              --              --
      Accumulated (Deficit)                                   (32,580,144)    (24,917,240)
                                                             ------------    ------------
         Total Stockholders' Equity                             7,766,527       4,948,559
                                                             ------------    ------------

         Total Liabilities and Stockholders' Equity          $ 13,488,849    $ 22,422,666
                                                             ============    ============
</TABLE>

           See Accompanying Notes to Consolidated Financial Statements

                                       -4-


<PAGE>
<TABLE>
<CAPTION>

                        TIDELANDS OIL AND GAS CORPORATION
                 STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
                YEARS ENDED DECEMBER 31, 2005 AND 2004 (RESTATED)



                                                                Stock
                                                              Additional                         Total
                                Common          Stock          Paid-In       Subscription     Accumulated    Stockholders'
                                Shares          Amount         Capital        Receivable       (Deficit)        Equity
                             ------------    ------------    ------------    ------------    ------------    ------------
<S>                          <C>             <C>             <C>             <C>             <C>             <C>
Balance
  December 1, 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       9,321,213            --              --         9,327,816

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

Beneficial Conversion
 Feature - Convertible
 Debentures                          --              --         3,092,105            --              --         3,092,105

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                             --              --              --              --       (14,302,037)    (14,302,037)
                             ------------    ------------    ------------    ------------    ------------    ------------

Balance
  December 31, 2004            61,603,359    $     61,604    $ 30,354,195    $   (550,000)   $(24,917,240)   $  4,948,559

Issuance of Common
  Stock for Services            2,970,000           2,971       4,019,554            --              --         4,022,525

Issuance of Common
  Stock for Conversion of
  Convertible Debentures        6,707,456           6,707       4,993,293            --              --         5,000,000

Beneficial Conversion
  Feature -Convertible
  Debentures                         --              --          (756,328)           --              --          (756,328)

Cancellation of Stock
  Previously Issued for
  Services per Litigation
  Settlement                     (285,000)           (285)       (297,540)           --              --          (297,825)

Exercise of Stock
  Purchase Warrants             7,500,000           7,500       2,505,000            --              --         2,512,500

Net Loss                             --              --              --              --        (7,662,904)     (7,662,904)
                             ------------    ------------    ------------    ------------    ------------    ------------

Balance
December 31, 2005              78,495,815    $     78,497    $ 40,818,174    $   (550,000)   $(32,580,144)   $  7,766,527
                             ============    ============    ============    ============    ============    ============
</TABLE>


           See Accompanying Notes to Consolidated Financial Statements

                                       -5-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                      STATEMENTS OF CONSOLIDATED OPERATIONS
                                   YEARS ENDED




                                                   December 31,    December 31,
                                                       2005            2004
                                                   ------------    ------------
                                                    (Restated)      (Restated)
Revenues:
      Gas Sales and Pipeline Fees                  $  1,725,756    $  1,800,863
      Construction Service                              135,567          82,975
      Other                                                   0               0
                                                   ------------    ------------
           Total Revenues                             1,861,323       1,883,838
                                                   ------------    ------------

Expenses:
      Cost of Sales                                   1,003,386       1,508,891
      Operating Expenses                                202,766          99,665
      Depreciation                                      485,481         244,889
      Interest                                          611,363         300,566
      Beneficial Conversion Feature Interest           (756,329)      3,092,105
      Sales, General and Administrative               8,033,249      11,022,019
      Impairment Losses - Long-Lived Assets             392,000               0
      Impairment Losses - Goodwill                    5,200,000      15,358,000
                                                   ------------    ------------

         Total Expenses                              15,171,916      31,626,135
                                                   ------------    ------------

(Loss) from Operations                              (13,310,593)    (29,742,297)
Gain on Reduction of Derivative Liability             5,168,000      15,390,000
Loss on Equipment Sale                                   (3,167)              0
Other Income                                             61,956               0
Interest and Dividend Income                            123,075          50,260
Minority Interest                                          --              --
Litigation Settlement                                   297,825               0
                                                   ------------    ------------

Net (Loss)                                         $ (7,662,904)   $(14,302,037)
                                                   ============    ============

Net (Loss) Per Common Share:
      Basic and Diluted                            $      (0.11)   $      (0.27)
      -----------------                            ============    ============

Weighted Average Number of Common
      Shares Outstanding -
      Basic and Diluted                              70,049,587      53,214,230
      -----------------                            ============    ============





           See Accompanying Notes to Consolidated Financial Statements

                                       -6-
<PAGE>

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




                                                   December 31,    December 31,
                                                       2005            2004
                                                   ------------    ------------
                                                                    (Restated)

Cash Flows Provided (Required) By
  Operating Activities:
    Net (Loss)                                     $ (7,662,904)   $(14,302,037)
   Adjustments to Reconcile Net (Loss)
      To Net Cash Provided (Required) By
      Operating Activities:

    Depreciation                                        485,481         244,889
    Goodwill                                                  0      (5,200,000)
    Impairment Losses                                 5,592,000      15,358,000
    Change in Derivative Instrument                  (5,168,000)    (10,222,000)
    Loss on Disposal of Equipment                         3,167               0
    Issuance of Common Stock:
     For Services Provided                            4,022,525       9,327,816
     Beneficial Conversion Feature - Interest          (756,329)      3,092,105
       Return of Issued Stock
         Litigation Settlement                         (297,825)              0
       Changes In:
         Accounts Receivable                             47,929        (516,159)
         Inventory                                      (59,681)        (82,523)
         Prepaid Expenses                               303,550        (465,279)
         Deferred Charges                               116,250        (116,250)
         Deposits                                       (61,699)        (25,308)
         Accounts Payable and Accrued Expenses          651,330        (201,370)
                                                   ------------    ------------

Net Cash (Required)
   By Operating Activities                           (2,784,206)     (3,108,116)
                                                   ------------    ------------

Cash Flows Provided (Required)
  By Investing Activities:
      (Increase) In Investments                               0        (901,871)
      Acquisitions of Property, Plant & Equipment    (1,837,222)     (8,727,010)
      Disposals of Equipment                                800               0
                                                   ------------    ------------

   Net Cash (Required)
            By Investing Activities                  (1,836,422)     (9,628,881)
                                                   ------------    ------------



           See Accompanying Notes to Consolidated Financial Statements

                                       -7-
<PAGE>

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



                                                   December 31,    December 31,
                                                       2005            2004
                                                   ------------    ------------
                                                                    (Restated)

Cash Flows Provided (Required)
   By Financing Activities:
      Proceeds from Issuance of Common Stock                  0       6,088,317
      Proceeds from Long-Term Loans                     277,385       6,731,883
      Proceeds from Issuance Of
        Convertible Debentures                                0       5,000,000
      Repayment of Short-Term Loans                           0        (250,000)
      Reduction of Stock Subscription Receivable              0          18,000
      Loan to Related Party                              (1,900)       (286,606)
                                                   ------------    ------------

Net Cash Provided By
  Financing Activities                                  275,485      17,301,594
                                                   ------------    ------------

Net Increase (Decrease) in Cash                      (4,345,143)      4,564,597
Cash at Beginning of Period                           5,459,054         894,457
                                                   ------------    ------------
Cash at End of Period                              $  1,113,911    $  5,459,054
                                                   ============    ============

Supplemental Disclosures of
   Cash Flow Information:
      Cash Payments for Interest                   $    356,504    $     38,320
                                                   ============    ============

      Cash Payments For Income Taxes               $          0    $          0
                                                   ============    ============

Non-Cash Financing Activities:
Return of Issued Stock For
  Beneficial Conversion Feature - Interest         $   (756,329)   $  3,092,105
Litigation Settlements                                 (297,825)              0
Increase of Stock Subscription Receivable                  --           550,000
Issuance of Common Stock:                                     0               0
    Operating Activities                              4,022,525       9,327,816
    Repayment of Notes                                2,512,500          75,000
    Conversion of Debentures                          5,000,000               0
    Payment of Accounts Payable                               0          38,311
    Acquisition Cost                                          0         126,437
                                                   ------------    ------------

      Total Non-Cash Financing Activities          $ 10,480,871    $ 13,209,669
                                                   ============    ============



           See Accompanying Notes to Consolidated Financial Statements

                                       -8-


<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

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 15-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 15-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 engaged in the  development  of natural  gas
         storage  facilities in Mexico and other  natural gas pipelines  between
         the United States and 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.



                                       -9-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

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 resulted
         in impairment  losses of $392,000,  all of which is attributable to the
         Rio Bravo Energy, LLC, Consolidated Group.

         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 carry  forwards,  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.




                                      -10-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

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

         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  (SFAS  142),  "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. As the result of an acquisition during the
         second quarter of 2004, the Company recorded  goodwill in the amount of
         $20,561,800.  The Company evaluates the carrying value of goodwill on a
         quarterly  basis. As part of the evaluation,  the company  compares the
         carrying value of the intangible asset with its fair value to determine
         whether  there  has  been  impairment.  As  a  result  of  management's
         impairment  review  of  goodwill  during  2004 and  2005,  the  Company
         recognized  impairment losses of $15,358,000 and $5,200,000 in 2004 and
         2005 respectively.

         Revenue Recognition
         -------------------

         The Company's revenues for 2005 were derived principally (80%) from the
         sale of  propane  gas to  residential  customers,  as  well as  charges
         generated from  transportation  fees (13%).  During 2004, the Company's
         main source of revenue  (71%) was derived  from the sale of natural gas
         to  commercial  accounts,  as  well  as  the  sale  of  propane  gas to
         residential  customers  (21%) and the charging of  transportation  fees
         (4%).  Additional  revenues,  7% and 4% in 2005 and 2004  respectively,
         were the  result of  construction  services  performed  in the  various
         subdivisions which were the recipients of the propane gas hook-ups.

         Revenues are recognized at the time of monthly  billings based on meter
         readings provided by independent contractors.



                                      -11-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

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

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

         In  June  2001,   Statement  of  Financial  Accounting  Standards  143,
         "Accounting for Asset  Retirement  Obligations",  (SFAS 143) was issued
         and is effective for fiscal years  beginning  after June 15, 2002. SFAS
         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.

         In July 2002,  Statement of  Financial  Accounting  Standards  No. 146,
         "Accounting  for Costs  Associated  with Exit or Disposal  Activities",
         (SFAS 146) was issued and is  effective  for  periods  beginning  after
         December 31, 2002.  SFAS 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.







                                      -12-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


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

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

         In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of Statement
         133 On Derivative  Instruments  And Hedging  Activities".  SFAS No. 149
         amends and clarifies accounting for derivative  instruments,  including
         certain  derivative  instruments  embedded in other contracts,  and for
         hedging  activities  under  SFAS No.  133.  SFAS No.  149 is  generally
         effective  for contracts  entered into or modified  after June 30, 2003
         and for hedging  relationships  designated  after June 30, 2003. In May
         2003, the FASB issued SFAS No. 150,  "Accounting For Certain  Financial
         Instruments With Characteristics Of Both Liabilities And Equity".  SFAS
         No. 150 improves the accounting for certain financial  instruments that
         previously  might  have been  accounted  for as  equity.  SFAS No.  150
         required  that  those  instruments  be  classified  as  liabilities  in
         statements  of  financial  position.  SFAS  No.  150 is  effective  for
         financial  instruments entered into or modified after May 31, 2003. The
         Company  adopted  both SFAS 149 and SFAS 150 in 2003.  The  adoption of
         these standards have resulted in beneficial  conversion feature charges
         (credits) of $3,092,105 and ($756,329) in 2004 and 2005 respectively.

NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS
------   ------------------------------------------------------

         During  the  fourth  quarter  of  2005,   management   reevaluated  its
         accounting  treatment for several complex  transactions  which occurred
         during the year ended December 31, 2004. After considerable  review and
         outside  consultation,  management determined that their interpretation
         of the accounting  guidelines for these involved issues was not correct
         and thereby  their  recording of the initial  transaction  needed to be
         restated.  Accordingly,  management  has chosen to restate in this note
         the consolidated  financial  statements for the year ended December 31,
         2004, as well as the interim  reports for the quarters  ended March 31,
         June 30, and September 30, 2005.  Following are the transactions  which
         precipitated the restatements:

         (A) Goodwill associated with the acquisition of Reef Ventures, LP, (May
            2004), and the related  derivative  liability for warrants issued as
            part of the purchase price.  Management,  after their review of EITF
            00-19 "Accounting For Derivative  Financial  Instruments Indexed To,
            and  Potentially  Settled In, A Company's Own Stock",  has concluded
            that it is  necessary  to  account  for  goodwill  and  the  related
            derivative  liability  associated with the May 2004 acquisition (see
            Note 15). At December  31, 2004,  the net effect of this  adjustment
            results in an increase in goodwill of $5,200,000, an increase in the
            derivative  liability  of  $5,168,000,  a gain on  reduction  of the
            derivative  liability of $15,390,000 and a goodwill  impairment loss
            of $15,358,000.




                                      -13-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------   -----------------------------------------------------------------

         (B) Issuance of convertible  debentures with freestanding  warrants and
            embedded beneficial conversion features. Management, after reviewing
            SFAS  133 and  EITF  00-19,  has  determined  that  the  convertible
            debentures issued in November,  2004, contain an embedded beneficial
            conversion feature.  Accordingly,  at December 31, 2004, this charge
            to the statement of operations amounted to $3,092,105.

         (C) Valuation  of  stock  issued  for  services  and  financing  costs.
            Management  reviewed all stock  issued for  services  and  financing
            costs in 2004,  and in accordance  with the  provisions  outlined in
            EITF 96-18 and SFAS 123, management increased the charges associated
            with these stock issuances by $4,724,750 at December 31, 2004.

         All of the  transactions  referred to above relate to non-cash  charges
         and do not affect the Company's revenues, cash flows from operations or
         liquidity.





















                                      -14-

<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------   -----------------------------------------------------------------


                    SUMMARY OF RESTATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
                                -----------------


                                       Previously        Restatement       Restated
                                        Reported          Adjustment         Total
                                      ------------       ------------    ------------
<S>                                   <C>                <C>             <C>
Consolidated Balance Sheets:
   Total Assets                       $ 17,222,666 (1)   $  5,200,000    $ 22,422,666
   Total Liabilities                    12,306,107 (2)      5,168,000      17,474,107
                                      ------------       ------------    ------------
   Stockholders' Equity               $  4,916,559       $     32,000    $  4,948,559
                                      ============       ============    ============

Consolidated Results of Operations:
   Revenues                              1,883,838                  0       1,883,838
   Expenses                              8,451,280 (3,4)   23,174,855      31,626,135
                                      ------------       ------------    ------------
Net (Loss) from Operations              (6,567,442)       (23,174,855)    (29,742,297)

   Derivative Gain                               0 (5)     15,390,000      15,390,000
   Other Income                             50,260                  0          50,260
                                      ------------       ------------    ------------

Net (Loss)                            $ (6,517,182)      $ (7,784,855)   $(14,302,037)
                                      ============       ============    ============

Net (Loss) per Common Share:
    Basic and Diluted                 $      (0.12)                      $      (0.27)
                                      ============                       ============

Weighted Average Number of Common
    Shares Outstanding:
    Basic and Diluted                   53,214,230                         53,214,230
                                      ============                       ============
</TABLE>








                                      -15-
<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------   -----------------------------------------------------------------

                   SUMMARY OF RESTATED INTERIM REPORTS - 2005

                                     MARCH 31, 2005                                 JUNE 30, 2005
                     --------------------------------------------    --------------------------------------------
                      Previously      Restatement     Restated        Previously     Restatement      Restated
                       Reported       Adjustment        Total          Reported       Adjustment        Total
<S>                  <C>                             <C>             <C>                             <C>
ASSETS
Current Assets:
  Cash and Cash
   Equivalents       $  4,623,198            --      $  4,623,198    $  3,468,839            --      $  3,468,839
  Accounts and
   Loans Receivable       404,488            --           404,488         309,323            --           309,323
  Inventory                60,159            --            60,159          75,573            --            75,573
  Prepaid Expenses        418,362            --           418,362         302,531            --           302,531
                     ------------    ------------    ------------    ------------    ------------    ------------
    Total Current
     Assets             5,506,207            --         5,506,207       4,156,266            --         4,156,266
                     ------------    ------------    ------------    ------------    ------------    ------------
Property, Plant
 and Equipment, Net     9,245,326            --         9,245,326       9,630,591            --         9,630,591
                     ------------    ------------    ------------    ------------    ------------    ------------
Other Assets:
  Deposits                  6,608            --             6,608           6,608            --             6,608
  Deferred Charges         38,750            --            38,750               0            --                 0
  Restricted Cash          75,000            --            75,000          75,846            --            75,846
  Note Receivable         287,170            --           287,170         286,114            --           286,114
  Goodwill              1,158,937   (1) 5,200,000       6,358,937       1,158,937            --         1,158,937
                     ------------    ------------    ------------    ------------    ------------    ------------
    Total Other
     Assets             1,566,465       5,200,000       6,766,465       1,527,505            --         1,527,505
                     ------------    ------------    ------------    ------------    ------------    ------------
    Total Assets     $ 16,317,998    $  5,200,000    $ 21,517,998    $ 15,314,362    $          0    $ 15,314,362
                     ============    ============    ============    ============    ============    ============
LIABILITIES AND
 STOCKHOLDERS' EQUITY
Current
 Liabilities:
  Current
   Maturities of
   Note Payable      $    225,000    $       --      $    225,000    $    112,500    $       --      $    112,500
  Convertible
   Debenture Payable    5,000,000            --         5,000,000       2,480,000            --         2,480,000
  Accounts
   Payable and
   Accrued Expenses       438,830            --           438,830         656,302            --           656,302
  Derivative
   Liability                    0   (2) 8,062,500       8,062,500               0            --                 0
                     ------------    ------------    ------------    ------------    ------------    ------------
    Total Current
     Liabilities        5,663,830       8,062,500      13,726,330       3,248,802            --         3,248,802
                     ------------    ------------    ------------    ------------    ------------    ------------
Long-Term Debt:
Note Payable,
 less Current
 Maturities             6,592,301            --         6,592,301       4,255,990            --         4,255,990
                     ------------    ------------    ------------    ------------    ------------    ------------
    Total
     Liabilities       12,256,131       8,062,500      20,318,631       7,504,792            --         7,504,792
                     ------------    ------------    ------------    ------------    ------------    ------------
Stockholders' Equity:
  Common Stock             62,364          62,364          74,281          74,281          77,157          77,157
  Additional
   Paid-in Capital     22,918,580      13,151,198      36,069,778      28,655,789       9,531,144      38,186,933
  Subscriptions
   Receivable            (550,000)       (550,000)       (550,000)       (550,000)       (550,000)       (550,000)
  Minority Interest          --              --              --              --              --              --
  Accumulated
   Deficit            (18,369,077)    (16,013,698)    (34,382,775)    (20,370,500)     (9,531,144)    (29,901,644)
                     ------------    ------------    ------------    ------------    ------------    ------------
    Total
     Stockholders'
     Equity             4,061,867      (2,862,500)      1,199,367       7,809,570            --         7,809,570
                     ------------    ------------    ------------    ------------    ------------    ------------
Total Liabilities
 and Stockholders'
 Equity              $ 16,317,998    $  5,200,000    $ 21,517,998    $ 15,314,362    $          0    $ 15,314,362
                     ============    ============    ============    ============    ============    ============
</TABLE>
                                      -16-

<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------   -----------------------------------------------------------------

                   SUMMARY OF RESTATED INTERIM REPORTS - 2005


                                  SEPTEMBER 30, 2005
                     --------------------------------------------
                      Previously      Restatement
                       Reported       Adjustment         Total
ASSETS
Current Assets:
  Cash and Cash
   Equivalents       $  2,336,430            --      $  2,336,430
  Accounts and
   Loans Receivable       208,668            --           208,668
  Inventory                90,332            --            90,332
  Prepaid Expenses        208,879            --           208,879
                     ------------    ------------    ------------
    Total Current
     Assets             2,844,309            --         2,844,309
                     ------------    ------------    ------------
Property, Plant
 and Equipment, Net    10,097,779            --        10,097,779
                     ------------    ------------    ------------
Other Assets:
  Deposits                  6,708            --             6,708
  Deferred Charges              0            --                 0
  Restricted Cash         101,471            --           101,471
  Note Receivable         284,944            --           284,944
  Goodwill              1,158,937            --         1,158,937
                     ------------    ------------    ------------
    Total Other
     Assets             1,552,060            --         1,552,060
                     ------------    ------------    ------------
    Total Assets     $ 14,494,148    $          0    $ 14,494,148
                     ============    ============    ============
LIABILITIES AND
 STOCKHOLDERS' EQUITY
Current
 Liabilities:
  Current
   Maturities of
   Note Payable      $    168,750    $       --      $    168,750
  Convertible
   Debenture Payable      980,000            --           980,000
  Accounts
   Payable and
   Accrued Expenses       642,457            --           642,457
  Derivative
   Liability                    0            --                 0
                     ------------    ------------    ------------
    Total Current
     Liabilities        1,791,207            --         1,791,207
                     ------------    ------------    ------------
Long-Term Debt:
Note Payable,
 less Current
 Maturities             4,252,304            --         4,252,304
                     ------------    ------------    ------------
    Total
     Liabilities        6,043,511            --         6,043,511
                     ------------    ------------    ------------
Stockholders' Equity:
  Common Stock
  Additional
   Paid-in Capital     30,369,493       9,682,940      40,052,433
  Subscriptions
   Receivable
  Minority Interest
  Accumulated
   Deficit            (21,446,013)     (9,682,940)    (31,128,953
                     ------------    ------------    ------------
    Total
     Stockholders'
     Equity             8,450,637            --         8,450,637
                     ------------    ------------    ------------
Total Liabilities
  and Stockholders'
 Equity              $ 14,494,148    $          0    $ 14,494,148
                     ============    ============    ============


                                      -17-
<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------   -----------------------------------------------------------------

             SUMMARY OF RESTATED INTERIM REPORTS - 2005 (CONTINUED)



                                  Three Months Ended March 31, 2005                 Six Months Ended June 30, 2005
                            --------------------------------------------    --------------------------------------------
                             Previously                       Restated       Previously                      Restated
                              Reported       Restatement        Total         Reported       Restatement       Total
                            ------------    ------------    ------------    ------------    ------------    ------------
<S>                         <C>             <C>             <C>             <C>             <C>             <C>
Revenues:
  Gas Sales and
   Pipeline Fees            $    586,949    $       --      $    586,949    $    849,490    $       --      $    849,490
  Construction Services           41,126            --            41,126         119,121            --           119,121
                            ------------    ------------    ------------    ------------    ------------    ------------
    Total Revenues               628,075            --           628,075         968,611            --           968,611
                            ------------    ------------    ------------    ------------    ------------    ------------
Expenses:
    Cost of Sales                284,679            --           284,679         415,248            --           415,248
    Operating Expenses            66,774            --            66,774         129,137            --           129,137
    Depreciation                 115,441            --           115,441         236,395            --           236,395
    Interest                     209,787            --           209,787         393,860            --           393,860
    Beneficial Conversion
     Feature Interest                  0   (3) 4,736,843       4,736,843               0  (3)    135,789         135,789
    Sales, General
     and Administrative        1,220,911   (4)   597,500       1,818,411       3,098,570  (4)  1,578,500       4,677,070
    Impairment
     Losses                            0               0               0               0  (1)  5,200,000       5,200,000
                            ------------    ------------    ------------    ------------    ------------    ------------
    Total Expenses             1,897,592       5,334,343       7,231,935       4,273,210       6,914,289       11,187,49
                            ------------    ------------    ------------    ------------    ------------    ------------
(Loss) from
 Operations                   (1,269,517)     (5,334,343)     (6,603,860)     (3,304,599)     (6,914,289)    (10,218,888)

    Derivative Gain
     (Loss)                         --     (5)(2,894,500)     (2,894,500)           --    (5)  5,168,000       5,168,000
    Gain (Loss) on
     Equipment Sale               (3,167)           --            (3,167)         (3,167)           --            (3,167)
    Interest and
     Dividend Income              35,992            --            35,992          69,651            --            69,651
    Minority Interest               --              --              --              --              --              --
    Litigation
     Settlement                        0            --                 0               0            --                 0
                            ------------    ------------    ------------    ------------    ------------    ------------
 Net (Loss)                 $ (1,236,692)   $ (8,228,843)   $ (9,465,535)    $(3,238,11)    $ (1,746,289)    $(4,984,40)
                            ============    ============    ============    ============    ============    ============
Net (Loss) Per
 Common Share,
 Basic and Diluted:         $      (0.02)   $       --      $      (0.15)   $      (0.05)   $       --      $      (0.07)
                            ============    ============    ============    ============    ============    ============
Weighted Average
 Number of Common
 Shares Outstanding:
   Basic and Diluted          61,893,359            --        61,893,359      67,941,251            --        67,941,251
                            ============    ============    ============    ============    ============    ============
</TABLE>



                                      -18-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------   -----------------------------------------------------------------

             SUMMARY OF RESTATED INTERIM REPORTS - 2005 (CONTINUED)



                                Nine Months Ended September 30, 2005
                            --------------------------------------------
                             Previously
                              Reported       Restatement       Total
                            ------------    ------------    ------------
Revenues:
  Gas Sales and
   Pipeline Fees            $  1,097,505    $       --      $  1,097,505
  Construction Services          119,121            --           119,121
                            ------------    ------------    ------------
    Total Revenues             1,216,626            --         1,216,626
                            ------------    ------------    ------------
Expenses:
    Cost of Sales                635,113            --           635,113
    Operating Expenses           210,545            --           210,545
    Depreciation                 360,817            --           360,817
    Interest                     503,950            --           503,950
    Beneficial Conversion
     Feature Interest                  0  (3)   (501,659)       (501,659)
    Sales, General
     and Administrative        4,022,271  (4)  2,556,200       6,578,471
    Impairment
     Losses                            0  (1)  5,200,000       5,200,000
                            ------------    ------------    ------------
    Total Expenses             5,732,696       7,254,541      12,987,237
                            ------------    ------------    ------------
(Loss) from
 Operations                   (4,516,070)     (7,254,541)    (11,770,611)

    Derivative Gain
     (Loss)                         --    (5)  5,168,000       5,168,000
    Gain (Loss) on
     Equipment Sale               (3,167)           --            (3,167)
    Interest and
     Dividend Income              96,240            --            96,240
    Minority Interest
    Litigation
     Settlement                  109,369  (4)    188,456         297,825
                            ------------    ------------    ------------
 Net (Loss)                 $ (4,313,62)    $ (1,898,085)   $ (6,211,713)
                            ============    ============    ============
Net (Loss) Per
 Common Share,
 Basic and Diluted:         $      (0.06)   $       --      $      (0.09)
                            ============    ============    ============
Weighted Average
 Number of Common
 Shares Outstanding:
   Basic and Diluted          69,378,850            --        69,378,850
                            ============    ============    ============


(1)      Adjust goodwill to period ending balances.

(2)      Adjust to recognize fair value of derivative  financial  instruments as
         liabilities  at  December  31,  2004  ($5,168,000)  and  first  quarter
         adjustment  ($2,894,500)  necessitated  by  marking  to market the fair
         value of the derivative.

(3)      Adjustments associated with the issuance of convertible debentures.

(4)      Adjustments  to  recognize  the fair  value  of  services  and  related
         expenses paid for by the issuance of stock.

(5)      Adjustments to recognize the gain / (loss) on changes in the derivative
         liability when the conversion price became variable.


                                      -19-
<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

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

         A summary of prepaid  expenses at December  31, 2005 and  December  31,
         2004 is as follows:

                                            December 31,   December 31,
                                                2005           2004
                                            ------------   ------------

         Prepaid Expenses-Other             $      2,741   $      4,802
         Prepaid Insurance                        88,340         82,318
         Prepaid License Fee                      84,270         79,500
         Prepaid Financing                             0        310,000
         Prepaid Rent                              7,500          8,301
         Prepaid Interest                          1,087          2,567
                                            ------------   ------------
                                            $    183,938   $    487,488
                                            ============   ============

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

         A summary of  property,  plant and  equipment  at December 31, 2005 and
         December 31, 2004 is as follows:

                                                                             Estimated
                                               December 31,   December 31,    Economic
                                                   2005           2004          Life
                                               ------------   ------------   ---------
<S>                                            <C>            <C>            <C>
Pre-Construction Costs:
    International Crossings to Mexico          $    540,880   $     27,601   N/A
       Mexican Gas Storage Facility
           and Related Pipelines                  1,926,616        928,232   N/A
        Domestic LNG System                          18,319              0
       Propane Distribution Systems                       0        207,415   N/A
                                               ------------   ------------
             Total                                2,485,815      1,163,248
Office Furniture, Equipment and
  Leasehold Improvements                            174,412         46,141    5 Years
Pipelines - Domestic                                      0        431,560   15 Years
Pipeline - Eagle Pass, TX to Piedras
  Negras, Mexico                                  6,106,255      6,106,255   20 Years
Gas Processing Plant                                      0        186,410   15 Years
Tanks & Lines - Propane Distribution
  System                                          1,895,494      1,596,439    5 Years
Machinery and Equipment                              66,493         57,180    5 Years
Trucks, Autos and Trailers                          136,940         63,175    5 Years
                                               ------------   ------------

            Total                                10,865,409      9,650,408
Less:  Accumulated Depreciation                     823,321        564,095
                                               ------------   ------------

           Net Property, Plant and Equipment   $ 10,042,088   $  9,086,313
                                               ============   ============
</TABLE>

         Depreciation expense for the years ended December 31, 2005 and December
         31, 2004 was $485,581 and $244,889 respectively.

NOTE 5 - RESTRICTED CASH
------   ----------------

         Restricted  cash consists of  certificates of deposit to secure letters
         of credit issued to the Railroad Commission of Texas.


                                      -20-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 6 - LONG-TERM DEBT
------   --------------

         A summary of long-term  debt at December 31, 2005 and December 31, 2004
         is as follows:

                                                   December 31,   December 31,
                                                       2005           2004
                                                   ------------   ------------

         Note Payable, Secured, Interest Bearing
           at 2% Over Prime Rate, Maturing
              May 25, 2008                            4,496,468      6,731,883

         Convertible Debentures, Unsecured,
            7% Interest Bearing,
               Maturing May 18, 2006                          0      5,000,000
                                                   ------------   ------------
                                                      4,496,468     11,731,883

         Less:  Current Maturities                      225,000              0
                                                   ------------   ------------

                   Total Long-Term Debt            $  4,271,468   $ 11,731,883
                                                   ============   ============

NOTE 7 - INCOME TAXES
------   ------------

         The Company files a consolidated federal income tax return. At December
         31,  2005,  the  Company  had a net  operating  loss  carry  forward of
         approximately  $24,200,000  available to offset future federal  taxable
         income through 2025.

         The components of the deferred tax assets and  liabilities  accounts at
         December 31, 2005 are as follows:

                  Total Deferred Tax Assets          $ 8,470,000
                  Less:  Valuation Allowance           8,470,000
                                                     -----------
                  Deferred Tax Asset (Liability)     $         0
                                                     ===========

NOTE 8 - COMMON STOCK TRANSACTIONS
------   -------------------------

         On January 3, 2005,  the company  issued  200,000  shares of its common
         stock for 2005 legal fees valued at $100,000 under the 2004 Stock Grant
         and Option Plan.

         On  February  1,  2005,  the  company  issued  500,000  shares  of  its
         restricted common stock valued at $797,500 to Impact International, LLC
         pursuant to the terms of the purchase of Reef Ventures, L.P.

         On February  25,  2005,  the Company  approved  the  issuance of 60,000
         shares of its  restricted  common  stock valued at $82,000 for investor
         public relations services.

         On May 1, 2005,  the Company  issued  500,000  shares of its restricted
         common stock valued at $900,000 to Impact  International,  LLC pursuant
         to the terms of the purchase of Reef Ventures, L.P.


                                      -21-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 8 - COMMON STOCK TRANSACTIONS (CONTINUED)
------   -------------------------------------

         On June 23, 2005,  the Company issued Impact  International,  LLC Seven
         Million Five Hundred Thousand  (7,500,000) common shares in response to
         Impact's  exercise of their  common  stock  purchase  warrants.  Impact
         tendered  payment  in the form of a  promissory  note in the  amount of
         $2,512,500.  The note will reduce and offset the principal balance owed
         by the Company under the Purchase and Sale Agreement dated May 25, 2004
         whereby it acquired the Eagle Pass pipeline by purchasing an additional
         73% of Reef Ventures, LP.

         On June 27, 2005, the Company authorized the issuance of 150,000 shares
         of its restricted  common stock valued at $199,500 to each of the three
         members of the Board of  Directors,  Michael R. Ward,  Ahmed  Karim and
         Carl Hessel.

         On June 27, 2005, the Company authorized the issuance of 150,000 shares
         of common stock under a 2004 non-qualified  stock grant and option plan
         which was  registered  on Form S-8,  November 5, 2004.  The shares were
         valued at $199,125  and were issued to James B.  Smith,  the  Company's
         Senior Vice President,  CFO and newly appointed  member of the Board of
         Directors.

         On July 1, 2005, the company issued  1,000,000 shares of its restricted
         common stock valued at $1,230,000  pursuant to an  employment  contract
         with an officer of the Company.

         On July 1, 2005,  the Company  issued 50,000  shares of its  restricted
         common stock valued at $61,500 pursuant to an employment  contract with
         an officer of the Company.

         On July 1, 2005,  the Company  issued 10,000  shares of its  restricted
         common stock valued at $12,150 to an employee of the Company.

         On August 18,  2005,  Tidelands  settled the legal  dispute  with L. L.
         Capital Group,  LLC whereby L. L. Capital Group,  LLC canceled  285,000
         shares of the 1,000,000 shares of the Company's restricted common stock
         which it had  received  for a one  year  consulting  contract  executed
         August 4, 2004. The 285,000 shares canceled were valued at $297,825.

         On December 20, 2005,  the Company  issued  10,000 shares of its common
         stock  valued at $8,350  under the 2004  Stock  Grant and  Option  Plan
         pursuant to an employment contract with an officer of the Company.

         On  December  20,  2005,  the  Company  issued  40,000  shares  of  its
         restricted  common  stock  valued at 33,400  pursuant to an  employment
         contract with an officer of the Company.




                                      -22-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 8 - COMMON STOCK TRANSACTIONS (CONTINUED)
------   -------------------------------------

         On June 14, 2005,  June 27,  2005,  July 5, 2005,  September  19, 2005,
         September  29, 2005 and November 2, 2005,  Mercator  Momentum Fund III,
         L.P., Monarch Pointe Fund, Ltd (the "Funds") and Robinson Reed, Inc. (a
         managed account of the "Funds") notified the Company of their intent to
         convert  portions of their  remaining 7%  convertible  debentures  into
         common stock which were converted as follows:

                                                           Price
                                                            Per      Number of
            Entity                              Amount     Share      Shares
            ------                              ------     -----      ------

         June 14, 2005
         -------------
         Mercator Momentum Fund, III, L.P.   $  273,600   $0.76      360,000
         Mercator Momentum Fund, L.P.           380,000    0.76      500,000
         Monarch Pointe Fund, Ltd               866,400    0.76    1,140,000

         June 27, 2005
         -------------
         Mercator Momentum Fund, III, L.P.      175,000    0.76      230,263
         Mercator Momentum Fund, L.P.           250,000    0.76      328,947
         Monarch Pointe Fund, Ltd               575,000    0.76      756,579

         July 5, 2005
         ------------
         Robinson Reed, Inc.                    200,000    0.76      263,158

         September 19, 2005
         ------------------
         Mercator Momentum Fund, L.P.            92,000    0.70      131,429
         Mercator Momentum Fund III, L.P.        60,000    0.70       85,714
         Monarch Pointe Fund, Ltd.              196,000    0.70      280,000
         Robinson Reed, Inc.                     52,000    0.70       74,286

         September 29, 2005
         ------------------
         Mercator Momentum Fund, L.P.           207,000    0.71      291,549
         Mercator Momentum Fund, III, L.P.      144,000    0.71      202,817
         Mercator Momentum Fund, Ltd.           459,000    0.71      646,479
         Robinson Reed, Inc.                     90,000    0.71      126,761

         November 2, 2005
         ----------------
         Mercator Momentum Fund, L.P.        $  214,000    0.76      261,579
         Mercator Momentum Fund, III, L.P.      134,900    0.76      177,500
         Monarch Pointe Fund, LTD               473,100    0.76      622,500
         Robinson Reed, Inc.                    158,000    0.76      217,895
                                             ----------           ----------
                                             $5,000,000            6,687,456
                                             ==========           ==========

         The "Funds" shares and the "Impact"  shares issued were all included in
         the  Company's  registration  statement  filed on Form  SB-2  which was
         declared  effective by the Securities & Exchange  Commission on May 27,
         2005.


                                      -23-
<PAGE>
<TABLE>
<CAPTION>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 9 - STOCK  OPTIONS,  STOCK  WARRANTS AND SHARES  RESERVED  FOR  CONVERTIBLE
------   DEBENTURES
         -----------------------------------------------------------------------

The  following  table  presents the  activity  for options,  warrants and shares
reserved for issuance upon conversion of outstanding  convertible debentures for
the year ending December 31, 2005 and 2004:

                                                              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     11,111,111          0.69
Exercised                          (2,500,000)    (1,500,000)             0          0.14
                                  -----------    -----------    -----------         -----

Outstanding - December 31, 2004       250,000     17,578,948     11,111,111         $0.50
                                  -----------    -----------    -----------         -----
Granted / Issued                            0              0              0           -
Exercised / Converted                       0     (8,500,000)    (6,687,456)         0.49
Expired                                     0              0              0           -
Cancelled                                   0        (50,000)    (4,423,655)            0
                                  -----------    -----------    -----------         -----
Outstanding - December 31, 2005       250,000      9,028,948              0         $1.01
                                  ===========    ===========    ===========         =====
</TABLE>

The  2004  Non-Qualified  Stock  Grant  and  Option  Plan has  4,350,872  shares
remaining available for future issuance.

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 M.A.G.  Capital,  LLC  ("M.A.G.")
(formerly  Mercator Advisory Group, LLC). In exchange for $5,000,000 the Company
issued to the Funds,  7% convertible  debentures with a maturity date of May 18,
2006. As of November 2, 2005,  the  $5,000,000  of  convertible  debentures  was
converted for 6,587,456 shares of the Company's common stock.

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  $0.80  to  $0.87.  The  Company  granted  the  Funds  and  M.A.G.
registration rights on both groups of securities; such registration was declared
effective May 27, 2005.

                     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 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.





                                      -24-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 10 - 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.

         The future annual license fee commitments are as follows:

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

NOTE 11 - 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, 2005, the loan
         balance was $288,506.

NOTE 12 - 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,  which
         expired November 30, 2005.

         The Company retained  tenancy in the building under the  month-to-month
         clause until February 1, 2006. On February 1, 2006, the Company renewed
         the lease until December 31, 2007 at the same $3,400 per month rental.

         The Company's  wholly-owned  subsidiary,  Sonterra Energy  Corporation,
         entered  into a sublease  agreement  for its  executive  officers in an
         adjacent  building  for $2,500 per month  until its  renewal in October
         2005 at which  time the  monthly  rent  increased  to $3,000  per month
         through March 31, 2006.  However,  on February 1, 2006, Sonterra Energy
         Corporation  entered  into a direct  operating  lease with the building
         owner at a monthly  rental of $3,300  for a term  ending  December  31,
         2007.





                                      -25-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

 NOTE 12 - LEASES (CONTINUED)
--------   ------------------

         Sonterra  Energy  Corporation  previously had entered into an operating
         lease  beginning  October 1, 2004 for a propane  tank site at an annual
         rent of $10,000 expiring September 30, 2019.

         Future commitments under the operating leases are as follows:

                                Year Ending                Total
                                -----------              ---------
                                  2006                   $  83,400
                                  2007                      90,400
                                  2008 - 2009              107,500
                                                         ---------
                          Total Minimum Lease Payments   $ 281,300
                                                         =========

         Rent expense for the years ended December 31, 2005 and 2004 was $82,300
         and $43,300, respectively.

NOTE 13 - 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 14 - LITIGATION
--------  ----------

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






                                      -26-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 14 - LITIGATION (CONTINUED)
--------  ----------------------

         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
         alFleging,  among other things, that Northern,  ZG Gathering,  Ltd. and
         Ken Lay,  fraudulently  induced her execution of the note. Northern has
         filed a general  denial of Sheerin's  counterclaims.  Sheerin's  answer
         included a third party cross claim against Tidelands.  She alleges that
         Tidelands  entered into an  agreement to purchase the Zavala  Gathering
         System from ZG  Gathering  Ltd. and that,  as a part of the  agreement,
         Tidelands  agreed to satisfy  all of the  obligations  due and owing to
         Northern,  thereby  relieving  Sheerin  of all  obligations  she had to
         Northern on the $1,950,000  promissory note in question.  Tidelands and
         Sheerin  agreed to delay the  Tideland's  answer date in order to allow
         time for mediation of the case.  Tidelands  participated in 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.

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

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



                                      -27-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 14 - LITIGATION (CONTINUED)
-------   ----------------------

         On  September  15,  2004 and again on October  15,  2004  respectively,
         Sheerin  amended her  pleadings  to include a third and fourth  amended
         third  party  cross  action  against  Tidelands  adding a claim for the
         $300,000  promissory  note.  In these amended  pleadings,  Sheerin also
         deleted her claims  against Carl Hessel and Ahmed  Karim.  After adding
         the claim on the $300,000  promissory note to the third party claims of
         Sheerin against Tidelands in Cause No. 2002-C1-16421, Sheerin dismissed
         Cause Number 2002-C1-16421.

         Tidelands won a partial summary  judgment  against Sheerin as to all of
         her tort claims pled against Tidelands,  save and except only her claim
         for conversion of 500,000 shares of Tidelands stock.

         Sheerin  seeks  damages  against  Tidelands  for indemnity for any sums
         found to be due from her to Northern  Natural Gas Company,  unspecified
         amounts of actual damages,  statutory damages,  unspecified  amounts of
         exemplary  damages,  attorneys fees, costs of suit, and prejudgment and
         post judgment interest.

         On August 5,  2005,  Northern  Natural  Gas  Company  filed its  Fourth
         Amended Original Petition which, for the first time, named Tidelands as
         a  defendant  to  Northern.  Northern  seeks  to  impose  liability  on
         Tidelands  for  $1,950,000  promissory  note  signed  by  McDay  Energy
         Partners, Ltd. (the predecessor to ZG Gathering,  Ltd.) and Sheerin and
         the $1,700,000  promissory note signed by McDay only. Northern contends
         that Tidelands is alternatively  liable to Northern for payment of both
         such  promissory  notes  totaling   $3,709,914  plus  interest  because
         Northern is a third-party beneficiary under a December 3, 2001 purchase
         and sale  agreement  between  ZG and  Tidelands  claiming  that in such
         agreement  Tidelands  agreed to assume and satisfy all indebtedness due
         and owing  Northern by Sheerin and ZG.  Northern also claims that it is
         entitled  to  foreclosure  of a lien on the gas  gathering  system  and
         pipeline that was the subject of the promissory notes in question.

         On March 6,  2006,  Tidelands  won a summary  judgment  motion it filed
         against  Northern  and the court has now  dismissed  Northern's  claims
         against Tidelands.

         On November 28, 2005,  ZG  Gathering,  Ltd. and ZG Pipeline  Management
         ("ZG")  filed its answer to  Northern's  Fifth  Amended  Petition,  its
         counter-claim against Northern,  and its answer and cross claim against
         Tidelands.  ZG  contends  that  the  promissory  notes  given by ZG and
         Sheerin  to   Northern   were   procured   by   Northern's   fraudulent
         misrepresentations and it claims unspecified amounts of damages against
         Northern.  ZG's cross action against Tidelands claims Tidelands entered
         into an agreement to purchase the Zavala  Gathering  System from ZG and
         that,  as part of that  agreement,  Tidelands  agreed  to  satisfy  the
         $3,700,914 Northern indebtedness of ZG, and to defend,  indemnify,  and
         hold  ZG and  Sheerin  harmless  from  such  indebtedness  to pay off a
         Sheerin  loan of $300,000,  and to issue 1 million  shares of Tidelands
         stock, of which 500,000 was to be free-trading  shares.  ZG claims that
         Tidelands  breached  this  agreement by failing to satisfy the Northern



                                      -28-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 14 - LITIGATION (CONTINUED)
-------   ----------------------

         indebtedness,  failing  to defend  and  indemnify  it from  such  debt,
         failing to pay off the $300,000 note, failing to issue the free-trading
         shares  in  Tidelands,  and by  placing  a stop  transfer  order on the
         restricted  stock  that was  issued  by  Tidelands.  ZG seeks  specific
         performance  of the  agreement,  recovery of an  unspecified  amount of
         damages, and its attorney's fees.

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

         During April and May, 2005, three separate legal actions were initiated
         against  Sonterra  Energy   Corporation   (Sonterra),   a  wholly-owned
         subsidiary of the Company.  Two of the actions  concern  claims made by
         developers  against Sonterra for their failure to pay rent and easement
         use fees as a  result  of  their  asset  purchase  from  Oneok  Propane
         Distribution  Company on November 1, 2004. The third action  involves a
         claim made by a builder that Sonterra  does not have a proper  easement
         for the current use of certain property.  The Company believes that the
         three actions  filed are without merit and intend to vigorously  defend
         itself.  Litigation  regarding  these three  actions are still in their
         early stages, therefore, potential financial impacts, if any, cannot be
         determined at this time.

         In accordance with Statement of Financial  Accounting  Standards No. 5,
         "Accounting for  Contingencies,"  management has reached the conclusion
         that   there  is  a  remote   possibility   that  any  or  all  of  the
         aforementioned  claims would be upheld at trial and has also determined
         that  the  amount  of  the  claims  cannot  be  reasonably   estimated.
         Accordingly, the Company's financial statements reflect no accrual of a
         loss contingency with response to the above legal matters.

NOTE 15 - 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.



                                      -29-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 15 - ACQUISITIONS (CONTINUED)
-------   ------------------------

         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.

         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.  All
         quarterly  interest  payments  due which are  limited by the amounts of
         Reef's net cash flow have been and will be added to the note balance if
         applicable.  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.

         Minority Interest

         The  remaining  two percent (2%) of Reef  Ventures,  LP, is owned by an
         unaffiliated  third party. No value or allocation of net income or loss
         will be attributed until the total investment by existing ownership has
         been recovered.


                                      -30-
<PAGE>

                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE 16 - SUBSEQUENT EVENTS
-------   -----------------

         During  January,  2006,  the Company  completed a private  placement of
         $6,569,750 of securities  with several  institutional  investors led by
         Palisades Master Fund, L.P. The private placement  consists of Original
         Issue Discount Convertible Debentures, convertible into common stock of
         the Company at a  conversion  price of $0.87 per share.  The  investors
         will also receive  three-year  warrants to purchase,  in the aggregate,
         2,491,975  shares of common stock of the Company at a conversion  price
         of $0.935 per share. Additional 13 month callable warrants to purchase,
         in the  aggregate,  7,551,432  were  issued  to the  investors  with an
         exercise  price of $1,275  which  warrants  include  a forced  exercise
         provision  by the Company if certain  price and equity  conditions  are
         met.  The Company  will  receive net  proceeds of  $4,964,410  from the
         transactions.
























                                      -31-
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On December 20, 2005,  the Company  issued 10,000 common shares valued at $8,350
and  40,000  shares of valued at  $33,400,  to  Robert  Dowies,  a company  vice
president under the terms of his employment agreement.

On September 14, 2005,  Michael Ward,  James B. Smith and Ahmed Karim,  executed
amended  promissory  notes  to the  Company  bearing  interest  at a rate  of 5%
annually and payable in full on, or before  September  14, 2006.  The notes were
originally  executed on September  14, 2004 in  connection  with the exercise of
common stock options. The shares of stock issued previously to these individuals
remained subject to security agreements. Prior to December 31, 2005, each of the
above  individuals  paid $5,500 in interest  accrued and owing to the Company on
the original promissory note maturity date of September 14, 2005.

On July 1, 2005, the company issued  1,000,000  shares of its restricted  common
stock valued at  $1,230,000  pursuant to the  employment  contract  with Michael
Ward, company president and CEO.

On July 1, 2005, the Company issued 50,000 shares of its restricted common stock
valued at $61,500  pursuant to an  employment  contract  with Robert  Dowies,  a
company vice president under the terms of his employment agreement.

On July 1, 2005, the Company issued 10,000 shares of its restricted common stock
valued at $12,150 Jason Jones, a Sonterra employee.

On June 27, 2005,  the Company  authorized the issuance of 150,000 shares of its
restricted  common stock valued at $199,500 to each of the three  members of the
Board of Directors, Michael R. Ward, Ahmed Karim and Carl Hessel.

On June 27,  2005,  the Company  authorized  the  issuance of 150,000  shares of
common stock to James B. Smith,  the Company's  Senior Vice  President,  CFO and
newly appointed member of the Board of Directors.  The transaction was valued at
$199,125.

On November 1, 2004,  we issued  500,000  common  shares to James B. Smith which
represents  the annual stock grant under the terms of his  employment  agreement
valued at $435,000.

One November 3, 2004,  the Company  issued 500,000 common shares to Michael Ward
under the terms of his employment contract. The shares were valued at $417,000.

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
under the terms of his employment agreement. The shares were valued at $427,500.

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

On September  14, 2004,  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.



                                      -32-
<PAGE>
<TABLE>
<CAPTION>

On September 14, 2004 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.

On September 14, 2005,  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 April 15, 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.

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, 2005, the loan balance was $288,506.

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.

ITEM 13. EXHIBITS

Exhibit           Description                                                          Location of Exhibit
-------           -----------                                                          -------------------
<C>      <C>                                                                                    <C>
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>




                                      -33-
<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,  2005  to be  signed  on its  behalf  by the  undersigned,
thereunto duly authorized on this 16th day of June, 2006.

                                   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: June 16, 2006                    /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





                                      -34-