**UNITED
          STATES SECURITIES AND EXCHANGE COMMISSION**
 Washington,
          D. C. 20549
  **FORM
                  10-K**
  **ANNUAL
          REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES**
 **EXCHANGE
          ACT OF 1934**
  F**or
          the year ended December 31, 2006**
 **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
                      incorporation or organization)
                  
                  (I.
                      R. S. EmployerIdentification 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
   Indicate
          by check mark if the registrant is a well-known seasoned issuer, as defined
          in
          Rule 405 of the Securities Act. Yes oNo x
  Indicate
          by check mark if the registrant is not required to file reports pursuant
          to
          Section 13 or Section 15(d) Yes oNo
x
  Indicate
          by check mark 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 o
  Check
          if
          there is no disclosure of delinquent filers in response to Item 405 of
          Regulation S-K 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-K or any amendment
          of this
          Form 10-K. o
  Indicate
          by check mark whether the registrant is a large accelerated filer, an
          accelerated filer, or a non-accelerated filer. See definitions of "accelerated
          filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
          one): Large accelerated filer o,
          Accelerated filer o, Non-accelerated
          filer x
  Indicate
          by check mark whether the registrant is a shell company (as defined by
          Rule
          12b-2of the Exchange Act. Yes o No x
  The
          aggregate market value of the issuer's common stock held by non-affiliates
          was
          $49,433,203 based on the closing sales price as reported by the NASD OTC
          Electronic Bulletin Board on June 30, 2006. The sum excludes the shares
          held by
          officers, directors, and stockholders whose ownership exceeded 10% of the
          outstanding shares, as such persons may be deemed affiliates of the Company.
          This determination of affiliate status is not necessarily a conclusive
          determination for other purposes.
  As
          of
          March 31, 2007, there were 105,104,494 shares of the issuer's common stock
          outstanding.
   
 Table
              of Contents
  **TIDELANDSOIL
&
GAS
          CORPORATION**
 **FORM
          10-K**
  **December
          31, 2006**
  **Page****PART
                      I**ITEM
                      1.
                  
                  Business
                  3ITEM
                      1A.
                  
                  Risk
                      Factors
                  8ITEM
                      1B.
                  
                  Unresolved
                      Staff Comments
                  15ITEM
                      2.
                  
                  Description
                      of Properties
                  15ITEM
                      3.
                  
                  Legal
                      Proceedings
                  16ITEM
                      4.
                  
                  Submission
                      of Matters to a Vote of Security
                      Holders
                  17**PART
                      II**ITEM
                      5.
                  
                  Market
                      for Registrant's Common Equity, Related
                      Stockholder Matters and Issuer Purchases of Equity
                      Securities
                  18ITEM
                      6.
                  
                  Selected
                      Financial Data
                  20ITEM
                      7.
                  
                  Management's
                      Discussion and Analysis of Financial
                      Condition and Results of Operation
                  22ITEM
                      7A.
                  
                  Quantitative
                      and Qualitative Disclosures About Market
                      Risk
                  29ITEM
                      8.
                  
                  Financial
                      Statements and Supplementary
                      Data
                  29ITEM
                      9.
                  
                  Changes
                      In and Disagreements with Accounting and
                      Financial Disclosure
                  29ITEM
                      9A.
                  
                  Controls
                      and Procedures
                  29ITEM
                      9B.
                  
                  Other
                      Information
                  29**PART
                      III**ITEM
                      10.
                  
                  Directors
                      and Executive Officers of the
                      Registrant
                  30ITEM
                      11.
                  
                  Executive
                      Compensation
                  31ITEM
                      12.
                  
                  Security
                      Ownership of Certain Beneficial Owners and
                      Management and Related Stockholder Matters
                  39ITEM
                      13.
                  
                  Certain
                      Relationships and Related
                      Transactions
                  40ITEM
                      14.
                  
                  Principal
                      Accounting Fees and
                      Services
                  41**Part
                      IV**ITEM
                      15.
                  
                  Exhibits
                      and Financial Statement
                      Schedules
                  42SIGNATURES
                  43
    Table
              of Contents
 **PART
        I**
  **CAUTIONARY
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
  This
        2006
        Annual Report on Form 10-K, including the sections entitled "Risk Factors,"
        "Management's Discussion and Analysis Financial Condition and Results of
        Operation" and "Business," contains "forward-looking statements" that include
        information relating to future events, future financial performance, strategies,
        expectations, competitive environment, regulation and availability of resources.
        These forward-looking statements include, without limitation, statements
        regarding: projections, predictions, expectations, estimates or forecasts
        for
        our business, financial and operating results and future economic performance;
        statements of management's goals and objectives; and other similar expressions
        concerning matters that are not historical facts. Words such as "may," "will,"
        "should," "could," "would," "predicts," "potential," "continue," "expects,"
        "anticipates," "future," "intends," "plans," "believes" and "estimates,"
        and
        similar expressions, as well as statements in future tense, identify
        forward-looking statements.
  Forward-looking
        statements should not be read as a guarantee of future performance or results,
        and will not necessarily be accurate indications of the times at, or by which,
        that performance or those results will be achieved. Forward-looking statements
        are based on information available at the time they are made and/or management's
        good faith belief as of that time with respect to future events, and are
        subject
        to risks and uncertainties that could cause actual performance or results
        to
        differ materially from those expressed in or suggested by the forward-looking
        statements. Important factors that could cause these differences include,
        but
        are not limited to:
  ·
            our
                failure to implement our business plan within the time period we
                originally planned to accomplish; and  ·
            other
                factors discussed under the headings "Risk Factors," "Management's
                Discussion and Analysis of
                Financial Condition and Results of Operation"and
                "Business."  Forward-looking
        statements speak only as of the date they are made. You should not put undue
        reliance on any forward-looking statements. We assume no obligation to update
        forward-looking statements to reflect actual results, changes in assumptions
        or
        changes in other factors affecting forward-looking information, except to
        the
        extent required by applicable securities laws. If we do update one or more
        forward-looking statements, no inference should be drawn that we will make
        additional updates with respect to those or other forward-looking
        statements.
  All
        references to "we," "our," "us" and the "Company" in this Annual Report on
        Form
        10-K refer to Tidelands Oil & Gas Corporation and its
        subsidiaries.
  **ITEM1.
        BUSINESS**
  Tidelands
          Oil & Gas Corporation, formerly known as C2 Technologies, Inc., was
          incorporated under the laws of the State of Nevada on February 25, 1997.
          C2
          Technologies, Inc. changed its name to Tidelands Oil & Gas Corporation on
          November 19, 1998. On April 17, 2006, we filed an amendment to our articles
          of
          incorporation increasing our authorized common stock capital from One Hundred
          Million (100,000,000) shares to Two Hundred Fifty Million (250,000,000)
          shares.
          We have eleven subsidiaries that we directly and indirectly own as follows:
          (1)
          Rio Bravo Energy LLC, (2) Arrecefe Management LLC, (3) Marea Associates,
          L.P.,
          (4) Terranova Energia, S. de R.L. de C.V., (5) Esperanza Energy LLC and
          (6)
          Sonterra Energy Corporation. We also own a 97% limited partnership interest
          in
          (7) Reef Ventures, L.P. Arrecefe Management LLC owns a 1% general partner
          interest in Reef Ventures, L.P. Rio Bravo Energy, LLC owns 100% of the
          member
          interest in (8) Sonora Pipeline LLC. Reef Ventures, L.P. owns 100% of the
          member
          interest in (9) Reef International LLC and (10) Reef Marketing LLC. In
          February
          2006, we formed subsidiary number (11) Tidelands Exploration & Production
          Corporation.
  Our
        products and services are primarily focused on development and operation
        of
        transportation, processing, distribution and storage of natural gas and natural
        gas liquids in the northeastern states of Mexico (Coahuila, Nuevo Leon and
        Tamaulipas) and the States of Texas and California.
  3
 Table
            of Contents
  **Reef
        Ventures International Pipeline**
  The
        assets of this business consist of two different pipelines: (1) an 8 mile
        twelve
        inch diameter natural gas pipeline with metering and dehydration facilities
        and
        (2) a two mile segment of six inch diameter pipeline to be used in a future
        LPG
        project. The twelve inch pipeline connects and receives natural gas from
        a third
        party pipeline for transmission to the border between Texas and Coahuila,
        Mexico. The pipeline is buried underneath the Rio Grande River with its
        termination at the delivery point in Piedras Negras, Coahuila owned by CONAGAS
        (the local distribution company). Reef Ventures, L.P. derives its revenues
        from
        transportation fees charged to CONAGAS for delivery of natural gas. The LPG
        project will require the future construction of receiving terminal facilities
        in
        Texas, boring and installation of additional six inch diameter pipeline under
        the Rio Grande River and approximately one mile of additional pipeline in
        Mexico
        with an unloading terminal and storage facilities at its termination
        point.
 
 **Esperanza
        Energy, LLC**
 
 Esperanza
        Energy, LLC ("Esperanza") was formed as a wholly-owned subsidiary of the
        Company
        in March 2006 to evaluate the feasibility of developing an offshore, deep-water
        liquefied natural gas (LNG) receiving and regasification terminal near Long
        Beach, California. Esperanza would utilize TORP Technology's HiLoad LNG Regas
        unit that attaches to an LNG tanker, directly vaporizes the LNG as it is
        offloaded and injects the regasified natural gas into an undersea pipeline
        for
        transportation of the natural gas to onshore metering stations and transmission
        pipelines to supply nearby gas markets. The TORP HiLoad LNG Regas unit
        eliminates the need for extensive above-ground storage tanks or large marine
        structures required for berthing and processing of the LNG. Esperanza has
        conducted its feasibility study for this project with the assistance of
        best-in-class LNG, environmental, pipeline and legal advisors and has concluded
        that the project is technically, environmentally and commercially feasible.
        Esperanza plans to develop the necessary information in 2007 to file
        applications with California state and U.S. Federal agencies for appropriate
        permits to construct, own and operate the LNG facilities.
  **Terranova
          Energia, S. de R.L. de C.V and the Burgos Hub
          Project**
  In
        December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
        to
        design, build and operate an underground natural gas storage facility in
        the
        vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
        at other regions in Mexico.
  We
        completed the initial study of the Burgos facility and expect to receive
        permits
        in 2007 to construct, own and operate the storage facility and the
        interconnecting pipelines from the Comision Reguladora de Energia (the Mexican
        regulatory branch of the Secretary of Energy). The capital budget for the
        first
        two phases of this project exceeds $700 Million Dollars and may be funded
        through issuance of additional equity of the Company, the addition of joint
        venture partners and/or debt financing. Marea Associates, L.P. was formed
        to own
        the majority interest in Terranova Energia, S. de R.L. de C.V., a Mexican
        company which will conduct all business dealings in Mexico on behalf of
        Tidelands. Rio Bravo Energy LLC, an existing wholly owned subsidiary owns
        the
        general partner interest in Marea Associates, L.P. and a minority interest
        in
        Terranova Energia, S. de R.L. de C.V.
  On
        June
        5, 2006, Tidelands Oil & Gas Corporation subsidiary, Terranova Energia, S.
        de R.L. de C.V. was awarded a Permit (#G/183/TRA 2006) by the Comision
        Reguladora de Energia de Mexico (CRE) to begin construction of the Terranova
        Occidente and Oriente pipeline portions of its Burgos Hub Project.
  The
            Permit is for the Occidente and Oriente Sections of the Terranova pipelines.
            The
            Occidente section will feature a 30-inch diameter pipeline, spanning
            approximately 323 kilometers in total length. One segment will run from
            the
            Brasil storage field to Nuevo Progreso, Mexico, where it will connect
            with the
            Sonora Pipeline LLC Progreso International Pipeline, a proposed international
            pipeline crossing into South Texas from Mexico extending to the Donna
            Station,
            which will provide the opportunity for interconnects into Texas natural
            gas
            pipelines owned by TETCO, TGPL and Texas Gas Services. The permitted
            pipeline
            will also include a section that will stretch from the Brasil storage
            field to
            Station 19 and up to Arguelles where another proposed international pipeline
            crossing into South Texas is planned (Sonora Pipeline, LLC’s Mission
            International Pipeline) with opportunities to interconnect with Houston
            Pipeline, Calpine and Kinder Morgan. A 36-inch diameter pipeline spanning
            some
            149 kilometers will characterize the Oriente Section of the Terranova
            pipelines.
            It will run from the proposed offshore LNG Regasification Terminal to
            Norte
            Puerto Mezquital and proceed to the Brazil storage field. Both Terranova
            pipelines are designed to flow natural gas bi-directionally between Texas
            and
            Mexico at a rate of approximately 1.0 BCFD (billion cubic feet per
            day).
  In
            the
            second quarter of 2007, Terranova expects to file an application with
            the CRE to
            amend its existing Mexican pipeline permit to allow for the construction
            of an
            additional segment of pipeline which will extend from Station 19 (located
            to the
            southwest of Reynosa, Tamaulipas) to Monterrey, Nuevo Leon. This filing
            is being
            pursued in response to commercial interest from industrial customers
            and
            potential service opportunity for the power generation facilities proposed
            by
            the Comision Federal de Electridad (CFE) in northeast Mexico. Discussion
            with
            staff at the regulatory body, CRE, indicates a timeline for action on
            the
            amended permit by the fourth quarter of 2007.
 4
 Table
            of Contents
  Terranova
        submitted the storage permit to the CRE on August 5, 2005 and it was accepted
        for full review on October 14, 2005. Several unique questions are presented
        by
        the filing of this permit due to the proposed location and the lack of previous
        storage permit applications having been considered by the CRE. The CRE, with
        cooperation from Terranova, is conducting discussions with PEMEX, the energy
        ministry of the United Mexican States (SENER) and the Mexican Petroleum
        Institute (MPI) to determine the mechanism for the grant of use rights for
        the
        depleted reservoir as a natural gas storage facility and the proper legal
        vesting of such rights with the holder of the CRE permit to construct own
        and
        operate a gas storage facility. Terranova expects that these issues and a
        decision regarding the Company’s storage permit application will be resolved by
        the CRE Commissioners in the third quarter of 2007.
  The
          Company continues to present the pipeline and storage segments of the Burgos
          Hub
          project to commercial audiences in efforts to solicit their interest and
          participation in the project at various levels. There have been numerous
          meetings with staff of the Comision Federal de Electricidad (CFE) with
          respect
          to its planned natural gas usage in northeast Mexico and the Monterrey
          industrial consumers of natural gas with a view toward clarifying their
          need and
          usage of the proposed project facilities. Efforts continue to secure precedent
          agreements for capacity reservation of the project facilities. Preliminary
          evaluation of demand for storage capacity reservation based upon direct
          discussion with the various customers is estimated at 40 Bcf for the market
          area
          influenced by the project. Similarly, discussions are continuing with interested
          parties in the U.S. and Mexico regarding the execution of a joint development
          agreement between Terranova and their firms for the funding, development
          and
          ownership of the Project.
  **Sonora
        Pipeline, LLC and the Burgos Hub Project**
  In
          connection with the Mexican storage and pipeline project mentioned above,
          Sonora
          Pipeline, LLC is the applicant before the Federal Energy Regulatory Commission
          for two proposed U.S. pipelines that will transport gas bidirectionally
          to/from
          the United States to Mexico at two different international crossing points
          along
          the Rio Grande River in South Texas - the Progreso International Pipeline
          and
          the Mission International Pipeline. The Progreso pipeline segment will
          be
          approximately 8.7 miles long and will comprise the eastern leg of the U.S.
          pipelines, which will interconnect with the Tennessee Gas Pipeline transmission
          lines at the Donna Station and will ultimately deliver natural gas to the
          proposed Brasil Storage facility approximately 17 miles south of the U.S./Mexico
          border at Progreso, Texas. The proposed Mission International Pipeline
          segment
          was re-designed in the first quarter of 2006 due to a routing conflict
          with a
          fiber optic line. It will be approximately 20.2 miles long and will commence
          at
          the existing HPL Valero-Gilmore gas plant in Hidalgo County, Texas, and
          will
          extend southward to the Arguelles crossing of the Rio Grande River into
          Mexico
          near the city of Mission, Texas. Both U.S. pipelines will connect with
          the
          pipelines being developed by Tidelands’ subsidiary in Mexico, Terranova Energia,
          S. de R.L. de C.V. On January 31, 2007, Sonora Pipeline, LLC (“Sonora”) filed
          application with FERC for a certificate of public convenience and necessity
          to
          construct and operate these natural gas pipeline facilities and to transport
          natural gas in interstate commerce for others including an application
          for a
          presidential permit at each pipeline segment’s crossing point from the U.S. into
          Mexico. Simultaneously, Sonora filed its Applicant Prepared Draft Environmental
          Assessment for review by the FERC. Sonora continues to respond to FERC
          inquiries
          and analysis with respect to these applications and has asked the FERC
          to grant
          the authorizations requested in the applications by July 1, 2007. The current
          catalog of FERC correspondence for Sonora's activities is located at
          www.ferc.gov under Docket No. PF07-74 et sequence.
  **Rio
        Bravo Energy, LLC and Sonora Pipeline, LLC**
  Rio
        Bravo
        Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas Processing
        Plant which was purchased in 1999 and was processing natural gas primarily
        from
        Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an oilfield
        which
        produced high BTU casinghead gas from which gas processing operations would
        yield valuable hydrocarbon components such as propane, butane and natural
        gasolines. As the field depleted, lower volumes of casinghead gas were being
        delivered by Conoco, and other gas producers could not be contracted with
        for
        processing of additional replacement volumes of gas. Therefore, in October
        2002,
        the plant was temporarily shut down due to the declining economics associated
        with low volume operation of the plant. During 2002 through the fourth quarter
        of 2005, management planned to reopen the plant when adequate volumes of
        gas
        from third party producers were obtained to make plant operations economically
        attractive. However, we have been unsuccessful in locating a locally available
        and adequate supply of high BTU natural gas and have elected to dispose of
        the
        gas plant assets. Accordingly, our financial statements for
        2005
        reflect an impairment charge with respect to the carrying value of these
        assets.
        Rio Bravo Energy, LLC continues to serve as the parent company for Sonora
        Pipeline, LLC, as the one percent general partner of Marea Associates, L.P.
        and
        owns a less than one percent minority interest in Terranova Energia, S. de
        R.L.
        de C.V.
  Sonora
        Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline network
        which has the capability of delivering adequate volumes of natural gas for
        economic operation of the Chittim Gas Processing Plant. The pipeline network
        consists of approximately 80 miles of gas pipeline. This pipeline network
        was
        acquired in conjunction with the Chittim Gas Processing Plant acquisition
        and,
        when operational, could generate revenue from transportation fees to be charged
        to third party gas producers shipping natural gas to the gas plant owned
        by Rio
        Bravo Energy, LLC. As noted above, management has evaluated the carrying
        value
        of these assets and has recorded an impairment charge in our 2005 financial
        statements with respect to pipeline network in addition to the gas plant.
        These
        assets will also be sold at a later date.
  5
 Table
            of Contents
  **Sonterra
        Energy Corporation Business**
  The
        assets of our Sonterra Energy Corporation ("Sonterra") subsidiary consist
        of
        propane distribution systems, including gas mains, yard lines, meters and
        storage tanks, serving the following residential subdivisions in the Austin,
        Texas area. The subdivisions include:
 
 1.
            Arbolago 2.
            Austin's
                Colony 3.
            Avonlea 4.
            Casalona/Riverbend 5.
            Cordillera
                Ranch 6.
            Costa
                Bella 7.
            The
                Hollows at Northshore 8.
            Hills
                of Lakeway 9.
            Jacarandas 10.
            Lake
                Pointe 11.
            La
                Ventana 12.
            Lakewinds
                Estates 13.
            Rob
                Roy Rim 14.
            Senna
                Hills 15.
            Sterling
                Acres 16.
            The
                Point 17.
            The
                Preserve at Barton Creek  These
        subdivisions contain approximately 2,250 lots which can be supplied with
        gas
        service from Sonterra. Currently 1,155 of these lots are metered for use.
        There
        are approximately 1,095 unmetered future lots within the above subdivisions
        where propane service can be connected. As new homes are constructed on these
        lots our customer base will grow. Construction activities continue in the
        existing subdivisions where expansion phases of development will result in
        the
        addition of approximately 170 customers in 2007. Sonterra's participation
        in the
        launch of new subdivisions is also occurring, as exemplified by the signing
        of a
        construction contract with the developers of Las Brisas at Ensenada Shores
        (located on Canyon Lake), where 75 new lots with propane service have been
        completed for sale to new customers. This subdivision's second phase of
        development is expected to add another 175 lots. Construction continues on
        Section 205 of the Cordillera Ranch subdivision which added 50 more residential
        customers in the fourth quarter of 2006. Sonterra has expanded into additional
        markets as evidenced by the signing of a construction contract to build a
        central propane system for a multi-use retail center in Lago Vista, Texas.
        The
        system will serve five to ten large commercial customers including two
        restaurants.
  Sonterra
          is the exclusive seller of propane in these subdivisions and is not considered
          a
          rate-regulated utility. The Texas Railroad Commission regulates all aspects
          of
          the production, transportation and processing of petroleum products, including
          propane, in the State of Texas. Sonterra purchases propane products from
          a
          number of distributors in Austin, Texas. Seasonality and weather conditions
          have
          a significant impact on the demand for propane for heating purposes. All
          of our
          propane customers rely heavily on propane as a heating fuel. The volume
          of
          propane sold is at its highest during the six-month peak heating season
          of
          October through March, during which approximately two-thirds of our annual
          retail propane volume is sold.
  6
 Table
            of Contents
  **Tidelands
          Exploration & Production Corporation**
  On
          July
          9, 2006, Tidelands Exploration & Production Corporation acquired a 50%
          interest in a 26-mile natural gas pipeline located in Medina, Atascosa
          and Bexar
          Counties in the state of Texas. In addition, the Company also acquired
          an
          undivided 50% working interest in two leases with 5 recompleted natural
          gas
          wells on approximately 1,000 acres with at least 10 additional natural
          gas wells
          for re-entry. These leases are located in Atascosa and Medina counties.
          The
          Company has elected not to participate in this venture on an ongoing basis
          and
          expects to resell these properties in 2007.
  Segment
        Reporting for Reef Ventures, LP and Sonterra Energy Corporation:
  The
        following table is a summary of the results of operations and other financial
        information by major segment:
 **2006**
                ****
                ****
                **Propane
                    Salesand Related Services**
                ****
                ****
                **PipelineTransportation
                    Fees**
                ****
                ****
                **All
                    Other and
                    Corporate**
                ****
                ****
                **Total**Revenue
                
                $
                1,921,763
                
                $
                285,098
                
                $
                15,737
                
                $
                2,222,598Depreciation
                
                $
                126,844
                
                $
                305,313
                
                $
                34,084
                
                $
                466,241Interest
                
                $
                1,629
                
                $
                -
                
                $
                3,404,149
                
                $
                3,405,778Operating
                      Income  (Loss)
                
                $
                (263,535
                )
                $
                (93,524
                )
                $
                (11,582,775
                )
                $
                (11,939,834
                )Total
                  Assets
                
                $
                5,284,938
                
                $
                5,702,978
                
                $
                4,198,723
                
                $
                15,186,639
   **2005**
                  
                  ******Propane
                      Salesand Related Services**
                  
                  ******PipelineTransportation
                      Fees**
                  
                  ******All
                      Other and
                      Corporate**
                  
                  ******Total**Revenue
                  
                  $
                  1,630,246
                  
                  $
                  231,077
                  
                  $
                  --
                  
                  $
                  1,861,323Depreciation
                  
                  $
                  116,853
                  
                  $
                  305,313
                  
                  $
                  63,315
                  
                  $
                  485,481Interest
                  
                  $
                  2,514
                  
                  $
                  --
                  
                  $
                  608,849
                  
                  $
                  611,363Operating
                        Income(Loss)
                  
                  $
                  (380,900
                  )
                  $
                  (164,523
                  )
                  $
                  (12,765,170
                  )
                  $
                  (13,310,593
                  )Total
                    Assets
                  
                  $
                  2,997,001
                  
                  $
                  5,621,536
                  
                  $
                  4,870,312
                  
                  $
                  13,488,849
   **2004**
                    
                    ******Propane
                        Salesand Related Services**
                    
                    **Natural
                        Gas Sales and****Pipeline
                        Transportation Fees**
                    
                    ******All
                        Other and
                        Corporate**
                    
                    ******Total**Revenue
                    
                    $
                    438,611
                    
                    $
                    1,400,227
                    
                    $
                    --
                    
                    $
                    1,838,838Depreciation
                    
                    $
                    20,158
                    
                    $
                    178,099
                    
                    $
                    46,632
                    
                    $
                    244,889Interest
                    
                    $
                    300
                    
                    $
                    --
                    
                    $
                    300,266
                    
                    $
                    300,566Operating
                          Income (Loss)
                    
                    $
                    98,229
                    
                    $
                    (141,502
                    )
                    $
                    (29,699,024
                    )
                    $
                    (29,742,297
                    )Total
                        Assets
                    
                    $
                    2,775,281
                    
                    $
                    5,881,774
                    
                    $
                    13,765,611
                    
                    $
                    22,422,666
 Note:
        Reef Ventures and Sonterra commenced operations in 2004.
  
 7
 Table
            of Contents
  **Competition**
  Reef
        Ventures, L.P. Eagle Pass Pipeline Crossing
  Our
          Eagle
          Pass international pipeline crossing competes with a pipeline owned by
          West
          Texas Gas, Inc. which is located two miles north of Eagle Pass. We believe
          that
          the West Texas Gas crossing will be able to compete with us but due to
          a very
          limited transmission capability, that organization cannot supply the total
          demand of the market area. Further efforts to increase revenues from the
          system
          by increasing transportation fees are currently being
          undertaken.
  Sonterra
        Energy Corporation Propane Distribution
  Our
        propane distribution business is not subject to competition within the
        residential subdivisions served because we are the sole propane supplier.
        The
        residential subdivisions are subject to a propane supply covenant granting
        us
        the exclusive supply of propane for each subdivision. In the future, we will
        compete in the bidding process for new propane distribution systems as new
        residential subdivisions are developed. We may also be able to acquire
        additional existing propane distribution systems from competitors.
  In
        addition, we compete with other established businesses that market similar
        products. Many of these companies have greater capital, marketing and other
        resources than we do. There can be no assurance that these or other companies
        will not develop new or enhanced products that have greater market acceptance
        than any that may be marketed by us.
  **Employees**
  Tidelands
        has six full-time employees including our corporate officers. Our Sonterra
        Energy subsidiary, which operates the Austin propane gas distribution company,
        has eight full-time employees.
  **ITEM
        1A. RISK FACTORS**
  In
        addition to the other information presented in this report, the following
        should
        be considered carefully in evaluating our business or purchasing shares of
        our
        common stock. Investing in our common stock involves a high degree of risk.
        This
        report contains various forward looking statements that involve risk and
        uncertainties. Our actual results may differ materially from the results
        discussed in the forward looking statements. Factors that might cause such
        a
        difference include, but are not limited to, those discussed below and elsewhere
        in this report.
  **OPERATING
        LOSSES**
  We
        have
        had significant losses ever since starting business and we expect to continue
        losing money for some time. To date, we have incurred significant losses.
        For
        the year ended December 31, 2006, we lost $11,836,925 and for the year ended
        December 31, 2005, we lost $7,662,904. These losses were caused primarily
        by:
  **s**
            Financing
                costs in connection with acquisitions made in prior years and the
                issuance
                of convertible debentures;  **s**
            Limited
                volumes of gas transported through the international pipeline
                crossing;  **s**
            Pre-development
                and operating expenses associated with the development of additional
                pipeline and storage projects in Mexico;  **s**
            Idle
                assets not producing revenue, such as the gas plant and associated
                pipeline;  **s**
            Default
                interest penalties regarding a convertible debenture
                financing;  **s**
            Increased
                employee related salaries, stock-based compensation and related
                costs.  8
 Table
            of Contents
  **WE
        MAY NOT HAVE ENOUGH FUNDING TO COMPLETE OUR BUSINESS PLAN OR CONTINUE
        OPERATIONS.**
  We
        will
        need additional financing to fully implement our business plan. We cannot
        give
        any assurance that this additional financing could be obtained of attractive
        terms or at all. Lack of funding could force us to curtail substantially
        or
        cease our operations.
  The
        financial statements included in this report have been prepared on the basis
        that we will continue as a going concern, which assumes the realization of
        assets and the satisfaction of liabilities in the normal course of business.
        We
        have incurred significant accumulated losses as of December 31, 2006. We
        do not
        expect to generate sufficient revenue to meet our cash requirements for the
        next
        twelve months. We will need to raise additional capital to continue meeting
        operational expenses. Our independent auditors have added an explanatory
        paragraph to their report of our financial statements for the year ended
        December 31, 2006 stating that our net losses, lack of revenues and dependence
        on our ability to raise additional capital to continue our existence, raise
        substantial doubt about our ability to continue as a going concern. If we
        are
        not successful in raising sufficient additional capital, we may we may not
        be
        able to continue as a going concern, our stockholders may lose their entire
        investment in us **.**
  **LIMITED
        OPERATING HISTORY**
  We
        have a
        limited operating history and our financial health will be subject to all
        the
        risks inherent in the establishment of a new business enterprise. The likelihood
        of success of our Company must be considered in the light of the problems,
        expenses, difficulties, complications, and delays frequently encountered
        in
        connection with the startup and growth of a new business, and the competitive
        environment in which we will operate. Our success is dependent upon the
        successful financing and development of our business plan. No assurance of
        success is offered. Unanticipated problems, expenses, and delays are frequently
        encountered in establishing a new business and marketing and developing
        products. These include, but are not limited to, competition, the need to
        develop customers and market expertise, market conditions, sales, marketing
        and
        governmental regulation. The failure of the Company to meet any of these
        conditions would have a materially adverse effect upon the Company and may
        force
        the Company to reduce or curtail operations. No assurance can be given that
        the
        Company can or will ever operate profitably.
  **RELIANCE
        ON MANAGEMENT**
  We
        recently appointed James B. Smith as our President and Chief Executive Officer.
        Mr. Smith also continues to serve as Chief Financial Officer. Assuming the
        roles
        of both Chief Executive Officer and Chief Financial Officer could place undue
        burden on Mr. Smith’s time and resources. In addition, the Company faces risks
        associated with the transition of management from our prior Chief Executive
        Officer to Mr. Smith. The Company depends substantially upon the efforts
        and
        abilities of Mr. Smith and the loss of Mr. Smith's services could have a
        serious
        adverse effect on our business, operations, revenues or prospects. We do
        not
        currently maintain any key man life insurance on Mr. Smith.
  **TRADING
        IN OUR COMMON STOCK ON THE OTC BULLETIN BOARD MAY BE
        LIMITED.**
  Our
        common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is
        not an
        exchange. Trading of securities on the OTC Bulletin Board is often more sporadic
        than the trading of securities listed on an exchange or Nasdaq. You may have
        difficulty reselling any of our common stock shares.
  **THERE
        HAS BEEN A VOLATILE PUBLIC MARKET FOR OUR COMMON STOCK AND THE PRICE OF OUR
        STOCK MAY BE SUBJECT TO FLUCTUATIONS.**
  We
        cannot
        assure you that a liquid transparent trading market for our common stock
        will
        develop or be sustained. You may not be able to resell your shares at or
        above
        the price you paid for them. The market price of our common stock is likely
        to
        be volatile and could be subject to fluctuations in response to factors such
        as
        the following, most of which are beyond our control:
  **s** operating
        results that
        vary from the expectations of securities analysts and investors;
 **s** changes
        in expectations as
        to our future financial performance, including financial estimates by securities
        analysts and investors;
 **s** the
        operations,
        regulatory, market and other risks discussed in this section;
 **s** announcements
        by us or our
        competitors of significant contracts, acquisitions, strategic partnerships,
        joint ventures or capital commitments;
 **s** announcements
        by third
        parties of significant claims or proceedings against us; and
 **s** future
        sales of our common
        stock.
  In
        addition, the market for our stock has from time to time experienced extreme
        price and volume fluctuations. These broad market fluctuations may adversely
        affect the market price of our common stock.
  **OUR
        COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION.**
  Our
        common stock is subject to regulations of the Securities and Exchange Commission
        relating to the market for penny stocks. The Securities Enforcement and Penny
        Stock Reform Act of 1990 (the "Reform Act") also requires additional disclosure
        in connection with any trades involving a stock defined as a "penny stock"
        (generally, according to recent regulations adopted by the Commission, any
        equity security that has a market price of less than $5.00 per share, subject
        to
        certain exceptions), including the delivery, prior to any penny stock
        transaction, of a disclosure schedule explaining the penny stock market and
        the
        risks associated therewith. These regulations generally require broker-dealers
        who sell penny stocks to persons other than established customers and accredited
        investors to deliver a disclosure schedule explaining the penny stock market
        and
        the risks associated with that market. These regulations also impose various
        sales practice requirements on broker-dealers. The regulations that apply
        to
        penny stocks may severely affect the market liquidity for our securities
        and
        that could limit your ability to sell your securities in the secondary
        market.
  **RISKS
        RELATING TO LOW-PRICE STOCKS**
  Because
        our stock is quoted on the NASD OTC Electronic Bulletin Board and subject
        to the
        Penny Stock Regulations, an investor may find it difficult to dispose of,
        or to
        obtain accurate quotations as to the market value of, our Company's securities.
        The regulations governing low-priced or penny stocks could limit the ability
        of
        broker-dealers to sell the Company's securities and thus the ability of holders
        of our common stock to sell their securities in the secondary
        market.
  **FUTURE
        CAPITAL NEEDS COULD RESULT IN DILUTION TO STOCKHOLDERS; ADDITIONAL FINANCING
        COULD BE UNAVAILABLE OR HAVE UNFAVORABLE TERMS.**
  Our
        future capital requirements will depend on many factors, including cash flow
        from operations, progress in our gas operations, competing market developments,
        and our ability to market our proposed products successfully. Our
        working capital is presently insufficient to fund the Company's activities.
        It
        will be necessary to raise additional funds through equity or debt financings.
        Any equity financings could result in dilution to our then-existing
        stockholders. Sources of debt financing may result in higher interest expense.
        Any financing, if available, may be on terms unfavorable to the Company.
        If
        adequate funds are not obtained, the Company may be required to reduce or
        curtail operations.
  **SUBSTANTIAL
        CAPITAL REQUIREMENTS**
  We
        may
        make substantial capital expenditures for the development, acquisition and
        production of natural gas pipeline, processing systems and, or storage
        facilities. If revenues or the Company's equity financing decrease as a result
        of lower natural gas prices or operating difficulties, the Company may have
        limited ability to expend the capital necessary to undertake or complete
        proposed plans and opportunities. There can be no assurance that additional
        debt
        or equity financing or cash generated by operations will be available to
        meet
        these requirements.
  9
 Table
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  **WE
        CAN GIVE NO ASSURANCE REGARDING THE AMOUNTS OF CASH THAT WE WILL
        GENERATE.**
  The
        actual amounts of cash we generate will depend upon numerous factors relating
        to
        our business which may be beyond our control, including:
  **s** the
        demand for natural
        gas;
 **s** profitability
        of
        operations;
 **s** required
        principal and interest payments on
        any debt we may incur;
 **s** the
        cost of
        acquisitions;
 **s** our
        issuance of equity
        securities;
 **s** fluctuations
        in working
        capital;
 **s** capital
        expenditures;
 **s** continued
        development of
        gas transportation network systems;
 **s** prevailing
        economic
        conditions; and
 **s** government
        regulations.
  **WE
        DO NOT EXPECT TO PAY DIVIDENDS FOR SOME TIME, IF AT ALL.**
  No
        cash
        dividends have been paid on the Common Stock. We expect that any income received
        from operations will be devoted to our future operations and growth. We do
        not
        expect to pay cash dividends in the near future. Payment of dividends would
        depend upon our profitability at the time, cash available for those dividends,
        and other factors.
  **COMPETITION**
  We
        will
        be competing with other established businesses that market similar products.
        Many of these companies have greater capital, marketing and other resources
        than
        we do. There can be no assurance that these or other companies will not develop
        new or enhanced products that have greater market acceptance than any that
        may
        be marketed by us. There can be no assurance that we will successfully
        differentiate ourselves from our competitors or that the market will consider
        our products to be superior or to or more appealing than those of our
        competitors. Market entry by any significant competitor may have an adverse
        effect on our sales and profitability.
  **WE
        OPERATE IN HIGHLY COMPETITIVE MARKETS IN COMPETITION WITH A NUMBER OF DIFFERENT
        COMPANIES.**
  We
        face
        strong competition in our geographic areas of operations. Our competitors
        include major integrated oil companies, interstate and intrastate pipelines.
        We
        compete with integrated companies that have greater access to raw natural
        gas supply and are less susceptible to fluctuations in price or volume, and
        some
        of our competitors that have greater financial resources may have an advantage
        in competing for acquisitions or other new business opportunities.
  10
 Table
            of Contents
  **GROWING
        OUR BUSINESS BY CONSTRUCTING NEW PIPELINES AND PROCESSING FACILITIES SUBJECTS
        US
        TO CONSTRUCTION RISKS AND RISKS THAT RAW NATURAL GAS SUPPLIES WILL NOT BE
        AVAILABLE UPON COMPLETION OF THE FACILITIES.**
  One
        of
        the ways we intend to grow our business is through the construction of additions
        to our existing gathering systems, modification of our existing gas processing
        plant and construction of new processing facilities. The construction of
        gathering and processing facilities requires the expenditure of significant
        amounts of capital, which may exceed our expectations. Generally, we may
        have
        only limited raw natural gas supplies committed to these facilities prior
        to
        their construction. Moreover, we may construct facilities to capture anticipated
        future growth in production in a region in which anticipated production growth
        does not materialize. As a result, there is the risk that new facilities
        may not
        be able to attract enough raw natural gas to achieve our expected investment
        return, which could adversely affect our results of operations and financial
        condition.
  **A
        SIGNIFICANT COMPONENT OF OUR GROWTH STRATEGY WILL BE ACQUISITIONS AND WE
        MAY NOT
        BE ABLE TO COMPLETE FUTURE ACQUISITIONS SUCCESSFULLY.**
  Our
        business strategy will emphasize growth through strategic acquisitions, but
        we
        cannot assure you that we will be able to identify attractive or willing
        acquisition candidates or that we will be able to acquire these candidates
        on
        economically acceptable terms. Competition for acquisition opportunities
        in our
        industry exists and may increase. Any increase in the level of competition
        for
        acquisitions may increase the cost of, or cause us to refrain from, completing
        acquisitions.
  Our
        strategy of acquisitions is dependent upon, among other things, our ability
        to
        obtain debt and equity financing and possible regulatory approvals. Our ability
        to pursue our growth strategy may be hindered if we are not able to obtain
        financing or regulatory approvals, including those under federal and state
        antitrust laws. Our ability to grow through acquisitions and manage such
        growth
        will require us to invest in operational, financial and management information
        systems and to attract, retain, motivate and effectively manage our employees.
        The inability to manage the integration of acquisitions effectively could
        have a
        material adverse effect on our financial condition, results of operations
        and
        business. Pursuit of our acquisition strategy may cause our financial position
        and results of operations to fluctuate significantly from period to
        period.
  **IF
        WE ARE UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY ACCEPTABLE
        TERMS, OUR FUTURE FINANCIAL PERFORMANCE MAY BE LIMITED.**
  There
        can
        be no assurance that:
  **s** we
        will identify
        attractive acquisition candidates in the future;
 **s** we
        will be able to acquire
        assets on economically acceptable terms;
 **s** any
        acquisitions will not
        be dilutive to earnings and operating surplus; or
 **s** any
        debt incurred to
        finance an acquisition will not affect our ability to make distributions
        to
        you.
  If
        we are
        unable to make acquisitions on economically and operationally acceptable
        terms,
        our future financial performance will be limited to the performance of our
        present gas gathering network.
  Our
        acquisition strategy involves many risks, including:
  **s** difficulties
        inherent in
        the integration of operations and systems;
 **s** the
        diversion of
        management's attention from other business concerns; and
 **s** the
        potential loss of key employees of
        acquired businesses.
  In
        addition, future acquisitions may involve significant expenditures. Depending
        upon the nature, size and timing of future acquisitions, we may be required
        to secure
        financing. We cannot assure you that additional financing will be available
        to
        us on acceptable terms.
  11
 Table
            of Contents
  **OUR
        BUSINESS IS DEPENDENT UPON PRICES AND MARKET DEMAND FOR NATURAL GAS AND PROPANE,
        WHICH ARE BEYOND OUR CONTROL AND HAVE BEEN EXTREMELY
        VOLATILE.**
  We
        are
        subject to significant risks due to fluctuations in commodity prices, primarily
        with respect to the prices of gas that we may own as a result of our processing
        and distribution activities.
  The
        markets and prices for residue gas depend upon factors beyond our control.
        These
        factors include demand for oil, and natural gas, which fluctuate with changes
        in
        market and economic conditions and other factors, including:
  **s** the
        impact of weather on
        the demand for oil and natural gas;
 **s** the
        level of domestic oil
        and natural gas production;
 **s** the
        availability of
        imported oil and natural gas;
 **s** the
        availability of local,
        intrastate and interstate transportation systems;
 **s** the
        availability and
        marketing of competitive fuels;
 **s** the
        impact of energy
        conservation efforts; and
 **s** the
        extent of governmental
        regulation and taxation.
  **WE
        GENERALLY DO NOT OWN THE LAND ON WHICH OUR PIPELINES ARE CONSTRUCTED AND
        WE ARE
        SUBJECT TO THE POSSIBILITY OF INCREASED COSTS FOR THE LOSS OF LAND
        USE.**
  We
        generally do not own the land on which our pipelines are constructed. Instead,
        we obtain the right to construct and operate the pipelines on other people's
        land for a period of time. If we were to lose these rights, our business
        could
        be affected negatively.
  **RISKS
        RELATED TO THE RETAIL PROPANE AND ASSOCIATED BUSINESSES**
  **s** Decreases
        in the demand
        for propane because of warmer weather may adversely affect our financial
        condition and results of operations.
  **s** Weather
        conditions have a
        significant impact on the demand for propane for heating purposes. All of
        our
        propane customers rely heavily on propane as a heating fuel. The volume of
        propane sold is at its highest during the six-month peak heating season of
        October through March and is directly affected by the severity of the winter
        weather. We estimate that approximately two-thirds of our annual retail propane
        volume will be sold during these months. Actual weather conditions can vary
        substantially from quarter to quarter and year to year, significantly affecting
        our financial performance. Furthermore, warmer than normal temperatures in
        our
        service area can significantly decrease the total volume of propane we sell.
        Consequently, our operating results may vary significantly due to actual
        changes
        in temperature. Weather conditions in any quarter or year may have a material
        adverse effect on our operations.
  **s** Sudden
        and sharp propane
        price increases that cannot be passed on to customers may adversely affect
        our
        profits, income, and cash flow.
  **s** Energy
        efficiency and
        technology may reduce the demand for propane and our revenues.
  **s** The
        national trend toward
        increased conservation and technological advances, including installation
        of
        improved insulation and the development of more efficient furnaces and other
        heating devices, has adversely affected the demand for propane by retail
        customers. Future conservation and efficiency measures or technological advances
        in heating, conservation, energy generation, or other devices might reduce
        demand for propane and our revenues.
  **s** The
        propane business is
        highly regulated. New or stricter environmental,
        health, or safety regulations may increase our operating costs and reduce
        our
        net income.
  **s** The
        propane business is
        subject to a wide range of federal, state, and local environmental,
        transportation, health and safety laws and regulations governing the storage,
        distribution, and transportation of propane. We may have increased costs
        in the
        future due to new or stricter safety, health, transportation, and environmental
        regulations or liabilities resulting from non-compliance with operating or
        other
        regulatory permits. The increase in any such costs may reduce our net
        income.
  **s** We
        will be subject to all
        operating hazards and risks normally associated with handling, storing,
        transporting, and delivering combustible liquids such as propane for use
        by
        consumers. As a result, we may be a defendant in various legal proceedings
        and
        litigation arising in the ordinary course of business. Our insurance may
        not be
        adequate to protect us from all material expenses related to potential future
        claims for personal injury and property damage or that insurance will be
        available in the future at economical prices. In addition, the occurrence
        of a
        serious accident, whether or not we are involved, may have an adverse effect
        on
        the public's desire to use our products.
  12
 Table
            of Contents
  **GOVERNMENT
        REGULATION AND ENVIRONMENTAL MATTERS**
  Our
        business is regulated by certain local, state and federal laws and regulations
        relating to the exploration for, and the development, production, marketing,
        pricing, transportation and storage of, natural gas and oil. We are also
        subject
        to extensive and changing environmental and safety laws and regulations
        governing plugging and abandonment, the discharge of materials into the
        environment or otherwise relating to environmental protection. In addition,
        we
        are subject to changing and extensive tax laws, and the effect of newly enacted
        tax laws cannot be predicted. The implementation of new, or the modification
        of
        existing, laws or regulations, including regulations which may be promulgated
        under the Oil Pollution Act of 1990, could have a material adverse effect
        on the
        Company.
  **FEDERAL,
        STATE OR LOCAL REGULATORY MEASURES COULD ADVERSELY AFFECT OUR BUSINESS.**
  While
        the
        Federal Energy Regulatory Commission, or FERC, does not directly regulate
        the
        major portions of our operations, federal regulation, directly or indirectly,
        influences certain aspects of our business and the market for our products.
        As a
        raw natural gas gatherer and not an operator of interstate transmission
        pipelines, we generally are exempt from FERC regulation under the Natural
        Gas
        Act of 1938, but FERC regulation still significantly affects our business.
        In
        recent years, FERC has pursued pro-competition policies in its regulation
        of
        interstate natural gas pipelines. However, we cannot assure you that FERC
        will
        continue this approach as it considers proposals by pipelines to allow
        negotiated rates not limited by rate ceilings, pipeline rate case proposals
        and
        revisions to rules and policies that may affect rights of access to natural
        gas
        transportation capacity.
  While
        state public utility commissions do not regulate our business, state and
        local
        regulations do affect our business. We are subject to ratable take and common
        purchaser statutes in the states where we operate. Ratable take statutes
        generally require gatherers to take, without undue discrimination, natural
        gas
        production that may be tendered to the gatherer for handling. Similarly,
        common
        purchaser statutes generally require gatherers to purchase without undue
        discrimination as to source of supply or producer. These statutes are designed
        to prohibit discrimination in favor of one producer over another producer
        or one
        source of supply over another source of supply. These statutes also have
        the
        effect of restricting our right as an owner of gathering facilities to decide
        with whom we contract to purchase or transport natural gas. Federal law leaves
        any economic regulation of raw natural gas gathering to the states, and some
        of
        the states in which we operate have adopted complaint-based or other limited
        economic regulation of raw natural gas gathering activities. States in which
        we
        operate that have adopted some form of complaint-based regulation, like
        Oklahoma, Kansas and Texas, generally allow natural gas producers and shippers to
        file
        complaints with state regulators in an effort to resolve grievances relating
        to
        natural gas gathering access and rate discrimination. The states in which
        we
        conduct operations administer federal pipeline safety standards under the
        Pipeline Safety Act of 1968, and the "rural gathering exemption" under that
        statute that our gathering facilities currently enjoy may be restricted in
        the
        future. The "rural gathering exemption" under the Natural Gas Pipeline Safety
        Act of 1968 presently exempts substantial portions of our gathering facilities
        from jurisdiction under that statute, including those portions located outside
        of cities, towns, or any area designated as residential or commercial, such
        as a
        subdivision or shopping center.
  **GOVERNMENTAL
        REGULATION OF OUR PIPELINES COULD INCREASE OUR OPERATING COSTS.**
  Currently
        our operations involving the gathering of natural gas from wells are exempt
        from
        regulation under the Natural Gas Act. Section 1(b) of the Natural Gas Act
        provides that the provisions of the Act shall not apply to facilities used
        for
        the production or gathering of natural gas. Our physical dimensions and
        operations support the conclusion that our facilities perform primarily a
        gathering function. We should not, therefore, be subject to Natural Gas Act
        regulation. There, however, can be no assurance that this will remain the
        case.
        The Federal Energy Regulatory Commission's oversight of entities subject
        to the Natural
        Gas Act includes the regulation of rates, entry and exit of service,
        acquisition, construction and abandonment of transmission facilities, and
        accounting for regulatory purposes. The implementation of new laws or policies
        that would subject us to regulation by the Federal Energy Regulatory Commission
        under the Natural Gas Act could have a material adverse effect on our financial
        condition and operations. Similarly, changes in the method or circumstances
        of
        operation, or in the configuration of facilities, could result in changes
        in our
        regulatory status. In addition, we are subject to federal and state safety
        laws
        that dictate the type of pipeline, quality of pipe protection, depth, methods
        of
        welding and other construction-related standards.
  Our
        gas
        gathering operations are subject to regulation at the state level, which
        increases the costs of operating our pipeline facilities. Matters subject
        to
        regulation include rates, service and safety. We have been granted an exemption
        from regulation as a public utility in Texas. Presently, our rates are not
        regulated in Texas. Changes in state regulations, or our status under these
        regulations due to configuration changes in our operating facilities, that
        subject us to further regulation could have a material adverse effect on
        our
        financial condition. Litigation or governmental regulation relating to
        environmental protection and operational safety may result in substantial
        costs
        and liabilities.
  **OUR
        BUSINESS INVOLVES HAZARDOUS SUBSTANCES AND MAY BE ADVERSELY AFFECTED BY
        ENVIRONMENTAL REGULATION.**
  Many
        of
        the operations and activities of our gathering systems, plants and other
        facilities are subject to significant federal, state and local environmental
        laws and regulations. These include, for example, laws and regulations that
        impose obligations related to air emissions and discharge of wastes from
        our
        facilities and the cleanup of hazardous substances that may have been released
        at properties currently or previously owned or operated by us or locations
        to
        which we have sent wastes for disposal. Various governmental authorities
        have
        the power to enforce compliance with these regulations and the permits issued
        under them, and violators are subject to administrative, civil and criminal
        penalties, including civil fines, injunctions or both. Liability may be incurred
        without regard to fault for the remediation of contaminated areas. Private
        parties, including the owners of properties through which our gathering systems
        pass, may also have the right to pursue legal actions to enforce compliance
        as
        well as to seek damages for non-compliance with environmental laws and
        regulations or for personal injury or property damage.
  There
        is
        inherent risk of the incurrence of environmental costs and liabilities in
        our
        business due to our handling of natural gas and other petroleum products,
        air
        emissions related to our operations, historical industry operations, waste
        disposal practices and the prior use of natural gas flow meters containing
        mercury. In addition, the possibility exists that stricter laws, regulations
        or
        enforcement policies could significantly increase our compliance costs and
        the
        cost of any remediation that may become necessary. We cannot assure you that
        we
        will not incur material environmental costs and liabilities. Furthermore,
        we
        cannot assure you that our insurance will provide sufficient coverage in
        the
        event an environmental claim is made against us.
  Our
        business may be adversely affected by increased costs due to stricter pollution
        control requirements or liabilities resulting from non-compliance with required
        operating or other regulatory permits. New environmental regulations might
        adversely affect our products and activities, including processing, storage
        and
        transportation, as well as waste management and air emissions. Federal and
        state
        agencies also could impose additional safety requirements, any of which could
        affect our profitability.
  **RISK
        OF ADDITIONAL COSTS AND LIABILITIES RELATED TO ENVIRONMENTAL AND SAFETY
        REGULATIONS AND CLAIMS**
  Our
        pipeline operations are subject to various federal, state and local
        environmental, safety, health and other laws, which can increase the cost
        of
        planning, designing, installing and operating such facilities. There can
        be no
        assurance that costs and liabilities relating to compliance will not be incurred
        in the future. Moreover, it is possible that other developments, such as
        increasingly strict environmental and safety laws, regulations and enforcement
        policies thereunder, and claims for damages to property or persons resulting
        from our operations, could result in additional costs to and liabilities
        for
        us.
  13
 Table
            of Contents
 
 **SOVEREIGN
        RISK**
  We
        are
        focusing on the development of infrastructure projects through our Mexican
        entity, Terranova Energia S. de R.L. de C.V., in the nation of the United
        Mexican States (Mexico). The risk of indirect or regulatory actions by local,
        state or federal authorities in Mexico which may inhibit, delay, hinder or
        block
        projects under development in Mexico is very high given the history of
        operations conducted by past businesses other than the Company in Mexico.
        There
        is a substantial risk that a set of actions taken by commission or omission
        by
        the various actors in the public, private, nongovernmental and/or social
        sectors
        could negatively impact a project or investment in Mexico. The legal system
        employed in Mexico is dramatically different in its structure and method
        of
        operation compared to the common law foundation present in the United States
        of
        America. The level of legal protection afforded investors by the North American
        Free Trade Agreement has not materially improved from a foreign investor's
        viewpoint.
  There
        can
        be no assurance that a commercially viable project will be completed due
        to the
        above factors which could result in commercial competitors trying to circumvent
        the market system through the exploitation of undocumented, extra-official
        channels of influence that constitute unfair competition. Federal, state
        and
        local authorities are not well coordinated in their legal protections and
        improper influence and competition may arise from any level of government
        to
        disrupt or destroy the commercial viability of investments by foreign investors.
        While the Company has taken precautions to limit its investments to prudent
        levels, there is a continuing risk of adverse activities arising from the
        above
        sources that could impair or result in the entire loss of investment in
        otherwise commercially viable projects initiated by the Company in
        Mexico.
  **PIPELINE
        SYSTEM OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND UNFORESEEN
        INTERRUPTIONS.**
  The
        operations of our pipeline systems are subject to hazards and unforeseen
        interruptions, including natural disasters, adverse weather, accidents or
        other
        events, beyond our control. A casualty occurrence might result in injury
        and
        extensive property or environmental damage. Although we intend to maintain
        customary insurance coverages for gathering systems of similar capacity,
        we can
        offer no assurance that these coverages will be sufficient for any casualty
        loss
        we may incur.
  **OPERATING
        RISKS OF NATURAL GAS OPERATIONS**
  The
        natural gas business involves certain operating hazards. The availability
        of a
        ready market for our natural gas products also depends on the proximity of
        reserves to, and the capacity of, natural gas gathering systems, pipelines
        and
        trucking or terminal facilities. As a result, substantial liabilities to
        third
        parties or governmental entities may be incurred, the payment of which could
        reduce or eliminate the funds available for exploration, development or
        acquisitions or result in the loss of our properties. In accordance with
        customary industry practices, we maintain insurance against some, but not
        all,
        of such risks and losses. We do not carry business interruption insurance.
        The
        occurrence of such an event not fully covered by insurance could have a material
        adverse effect on our financial condition and results of
        operations.
  **OUR
        BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL RISKS, SOME OF WHICH MAY NOT
        BE
        COVERED BY INSURANCE.**
  Our
        operations are subject to the many hazards inherent in the gathering,
        compressing, treating and processing of raw natural gas and NGLs and storage
        of
        residue gas, including ruptures, leaks and fires. These risks could result
        in
        substantial losses due to personal injury and/or loss of life, severe damage
        to
        and destruction of property and equipment and pollution or other environmental
        damage and may result in curtailment or suspension of our related operations.
        We
        are not fully insured against all risks incident to our business. If a
        significant accident or event occurs that is not fully insured, it could
        adversely affect our operations and financial condition.
  14
 Table
            of Contents
 
 **INSURANCE**
  Companies
        engaged in the petroleum products distribution and storage business may be
        sued
        for substantial damages in the event of an actual or alleged accident or
        environmental contamination. We maintain $2,000,000 of liability insurance.
        There can be no assurance that we will be able to continue to maintain liability
        insurance at a reasonable cost in the future, or that a potential liability
        will
        not exceed the coverage limits. Nor can there be any assurance that the amount
        of insurance carried by us will enable us to satisfy any claims for which
        we
        might be held liable resulting from the conduct of our business
        operations.
  **ITEM
        1B. UNRESOLVED STAFF COMMENTS**
  **Not
        Applicable to Non-Accelerated Filers.**
  **ITEM
        2. DESCRIPTION OF PROPERTIES**
  Reef
        Ventures, L.P. owns and operates the international natural gas pipeline and
        related facilities located in Maverick County, Texas and Coahuila, Mexico.
        Tidelands owns a 97% limited partnership interest and a 1% general partner
        interest (through Arrecefe Management, LLC) in this entity. We acquired these
        interests from Impact International, LLC. Impact financed our purchase of
        this
        system and, as of December 31, 2006, we owe Impact $4,785,003.
  Rio
        Bravo
        Energy, LLC owns and operates the Chittim Gas Processing Plant which is located
        in Maverick County, Texas. The plant is currently shut down. The gas plant
        has
        the capability to fractionate natural gas into commercial grade propane and
        butane. In the near future, we expect to sell these assets.
  Sonora
          Pipeline, LLC owns the Sonora Pipeline network in Maverick, Dimmitt and
          Zavala
          Counties, Texas, consisting of approximately 80 miles of pipeline. No
          significant encumbrances exist with respect to the assets of this subsidiary.
          The pipeline is currently inactive and could be used to transport natural
          gas
          from third party producers to supply feedstock for the Chittim Gas Processing
          Plant owned by Rio Bravo Energy, LLC. In the near future, we expect to
          sell
          these assets. Sonora Pipeline, LLC also plans to construct, own and operate
          approximately 29 miles of natural gas pipelines in Hidalgo County, Texas
          which
          will interconnect at the U.S.-Mexico border with the pipeline and storage
          assets
          to be constructed, owned and operated by Terranova Energia, S. de R.L.
          de C.V,
          another subsidiary of Tidelands Oil & Gas Corporation.
  Sonterra
          Energy Corporation operates propane distribution systems providing propane
          to 17
          residential subdivisions in Central Texas. Sonterra is currently constructing
          a
          propane distribution system for approximately 350 residential units in
          Cordillera Ranch, a rural subdivision located in Kendall County,
          Texas.
 
 Tidelands
          Exploration & Production Corporation owns a 50% interest in a 26 mile
          natural gas pipeline located in Medina, Atascosa and Bexar Counties, Texas
          and
          also owns a 50% interest in two leases with 5 recompleted natural gas wells
          in
          Atascosa and Medina Counties, Texas. These assets are held for sale at
          present
          with active negotiations underway.
 We
        lease
        our San Antonio executive office. We renewed this lease on February 1, 2006
        for
        a term until December 31, 2007, with a current monthly lease payment of $3,400.
        Sonterra Energy Corporation entered into a sublease agreement for its offices
        in
        an adjacent building. On February 1, 2006, Sonterra Energy Corporation entered
        into a direct lease with the building owner at a rent of $3,300 per month
        for a
        term ending December 31, 2007. Sonterra
        leased a field office and storage yard in Dripping Springs, Texas on May
        15,
        2006, for a five-year term at an annual rent rate of $8,100.
  15
 Table
            of Contents
 
 **ITEM
        3. LEGAL PROCEEDINGS**
  **Matter
        No. 1:**
  On
        January 6, 2003, we were served as a third party defendant in a lawsuit titled
        Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil & Gas
        Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
        Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
        initiated by Northern Natural Gas (“Northern”) when it sued Betty Lou Sheerin
        (“Sheerin”) for her failure to make payments on a note she executed payable to
        Northern in the original principal amount of $1,950,000. Northern's suit
        was
        filed on November 13, 2002. Sheerin answered Northern's lawsuit on January
        6,
        2003. Sheerin's answer generally denied Northern's claims and raised the
        affirmative defenses of fraudulent inducement by Northern, estoppel, waiver
        and
        the further claim that the note does not comport with the legal requirements
        of
        a negotiable instrument. Sheerin seeks a judicial ruling that Northern be
        denied
        any recovery on the note. Sheerin's answer included a counterclaim against
        Northern, ZG Gathering, and Ken Lay generally alleging, among other things,
        that
        Northern, ZG Gathering, Ltd. and Ken Lay, fraudulently induced her execution
        of
        the note. Northern has filed a general denial of Sheerin's counterclaims.
        Sheerin's answer included a third party cross claim against Tidelands Oil
        and
        Gas Corporation (“Tidelands”). She alleges that Tidelands entered into an
        agreement to purchase the Zavala Gathering System from ZG Gathering Ltd.
        and
        that, as a part of the agreement, Tidelands agreed to satisfy all of the
        obligations due and owing to Northern, thereby relieving Sheerin of all
        obligations she had to Northern on the $1,950,000 promissory note in question.
        Tidelands and Sheerin agreed to delay the Tidelands' answer date in order
        to
        allow time for mediation of the case. Tidelands participated in mediation
        on
        March 11, 2003. The case was not settled at that time. Tidelands answered
        the
        Sheerin suit on March 26, 2003. Tidelands' answer denies all of Sheerin's
        allegations.
  On
          May 24
          and June 16, 2004 respectively, Betty Lou Sheerin filed her first and second
          amended original answer, affirmative defenses, special exceptions and second
          amended original counterclaim, second amended original third party cross-actions
          and requests for disclosure. In these amended pleadings, she sued Michael
          Ward,
          Royis Ward, James B. Smith, Carl Hessel and Ahmed Karim in their individual
          capacities. Her claims against these individuals are for fraud, breach
          of
          contract, breach of the Uniform Commercial Code, breach of duty of good
          faith
          and fair dealing and conversion. Sheerin has now non-suited her claims
          against
          Michael Ward, Royis Ward, and James B. Smith.
  In
          September 2002, as a pre-closing deposit to the purchase of the Zavala
          Gathering
          System, the Company executed a $300,000 promissory note to Betty L. Sheerin,
          a
          partner of ZG Gathering, Ltd. In addition, the Company issued 1,000,000
          shares
          of its common stock to various partners of ZG Gathering, Ltd. On December
          3,
          2003, Sheerin filed a separate lawsuit against Tidelands in the 150th District
          Court of Bexar County, Texas on this promissory note seeking a judgment
          against
          Tidelands for the principle amount of the note, plus interest. On December
          29th,
          2003, Tidelands answered this lawsuit denying liability on the note. On
          April 1,
          2004, Tidelands filed a plea in abatement asking the court to dismiss or
          abate
          Sheerin's lawsuit on the $300,000 promissory note as it was related to
          and its
          outcome was dependent on the outcome of the Sheerin third party cross action
          against Tidelands in Cause Number 2002-C1-16421. The Company believes that
          the
          promissory note and shares of common stock should be cancelled based upon
          the
          outcome of the litigation described above. Accordingly, our financial statements
          reflect this belief.
  On
          September 15, 2004 and again on October 15, 2004 respectively, Sheerin
          amended
          her pleadings to include a third and fourth amended third party cross action
          against Tidelands adding a claim for the $300,000 promissory note. In these
          amended pleadings, Sheerin also deleted her claims against Carl Hessel
          and Ahmed
          Karim (“Company Directors”). After adding the claim on the $300,000 promissory
          note to the third party claims of Sheerin against Tidelands in Cause No.
          2002-C1-16421, Sheerin dismissed Cause Number 2002-C1-16421.
  Tidelands
        won a partial summary judgment against Sheerin as to all of her tort claims
        pled
        against Tidelands, save and except only her claim for conversion of 500,000
        shares of Tidelands stock.
  Sheerin
        seeks damages against Tidelands for indemnity for any sums found to be due
        from
        her to Northern, unspecified amounts of actual damages, statutory damages,
        unspecified amounts of exemplary damages, attorneys fees, costs of suit,
        and
        prejudgment and post judgment interest.
  16
 Table
            of Contents
  On
        August
        5, 2005, Northern filed its Fourth Amended Original Petition which, for the
        first time, named Tidelands as a defendant to Northern. Northern seeks to
        impose
        liability on Tidelands for $1,950.000 promissory note signed by McDay Energy
        Partners, Ltd. (the predecessor to ZG Gathering, Ltd.) and Sheerin and the
        $1,700,000 promissory note signed by McDay only. Northern contends that
        Tidelands is alternatively liable to Northern for payment of both such
        promissory notes totaling $3,709,914 plus interest because Northern is a
        third
        party beneficiary under a December 3, 2001 purchase and sale agreement between
        ZG Gathering, Ltd., and Tidelands claiming that in such agreement Tidelands
        agreed to assume and satisfy all indebtedness due and owing Northern by Sheerin
        and ZG Gathering, Ltd. Northern also claims that it is entitled to foreclosure
        of a lien on the gas gathering system and pipeline that was the subject of
        the
        promissory notes in question. 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 indebtedness, failing to defend and indemnify it from such debt,
        failing to pay off the $300,000 note, failing to issue the free trading shares
        in Tidelands, and by placing a stop transfer order on the restricted stock
        that
        was issued by Tidelands. ZG seeks specific performance of the agreement,
        recovery of an unspecified amount of damages, and its attorney's fees.
  On
        March
        6, 2006, the Court granted Tidelands’ motion for summary judgment against NNG
        and dismissed NNG’s suit against Tidelands. On March 16, 2006, the Court denied
        Tidelands’ motion for summary judgment against Sheerin on Tidelands’ affirmative
        defense of mutual mistake. On July 19, 2006, the Court denied ZG’s motion for
        summary judgment to strike Tidelands’ affirmative defense of mutual
        mistake.
  Trial
        is
        scheduled to begin May 7, 2007, unless a settlement is completed.  A
        settlement agreement which is conditioned on funding and which involves
        Tidelands’ sale of certain assets has been signed by all but one of the
        litigation parties. Based on negotiations, the Company has reserved $2,250,000
        as an estimated litigation settlement and that amount has been included in
        this
        report.
  **Matter
        No. 2:**
  Cause
        No.
        GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp., Defendant,
        was filed in the 53rd Judicial District of Travis County, Texas and Cause
        No. GN
        501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy Corp.,
        Defendant, was filed in the 98 th Judicial
        District Court of Travis County, Texas. The above matters were each filed
        against Sonterra in May 2005 and involve the same claims arising from the
        same
        propane service agreement. In each case, the plaintiff initially brought
        claims
        against Sonterra arising from Sonterra’s failure, as an assignee of the
        agreement, to pay easement use fees to the plaintiff. Sonterra obtained summary
        judgment as to the plaintiffs’ respective breach of contract and failure of
        assignment claims arising from the failure to pay easement use fees. The
        cases
        were not, however, fully dismissed because the plaintiffs added new causes
        of
        action for failure to pay easement use fees, claims for unpaid developer
        bonus,
        reformation of the agreements to require payment of easement use fees and
        alleged failure of assignment. These separate lawsuits have since been
        consolidated into one suit for purposes of pretrial and trial. The May 2007
        trial date has been continued and will likely be reset in September 2007.
  **Matter
        No. 3:**
  Cause
        No.
        GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
        Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
        Court of Travis County, Texas. This case involves a claim that Defendant
        Toll
        Brothers Property, LP (“Toll Brothers”) sold Plaintiff Goodson Builder, Ltd.
        (“Plaintiff” or “Goodson”) property without disclosing a propane easement.
        Plaintiff sued Sonterra Energy Corp. (“Sonterra”) for trespassing through the
        use of the easement. Goodson’s primary claim is against the seller for fraud and
        non-disclosure. Toll Brothers has responded with a claim for sanctions because
        the claim is frivolous. Toll Brothers offers a witness who is Plaintiff’s former
        employee and took pictures of the propane tank prior to the Plaintiff’s
        purchase. Goodson seeks damages in the hundreds of thousands of dollars.
        Insurance would not cover these damages.
  The
        case
        is pending summary judgment. The Company is contesting the case vigorously;
        however, the Company is willing to settle if the Plaintiff is willing to
        drop
        the claim.
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
        HOLDERS**
  No
        matters were brought to a vote of the security holders during the quarter
        ended
        December 31, 2006.
  17
 Table
            of Contents
  **PART
        II**
  **ITEM
        5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER**
 
 **PURCHASES
        OF EQUITY SECURITIES**
  **Market
        For Common Equity And Related Stockholder Matters**
  Our
        common stock is traded on the OTC Electronic Bulletin Board. The following
        table
        sets forth the high and low bid prices of our common stock for each quarter
        for
        the years 2006 and 2005. The quotations set forth below reflect inter-dealer
        prices, without retail mark-up, mark-down or commission and may not represent
        actual transactions.
  **Common
        Stock**
  Our
        common stock trades Over-the-Counter (OTC) on the OTC Bulletin Board under
        the
        symbol TIDE. The table below sets forth the high and low bid information
        for the
        past two years. These quotations reflect inter-dealer prices, without retail
        mark-up, mark-down or commission and may not represent actual transactions.
        These quarterly trade and quote data provided by NASDAQ OTC Bulletin
        Board.
 
 Bid
                InformationFiscal
                Quarter Ended**High**
              ****
              **Low**December
                31, 2006
              0.57
              
              0.26September
                30, 2006
              0.84
              
              0.51June
                30, 2006
              1.18
              
              0.51March
                31, 2006
              1.18
              
              0.78December
                31, 2005
              1.01
              
              0.76September
                30, 2005
              1.39
              
              0.80June
                30, 2005
              1.77
              
              0.95March
                31, 2005
              2.59
              
              1.74
 
 As
        of
        December 31, 2006, we had an aggregate of 95 stockholders of record as reported
        by our transfer agent, Signature Stock Transfer Co., Inc. Certain shares
        are
        held in the "street" names of securities broker dealers and we estimate the
        number of stockholders which may be represented by such securities broker
        dealer
        accounts may exceed 5,000.
  18
 Table
            of Contents
  **Dividends
        and Dividend Policy**
 
 There
        are
        no restrictions imposed on the Company that limit its ability to declare
        or pay
        dividends on its common stock, except as limited by state corporation law.
        During the year ended December 31, 2006, no cash or stock dividends were
        declared or paid and none are expected to be paid in the foreseeable
        future.
 
 We
        expect
        to continue to retain all earnings generated by our future operations for
        the
        development and growth of our business. The Board of Directors will determine
        whether or not to pay dividends in the future in light of our earnings,
        financial condition, capital requirements and other factors.
 
 Recent
        Sales of Unregistered Securities
 
 We
        made
        the following issuances of unregistered (restricted) securities during the
        fourth quarter of the fiscal year ended on December 31, 2006:
 
 On
        November 27, 2006, the Company issued 40,000 shares of its restricted common
        stock valued at $16,000 to an employee of the Company.
 
 No
        commissions were paid in connection with any of these sales. We did not employ
        any form of general solicitation or advertising in connection with the offer
        and
        sale of the securities described below. Except as otherwise noted above,
        the
        offer and sale of the securities listed below were made in reliance on the
        exemption from registration provided by Section 4(2) of the Securities Act
        and/or Regulation D promulgated by the Securities and Exchange Commission
        as
        transactions by an issuer not involving any public offering.
   **PERFORMANCE
        GRAPH**
 
 The
        following graph compares total stockholder returns for Tidelands Oil and
        Gas
        Corporation’s common stock for the past five years to two indices: the Russell
        Microcap Index and the Nasdaq Combined Industrial Index. All of the cumulative
        total returns are computed assuming the value of the investment in Tidelands’
common stock and each index as $100.00 on December 31, 2001, and the
        reinvestment of all dividends (to date, the Company has not declared any
        dividends). The comparisons shown on the graph below are based on historical
        data and are not intended to be indicative of future performance of Tidelands’
common stock.




**INDEXED
                      RETURNSYears
                      Ending December 31****Company/Index**
                  
                  **BasePeriod12/31/01**
                  
                  **2002**
                  
                  **2003**
                  
                  **2004**
                  
                  **2005**
                  
                  **2006**TIDELANDS
                      OIL AND GAS CORP.
                  
                  100
                  
                  22.00
                  
                  151.36
                  
                  92.33
                  
                  56.41
                  
                  17.41RUSSELL
                      MICROCAP INDEX
                  
                  100
                  
                  88.10
                  
                  121.58
                  
                  144.05
                  
                  161.65
                  
                  183.26NASDAQ
                      COMBINED INDUSTRIAL INDEX
                  
                  100
                  
                  76.04
                  
                  114.41
                  
                  130.69
                  
                  134.51
                  
                  149.49
  The
          Stock
          Performance Graph shall not be deemed incorporated by reference into any
          filing
          made by the Company under the Securities Act of 1933 or the Securities
          Exchange
          Act of 1934, notwithstanding any general statement contained in any such
          filing
          incorporating this Annual Report on Form 10-K by reference, except to the
          extent
          the Company incorporates the Graph by specific reference.
  19
 Table
              of Contents
 
 **ITEM
        6. SELECTED FINANCIAL DATA**
 
 **SELECTED
        CONSOLIDATED FINANCIAL INFORMATION**
 
 The
        following tables present our selected consolidated financial information
        as of
        the end of the periods indicated. The selected consolidated financial
        information for, and as of the end of, each of the twelve months ended December
        31, 2006, December 31, 2005, December 31, 2004, December 31, 2003, and December
        31, 2002, are from our audited consolidated financial statements.
 
 The
        selected consolidated financial information is not necessarily indicative
        of the
        results that may be expected for any future period. The selected consolidated
        financial information should be read in conjunction with "Management's
        Discussion and Analysis" and the historical and consolidated financial
        statements and notes incorporated by reference in this prospectus.
  **(Dollars
                    in thousands, except share and per share
                    data)**Operating
                    Data:
                
                
                **2006**
                
                
                **2005**
                
                
                **2004**
                
                
                **2003**
                
                
                **2002**Revenue
                
                $
                2,223
                
                $
                1,861
                
                $
                1,884
                
                $
                179
                
                $
                710Operating
                    Expenses
                
                
                14,163
                
                
                15,172
                
                
                31,626
                
                
                3,061
                
                
                4,454Operating
                    Income (Loss)
                
                
                (11,940
                )
                
                (13,311
                )
                
                (29,742
                )
                
                (2,882
                )
                
                (3,744
                )Other
                    Income (Expense), Net
                
                
                103
                
                
                5,648
                
                
                15,440
                
                
                1,534
                
                
                (316
                )Net
                    Income (Loss)
                
                $
                (11,837
                )
                $
                (7,663
                )
                $
                (14,302
                )
                $
                (1,348
                )
                $
                (4,060
                )Statement
                    of Cash Flows Data:Cash
                    Provided (Used) by Operating Activities
                
                $
                (4,821
                )
                $
                (2,784
                )
                $
                (3,108
                )
                $
                441
                
                $
                (423
                )Cash
                    Provided (Used) by Investing Activities
                
                $
                (2,793
                )
                $
                (1,836
                )
                $
                (9,629
                )
                $
                366
                
                $
                (354
                )Cash
                    Provided (Used) by Financing Activities
                
                $
                6,868
                
                $
                275
                
                $
                17,302
                
                $
                (106
                )
                $
                573Balance
                    Sheet Data:Total
                    Assets
                
                $
                15,187
                
                $
                13,489
                
                $
                22,423
                
                $
                1,624
                
                $
                1,379Long-Term
                    Debt
                
                $
                8,934
                
                $
                4,272
                
                $
                11,732
                
                $
                -
                
                $
                -Total
                    Stockholders' Equity
                
                $
                2,153
                
                $
                7,767
                
                $
                4,949
                
                $
                485
                
                $
                (2,536
                )
  20
 Table
            of Contents
 
 **SELECTED
        CONSOLIDATED QUARTERLY FINANCIAL INFORMATION**
 **The
        information below is from unaudited consolidated financial
        statements.**
   **Year
                    Ended December 31, 2006**
                
                **March
                    31**
                
                **June
                    30**
                
                **September
                    30**
                
                **December
                    31**Revenues
                
                $
                802
                
                $
                407
                
                $
                369
                
                $
                645Cost
                    of Goods Sold
                
                
                377
                
                
                206
                
                
                177
                
                
                414Gross
                    Margin
                
                
                425
                
                
                201
                
                
                192
                
                
                231Operating
                    Expenses
                
                
                2,155
                
                
                2,190
                
                
                4,017
                
                
                2,377Other
                    Income (Expense), Net
                
                
                34
                
                
                28
                
                
                48
                
                
                (7
                )Net
                    earnings (loss)
                
                $
                (1,696
                )
                $
                (1,961
                )
                $
                (3,777
                )
                $
                (2,153
                )Basic
                    (loss) per share
                
                $
                (0.02
                )
                $
                (0.03
                )
                $
                (0.05
                )
                $
                (0.03
                )Diluted (loss)
                    per share
                
                $
                (0.02
                )
                $
                (0.03
                )
                $
                (0.05
                )
                $
                (0.03
                )
 **Year
                    Ended December 31, 2005**
                
                
                **March
                      31**
                
                
                **June
                      30**
                
                
                **September
                      30**
                
                
                **December
                      31**Revenues
                
                $
                628
                
                $
                341
                
                $
                248
                
                $
                644Cost
                    of Goods Sold
                
                
                285
                
                
                130
                
                
                220
                
                
                368Gross
                    Margin
                
                
                343
                
                
                211
                
                
                28
                
                
                276Operating
                    Expenses
                
                
                6,947
                
                
                3,825
                
                
                1,580
                
                
                1,817Other
                    Income (Expense), Net
                
                
                (2,862
                )
                
                8,096
                
                
                324
                
                
                90Net
                    earnings (loss)
                
                $
                (9,466
                )
                $
                4,482
                
                $
                (1,228
                )
                $
                (1,451
                )Basic
                    income (loss) per share
                
                $
                (0.15
                )
                $
                0.08
                
                $
                (0.02
                )
                $
                (0.11
                )Diluted
                    income (loss) per share
                
                $
                (0.15
                )
                $
                0.08
                
                $
                (0.02
                )
                $
                (0.11
                )
   **Year
                    Ended December 31, 2004**
                
                
                **March
                      31**
                
                
                **June
                      30**
                
                
                **September
                      30**
                
                
                **December
                      31**Revenues
                
                $
                0
                
                $
                508
                
                $
                825
                
                $
                551Cost
                    of Goods Sold
                
                
                0
                
                
                498
                
                
                802
                
                
                209Gross
                    Margin
                
                
                0
                
                
                10
                
                
                23
                
                
                342Operating
                    Expenses
                
                
                1,538
                
                
                4,209
                
                
                3,545
                
                
                20,825Other
                    Income (Expense), Net
                
                
                4
                
                
                15,397
                
                
                6
                
                
                33Net
                    earnings (loss)
                
                $
                (1,534
                )
                $
                11,198
                
                $
                (3,516
                )
                $
                (20,450
                )Basic
                    income (loss) per share
                
                $
                (0.03
                )
                $
                0.18
                
                $
                (0.02
                )
                $
                (0.34
                )Diluted
                    income (loss) per share
                
                $
                (0.03
                )
                $
                0.18
                
                $
                (0.02
                )
                $
                (0.34
                )
  21
 Table
            of Contents
  **ITEM
        7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
  **Business
        Overview**
  Our
        products and services are primarily focused on development and operation
        of
        transportation, processing, distribution and storage projects of natural
        gas and
        natural gas liquids in the northeastern states of Mexico (Coahuila, Nuevo
        Leon
        and Tamaulipas) and the states of Texas and California in the United States
        of
        America.
  We
        derive
        our revenue from transportation fees from delivery of natural gas to Conagas,
        the local distribution company in Piedras Negras, Coahuila, through the pipeline
        owned by Reef Ventures, L.P. and the sale of propane gas to residential
        customers through the assets owned by Sonterra Energy Corporation. Sonterra
        also
        designs and constructs residential propane delivery systems for new residential
        developments in Central Texas. We derive revenue from this activity in two
        ways,
        the first being from construction revenue for yard lines and meter sets
        installed to a homeowner's lot, and the second being the sale of LPG gas
        to
        customers in the residential subdivisions. Sonterra Energy Corporation has
        recently begun performing construction services for third party utility
        companies in order to more efficiently utilize its existing compentencies
        and
        assets.
  With
          respect to our pipeline system owned by Reef Ventures, L.P., management
          has
          evaluated an expansion of the pipeline in Coahuila to serve new markets
          along
          the state highway No. 57 corridor to Monclova, Coahuila. We currently expect
          that Reef Ventures, L.P. will not be participating in the construction
          of
          additional pipelines in Mexico to reach these new markets. The required
          pipeline
          will be constructed by end users or an intermediate purchaser of the natural
          gas. If constructed, Reef Ventures, L.P. is expecting to simply continue
          to
          transport the additional volumes of natural gas required for these markets
          through its existing facilities which would be interconnected in Mexico
          to the
          new pipeline that is required to reach these potential markets. Management
          believes the timeline for the initiation of construction for such pipeline
          project in Mexico is likely to be a 2009 event with completion in 2010.
          The
          increased volume for the Reef Ventures pipeline from such an event could
          approximate 5 million cubic feet per day. The current baseload for the
          Conagas
          system in Piedras Negras is approximately 5.5 million cubic feet per day
          of
          which Reef Ventures LP transports 1/3 to 1/2 of the total volume. The expected
          end users for increased market demand in the Piedras Negras, Coahuila area
          would
          be a cardboard packaging and bottling operation for a proposed beer brewing
          facility. In December 2006, Grupo Modelo announced its intention to build
          the
          first phase of a new brewery in the year 2010. In addition to these potential
          developments, management believes that increasing volumes of natural gas
          can be
          transported in its existing facilities. In 2005, which was the final year
          of a
          two-year contractual nomination scheme, the Reef Ventures pipeline was
          carrying
          only half the actual baseload volume (and none of the swing volume) was
          being
          transported to CONAGAS in Piedras Negras. In 2006, management did not
          successfully increase the volumes transported on the natural gas line.
          We
          believe that if given adequate supplies, the Reef Ventures pipeline can
          transport all of the current base load and the swing requirements of CONAGAS
          which would result in a doubling of volumes and revenues for the pipeline.
          However the current dependence on volume increases in order to achieve
          the
          necessary rate of return on this investment has been unsuccessful. Accordingly,
          management has sought to increase revenues by imposing a minimum demand
          charge
          for the reservation of capacity on the pipeline. Negotiations are currently
          underway to achieve that objective. In the event these negotiations are
          unsuccessful, a sale of all or part of the Reef Ventures, LP pipeline will
          be
          considered in order to retire the current indebtedness of $4,785,003 currently
          owed to Impact International, LLC. This debt matures at the end of May
          2008 and
          is currently increasing each quarter due to negative amortization as a
          result of
          the poor revenue return from the current transportation fee
          arrangements.
  Sonterra
        Energy Corporation, a wholly-owned subsidiary of Tidelands, entered into
        the
        residential propane distribution business on November 1, 2004 with its
        acquisition of 850 existing customers located in 15 subdivisions in the vicinity
        of Austin, Texas. At December 31, 2006, Sonterra had increased its number
        of
        meter hookups to 1,155 and is expecting a 15% rate of increase in the number
        of
        new meter hookups in 2007. There are approximately 1,095 unmetered future
        lots
        within the above subdivisions where propane service can be connected. As
        new
        homes are constructed on these lots our customer base will grow. Construction
        activities continue in the existing subdivisions where expansion phases of
        development will result in the addition of approximately 170 customers in
        2007.
        Sonterra's participation in the launch of new subdivisions is also occurring,
        as
        exemplified by the signing of a construction contract with the developers
        of Las
        Brisas at Ensenada Shores (located on Canyon Lake), where 75 new lots with
        propane service have been completed for sale to new customers. This
        subdivision's second phase of development is expected to add another 175
        lots.
        Construction continues on Section 205 of the Cordillera Ranch subdivision,
        which
        added 50 more residential customers in the fourth quarter of 2006. Sonterra
        has
        expanded into additional markets as evidenced by the signing of a construction
        contract to build a central propane system for a multi-use retail center
        in Lago
        Vista, Texas. The system will serve five to ten large commercial customers
        including two restaurants.
  22
 Table
            of Contents
  Sonora
            Pipeline, LLC, will own and operate the U.S. (Texas) pipeline segments
            to be
            constructed in connection with the Burgos Hub pipeline, LNG regasification
            terminal and gas storage projects which will interconnect to the U.S.
            via two
            international pipeline crossings in Hidalgo County, Texas. Management
            has filed
            applications for a certificate of public convenience and necessity and
            two
            presidential permits for cross-border pipeline construction into Mexico
            with the
            Federal Energy Regulatory Commission. If the permits are granted and
            the
            pipelines are completed and fully operational, these international pipeline
            crossings near Mission and Progreso, Texas would result in the delivery
            of
            natural gas into the state of Tamaulipas and the pipelines owned by our
            Mexican
            subsidiary, Terranova Energia S. de R.L. de C.V.
  The
            Company is focusing on the development of the Burgos Hub projects through
            its
            Mexican entity, Terranova Energia S. de R.L. de C.V., in Mexico. Terranova
            Energia is focused on project development and implementation of a natural
            gas
            storage and transportation infrastructure to support the integration
            of
            Northeastern Mexico and South Texas and the related economic growth of
            the
            border regions.
 Tidelands
        and Terranova Energia have hired project development advisors in the United
        States and Mexico. The Terranova Energia advisors include Project Consulting
        Services, Inc., and Ritch Mueller, SC, Abogados. The Tidelands/Sonora advisors
        include Netherland Sewell & Associates, Mayer Brown Rowe & Maw, LLP, BNC
        Engineering, LLC, HSBC Securities, USA, Inc. and Ross, Marsh &
Foster.
  The
        Terranova Energia project was developed to serve the needs of CFE, the Mexican
        federal electricity commission, to manage swing and seasonal spread in its
        procurement and dispatch of natural gas to its combined cycle power plants
        in
        Northern Mexico. The region's forecasted growth will require additional natural
        gas for power generation in the region. The same need to manage swing and
        seasonal spread is present for the industrial users of natural gas in Northern
        Mexico, in particular, the industrial users located in the Monterrey, Nuevo
        Leon
        area.
 Our
          various projects in South Texas and Northeast Mexico are collectively called
          the
          Burgos Hub Project. Our medium term goals, subject to a variety of factors,
          including, but not limited to, regulatory permitting, engineering design,
          financing, construction and operating agreements, are focused on the Brasil
          storage field and Terranova Occidente pipeline.
 
 The
        pipelines proposed are (A) the Occidente Section comprised of: (1) a pipeline
        from the Brasil Storage field to Nuevo Progresso with a proposed international
        pipeline crossing into the U.S., (2) a pipeline from Brasil storage to Station
        19 up to Arguelles which is another proposed international pipeline crossing
        into U.S. and (3) a pipeline from Pemex's Station 19 south of Reynosa which
        will
        extend southward to the Monterey Nuevo Leon area; and (B) the Oriente Section
        from the offshore regasification station to Norte Puerto Mezquital proceeding
        to
        the Brazil storage field. The Occidente Section will include approximately
        323
        kilometers of pipeline and the Oriente Section will contain approximately
        149
        kilometers of pipeline. Our long term goal includes the construction of the
        offshore LNG regasification station.
  The
        proposed international pipeline crossings into South Texas will interconnect
        with other pipelines at the Donna Station and the Valero Gilmore Plant. At
        the
        Donna Station, our potential interconnects into Texas pipelines are with
        TETCO,
        TGPL and Texas Gas Services. At the Arguelles crossing and the Valero Gilmore
        Plant, our potential interconnects are with HPL, Calpine and Kinder Morgan.
        The
        Terranova pipeline capacity is estimated at 1.0 BCFD (billion cubic feet
        per
        day).
  The
        Terranova pipelines have been designed for 30 and 36 inch diameter with
        bi-directional flow. The pipeline from the proposed LNG regasification terminal
        to the Brasil field is anticipated to be a 36 inch diameter pipeline and
        from
        the Brasil field to Monterey and international crossings are anticipated
        to be
        30 inch diameter pipelines.
 On
          June
          5, 2006, Tidelands Oil & Gas Corporation subsidiary, Terranova Energia, S.
          de R.L. de C.V. was awarded a Permit (#G/183/TRA 2006) by the Comision
          Reguladora de Energia de Mexico (CRE) to begin construction of the Terranova
          Occidente and Oriente pipeline portions of its Burgos Hub Project In the
          second
          quarter of 2007, Terranova expects to file an application with the CRE
          to amend
          its existing Mexican pipeline permit to allow for the construction of an
          additional segment of pipeline which will extend from Station 19 to Monterrey,
          Nuevo Leon. This filing is being pursued in response to commercial interest
          from
          industrial customers and potential service opportunity for the power generation
          facilities proposed by the Comision Federal de Electridad (CFE) in northeast
          Mexico. Discussion with staff at the regulatory body, CRE, indicates a
          timeline
          for approval of the amended permit by the fourth quarter of
          2007.
  23
 Table
            of Contents
  The
        proposed underground natural gas storage facility will be located in the
        depleted reservoir at the B1 Horizon-Brasil Field and include above ground
        facilities. Our design proposal for the use of this depleted reservoir as
        a
        storage facility was prepared by Netherland Sewell. Netherland Sewell, after
        geological and mechanical modeling, reported the reservoir at the B1 horizon
        as
        suitable for natural gas storage. The design capacity of the storage field
        contemplates incremental increases in capacity over three seasons. The first
        season capacity is 25 BCF (billion cubic feet), second season capacity is
        40 BCF
        and third season onward is 50 BCF. The design proposes that natural gas be
        injected into the reservoir at 350 MMCFD (million cubic feet per day) at
        pressures from 2,400 psi up to 3,200 psi. Extraction flows of natural gas
        will
        be kept at 500 MMCFD to maintain structural integrity of the reservoir. The
        storage facility plans call for 22 injection and extraction wells. The above
        ground facilities will include compression stations.
  Additionally,
          we submitted the storage permit to the CRE on August 5, 2005 and it was
          accepted
          for full review on October 14, 2005. Several unique questions are presented
          by
          the filing of this permit due to the proposed location and the lack of
          previous
          storage permit applications having been considered by the CRE. The CRE,
          with
          cooperation from Terranova, is conducting discussions with PEMEX, the energy
          ministry of the United Mexican States (SENER) and the Mexican Petroleum
          Institute (MPI) to determine the mechanism for the grant of use rights
          for the
          depleted reservoir as a natural gas storage facility and the proper legal
          vesting of such rights with the holder of the CRE permit to construct own
          and
          operate a gas storage facility. Terranova expects that these issues regarding
          the Company’s storage permit application will be resolved by the CRE
          Commissioners in the fourth quarter of 2007.
  The
        proposed Offshore LNG Regasification Station will be based on technology
        developed by the Norwegian company TORP Technology. It utilizes an unmanned
        floating station called a HiLoad. It has a peak capacity of 1.4 BCFD (billion
        cubic feet per day). This technology permits any LNG carrier vessel to connect
        and carry out regasification operations without any vessel modifications.
        The
        LNG station will be located no less than 40 nautical miles from the coast
        at a
        depth of 450 feet. A support station with a power generation system and central
        control will be located on-shore. A buoy will support the mooring of the
        LNG
        carrier vessels. Electrical power cables, control umbilicals and pipelines
        will
        connect the HiLoad to the on-shore support station. We expect this phase
        of the
        project to be developed as the last phase of the project given the tightness
        of
        LNG supply in the Atlantic Basin for the next four years. A further influence
        on
        the timing and implementation of this phase of the project will be the degree
        of
        progress made in actual construction of permitted LNG receiving terminals
        in the
        Corpus Christi, Texas area.
  There
          are
          significant challenges for the natural gas supply to the power generation
          industry in Northeastern Mexico. Presently, there are three LNG regasification
          projects permitted or under construction in Mexico at Altamira, Rosarito
          and
          Manzanillo. Additionally, there are new electrical generation plants and
          associated pipelines under construction. The CFE has forecasted natural
          gas
          demand growth in the region from 2004 through year 2013. The CFE forecasts
          gas
          demand will increase from 1.7 BCFD in 2004 to 4.2 BCFD in 2013. We believe
          that
          natural gas storage facilities in northern Mexico will provide a reliable,
          flexible gas supplies while creating conditions for competitive natural
          gas
          pricing.
  With
          the
          assistance of our financial advisory firm, we have determined that financing
          of
          the project should be possible under a commercial structure acceptable
          to debt
          providers that would involve long-term capacity reservation agreements
          with
          creditworthy counterparties for each constituent element of the project.
          Another
          essential factor that is critical for the project's ability to raise debt
          financing is the ability of Terranova to attract equity capital from strategic
          and/or financial investors in the amounts which are likely to be required
          by
          debt providers. Our financial advisory firm continues to assist us in making
          presentations of the project to the potential strategic and financial equity
          investors. We have received positive feedback from several such parties
          and
          active negotiations are continuing under confidentiality agreements with
          several
          firms, including energy enterprises headquartered in Mexico. On this basis,
          we
          could conclude that the project, in its currently envisioned configuration,
          could attract considerable equity capital from the potential investors.
          Investor
          appetite will depend on our ability to obtain an acceptable commercial
          structure, relevant permits and other regulatory approvals and the fulfillment
          of other conditions standard for non-recourse project financing. We believe
          that
          in 2007 the Company will bring to completion our efforts to obtain the
          required
          major permit approvals and the co-investment in the project of industry
          partners. Given the timeline necessary to obtain debt financing, execute
          an EPC
          contract, and the actual construction time for the first phase of the project
          (the pipeline from South Texas to Monterrey, Nuevo Leon), we are projecting
          the
          first operating cash flows from our Burgos Hub Project to be received in
          the
          year 2010.
 Esperanza
        Energy, LLC ("Esperanza") was formed as a wholly-owned subsidiary of the
        Company
        in March 2006 to evaluate the feasibility of developing an offshore, deep-water
        liquefied natural gas (LNG) receiving and regasification terminal near Long
        Beach, California. Esperanza would utilize TORP Technology's HiLoad LNG Regas
        unit that attaches to an LNG tanker, directly vaporizes the LNG as it is
        offloaded and injects the regasified natural gas into an undersea pipeline
        for
        transportation of the natural gas to onshore metering stations and transmission
        pipelines to supply nearby gas markets. The TORP HiLoad LNG Regas unit
        eliminates the need for extensive above-ground storage tanks or large marine
        structures required for berthing and processing of the LNG. Esperanza has
        conducted its feasibility study for this project with the assistance of
        best-in-class LNG, environmental, pipeline and legal advisors and has concluded
        that the project is technically, environmentally and commercially feasible.
        Esperanza will develop the necessary information in 2007 to file applications
        with California state and U.S. Federal agencies for appropriate permits to
        construct, own and operate the LNG facilities.
  24
 Table
            of Contents
  The
            expected timeline for development of the Port Esperanza project is influenced
            by
            the preparation of the application in a form sufficient to be “deemed complete”
by the Maritime Administration and Coast Guard which are the principal
            Federal
            agencies with permit jurisdiction for LNG terminal development in the
            offshore
            United States of America waters. After an application is deemed complete,
            the
            process of obtaining the approvals is often longer than the statutory
            time
            period of approximately one year due to “time out” or suspension of the running
            of the clock on the application process due to issues raised during the
            review
            of the permit application. California state and local agency approvals
            can also
            impact the permit approval process beyond the normal time expectations.
            The
            focus of the Port Esperanza project team has been to design a project
            that has
            anticipated and mitigated these risks during its design phase. We have
            assembled
            best-in-class team members with previous offshore LNG terminal development
            experience with a view of profiting from their experience in dealing
            with the
            various issues raised in the development of an LNG receiving facility
            in
            California. Nevertheless, in view of the relative shortage of LNG supply
            in the
            Pacific Basin through the year 2011, we anticipate that the first operational
            cash flows from the Port Esperanza project would occur in the year 2012.
            The
            projected capital expenditures for the project are significant and depending
            on
            the final configuration may cost as much as $1 billion USD with the cost
            of the
            permitting process for the USCG/MARAD permit estimated in excess of $20
            million
            USD. It is expected that a major portion of the initial development cost
            and the
            required equity in the project will be obtained from co-venturers. Active
            discussions are underway with several potential partners who would invest
            in the
            project. An announcement concerning partners is expected by the end of
            the
            second quarter 2007, to be followed by the initiation of the process
            of
            developing the application for the USCG/MARAD permit which is estimated
            to
            require a six month timeline prior to submission of the application.
  Given
        the
        large capital outlays required for development of the Burgos Hub Project
        and
        Port Esperanza, it is likely that the Company will be diluted with respect
        to
        the project level cash flows by virtue of the sale of interests in the projects
        to third party partners. Similarly, the Company as an integrated enterprise
        continues to experience negative cash flows and will require sequential rounds
        of deficit fundings which will likely result in further dilution to the Company
        shareholders. The Board of Directors is considering all options for dealing
        with
        these issues including the merger or acquisition of profitable and complementary
        business operations with a view towards eliminating Company operating deficits
        and efficient utilization of tax loss carryforwards.
  **Results
        of Operations**
  **YEAR
        ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31,
        2005**
  REVENUES:
          The Company reported revenues of $2,222,598 for the twelve months ended
          December
          31, 2006, as compared with revenues from continuing operations of $1,861,323
          for
          the twelve months ended December 31, 2005. The increase was divided between
          each
          revenue stream: Reef Ventures, LP, increased income from gas transportation
          fees
          from $231,077 for the twelve months ended December 31, 2005, to $285,098
          for the
          twelve months ended December 31, 2006, an increase of $54,021; Sonterra
          Energy
          Corporation increased propane gas sales to $1,740,870 for the twelve months
          ended December 31, 2006, from $1,494,679 for the twelve months ended December
          31, 2005, an increase of $246,191 due mainly to an increase in total customers
          served and product prices. Construction service revenues for Sonterra Energy
          Corporation increased to $180,693 for the twelve months ended December
          31, 2006
          compared to $135,567 for the twelve months ended December 31, 2005, an
          increase
          of $45,126. Tidelands Exploration & Production Corporation had $15,737 of
          natural gas revenues for its first quarter of operations.
  TOTAL
        COSTS AND EXPENSES: Total costs and expenses from continuing operations
        decreased from $15,171,916 for the twelve months ended December 31, 2005,
        to
        $14,162,432 for the twelve months ended December 31, 2006. The most significant
        decreases occurred in Sales, General and Administrative and Impairment Losses,
        which decreases more than offset increased interest expense due to default
        costs
        incurred with a private placement of convertible debt (See Note 16 of Audited
        Financial Statements) whereas a reserve for litigation of $2,250,000 was
        recorded which reduced the decrease of expenses to $1,009,484.
  COST
        OF
        SALES: Total Cost of Sales increased from $1,003,386 for the twelve months
        ended
        December 31, 2005, to $1,173,561 for the twelve months ended December 31,
        2006,
        an increase of $170,175, of which $164,216 was attributable to Sonterra Energy
        Corporation. This increase resulted from increased cost and volume of propane
        sold and, to a lesser extent, increased construction services.
  OPERATING
        EXPENSES: Operating expenses from continuing operations which are expenses
        related to the operation of Company assets in an active business segment
        increased from $202,766 for the twelve months ended December 31, 2005, to
        $420,200 for the twelve months ended December 31, 2006, an increase of $217,434;
        $165,215 of this increase was from the operating expenses incurred by Sonterra
        Energy Corporation due to increased revenues. Depreciation expense decreased
        from $485,481 for the twelve months ended December 31, 2005, to $466,241
        for the
        twelve months ended December 31, 2006, reflecting a decrease in depreciable
        assets for the respective periods due to impairment of certain long-lived
        assets
        in 2005.
  INTEREST
        EXPENSE:  Interest expense increased from $611,363 for the twelve months
        ended December 31, 2005, to $3,405,778 for the twelve months ended December
        31,
        2006, primarily as a result of three factors: (a) interest penalties in the
        amount of $1,696,982 in connection with the payment of stock to the various
        investors upon the defaults described in Notes 16 of the Audited Financial
        Statements, (b) liquidated damage payments in the amount of $478,155 paid
        in
        cash to the various investors as described in Note 16 of the Financial
        Statements, and (c) interest paid in connection with the convertible debenture
        financing as described in Note 16 of the Audited Financial Statements, in
        the
        amount of $763,499 during the twelve-month period ended December 31, 2006.
        No
        income or expense for Beneficial Conversion Feature Interest was recorded
        for
        the twelve months ended December 31, 2006, as compared to income of $756,339
        for
        the twelve months ended December 31, 2005, due to a reversal of previously
        charged Beneficial Conversion Feature Interest. The market price for the
        Company’s common stock at the relevant measurement dates during the twelve
        months ended December 31, 2006, was less than the conversion price for the
        debentures issued on January 20, 2006. Accordingly, there was no benefit
        to the
        holders of the debentures in the event of conversion during those periods
        and no
        beneficial conversion interest charge was recorded.
  SALES,
        GENERAL AND ADMINISTRATIVE: Sales, General and Administrative Expenses decreased
        by $1,586,597 during the twelve months ended December 31, 2006, to a total
        amount of $6,446,652 as compared to $8,033,249 for the twelve months ended
        December 31, 2005. This decrease was due primarily to the absence of financing
        costs paid to Impact International, LLC, during the period ended December
        31,
        2006 as compared to financing costs of $1,272,500 paid to Impact International,
        LLC, during the twelve months ended December 31, 2005. The remaining decrease
        in
        Sales, General & Administrative expense was due to a reduction in the
        issuance of common stock for consulting services during the twelve months
        ended
        December 31, 2006, versus the twelve months ended December 31, 2005.
  IMPAIRMENT
        LOSS: No expense for impairment loss was recorded for the twelve months ended
        December 31, 2006, compared to $5,200,000 of impairment of goodwill and $392,000
        impairment of long-lived assets, recorded as losses for the twelve months
        ended
        December 31, 2005.
  DERIVATIVE
        GAIN:  Gain from embedded derivative instrument liabilities decreased from
        $5,168,000 for the twelve months ended December 31, 2005, to $0 for the twelve
        months ended December 31, 2006. The warrants issued in connection with the
        January 20, 2006, financing had an exercise price that was greater the fair
        market value of the Company’s common stock at the relevant measurement dates.
        Accordingly, no derivative gain or reduction in liability for the issuance
        of
        the warrants in this financing transaction was recorded for the twelve months
        ended December 31, 2006.
  25
 Table
            of Contents
  NET
        LOSS:
        Net loss of ($7,662,904) for the twelve months ended December 31, 2005,
        increased to ($11,836,925) for the twelve months ended December 31, 2006,
        an
        increase in the amount of loss of $4,174,021. The principal reason for this
        amount of increase in net loss was the lack of Derivative Gains to offset
        Loss
        from Operations for the twelve months ended December 31, 2006, versus the
        twelve
        months ended December 31, 2005 recording of a $2,250,000 reserve for litigation.
        Included in the net loss of ($11,836,925) for the twelve months ended December
        31, 2006, is $2,164,300 of expenses for employment contract costs, directors
        fees and legal fees paid by issuance of common stock.
  LIQUIDITY
        AND CAPITAL RESOURCES: The independent auditors report on our December 31,
        2006
        financial statements included in this Form 10-K states that our difficulty
        in
        generating sufficient cash flow to meet our obligations and sustain operations
        raises substantial doubts about the our ability to continue as a going
        concern
  With
          regard to liquidity and adequacy of capital resources, management believes
          that
          the Company will need additional equity or debt financing after the first
          quarter of 2007. Management plans to raise additional capital through a
          variety
          of fund raising methods during fiscal 2007 and to pursue all available
          financing
          alternatives in this regard. Management may also consider a variety of
          potential
          partnership or strategic alliances to strengthen its financial position.
          In the
          event that a decision to proceed with the offshore LNG regas terminal project
          in
          Southern California is made during the upcoming months, additional funding
          for
          the permit process will be needed beyond the amounts currently required.
          Furthermore, the Company will need to raise additional capital to fund
          ongoing
          development activities for its Mexican subsidiary, Terranova Energia and
          also to
          fund operating overhead at the parent company level and the possible cost
          of a
          litigation settlement or adverse verdict if the case goes to trial. New
          issuance
          of common stock sufficient to retire the outstanding debentures and to
          provide
          additional required capital is under active negotiation. No assurance can
          be
          made that such capital can be acquired in a timely fashion or at all.
          Furthermore, if capital is available through these sources, if may be at
          terms
          that are disadvantageous to the Company and its shareholders.
  In
          light
          of these possible outcomes and the current cash resources available for
          the
          sustenance of corporate operations, management has taken action to reduce
          overhead costs and otherwise obtain cash resources for the Company. Actions
          completed include reduction of staff, assignment of the Suite License Agreement
          with the San Antonio Spurs, LLC, to a former officer, collection of a stock
          subscription receivable from a past officer, collection of an account receivable
          from an officer, accelerated collection of past due accounts from customers
          of
          Sonterra Energy and Reef Ventures, LP, and collection of the $283,854 balance
          of
          the Note Receivable for the related party aircraft charter services including
          termination of those services to the Company.
  Direct
        capital expenditures during the twelve months ended December 31, 2006, totaled
        $2,814,512. The capital expenditures were composed of increased pre-construction
        costs regarding potential international pipeline crossings and storage
        facilities in Mexico, pre-construction costs regarding an offshore LNG terminal
        in Southern California, additional machinery, equipment, trucks, autos and
        trailers for the operation of the Sonterra Energy Corporation propane systems
        and $502,060 invested in a natural gas pipeline and nearby leases for
        development. Total debt increased from $5,722,322 at December 31, 2005, to
        $13,034,046 including the aforementioned reserve for litigation at December
        31,
        2006. The increase in total debt is due primarily to the issuance of $6,569,750
        of convertible debentures in the financing transaction of January 20, 2006.
        Net
        loss for the twelve months ended December 31, 2006, was ($11,836,925) an
        increase in net loss of 54.5% from the net loss of ($7,662,904) for the twelve
        months ended December 31, 2005. Basic and diluted net loss per common share
        increased to ($0.15) for the twelve months ended December 31, 2006, as compared
        to ($0.11) for the twelve months ended December 31, 2005. The net loss per
        share
        calculation for the twelve months ended December 31, 2006, included an increase
        in actual and equivalent shares outstanding.
  **YEAR
        ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31,
        2004**
  REVENUES:
        The Company reported revenues of $1,861,323 for the twelve months ended December
        31, 2005 as compared with revenues from continuing operations of $1,883,838
        for
        the twelve months ended December 31, 2004. The primary differences in year
        to
        year results occurred from the conversion of Reef Ventures, L.P. income from
        gas
        sales to transportation fees. In the year ended December 31, 2005, Reef Ventures
        sold no natural gas ($0) compared to $1,323,459 of gas sales for the twelve
        months ended December 31, 2004. However, Reef Ventures, L.P. increased
        transportation fees to $231,077 for the twelve months ended December 31,
        2005
        compared to transportation fees of $76,767 for the twelve months ended December
        31, 2004, an increase of $154,310. In addition, the mix of revenues earned
        by
        Sonterra Energy Corporation showed a significant change in terms of propane
        gas
        sales due to the reporting of a full year of operations in 2005 versus three
        months for the 2004 year. Propane sales for Sonterra Energy Corporation for
        the
        twelve months ended December 31, 2005 were $1,494,679 compared to sales of
        $400,637 for the twelve months ended December 31, 2004, an increase of
        $1,094,042. Construction service revenues for Sonterra Energy Corporation
        increased to $135,567 for the twelve months ended December 31, 2005 compared
        to
        $82,975 for the twelve months ended December 31, 2004, an increase of
        $52,592.
  TOTAL
        COSTS AND EXPENSES: Total costs and expenses from continuing operations
        decreased from $31,626,135 for the twelve months ended December 31, 2004
        (as
        restated) to $15,171,916 for the twelve months ended December 31, 2005. The
        most
        significant decreases occurred in Beneficial Conversion Feature Interest,
        Sales,
        General and Administrative and Impairment Losses. Each of the decreases in
        these
        categories of expenses resulted primarily from results related to the matters
        discussed in Footnotes 1 and 2 of the financial statements for the year ended
        December 31, 2005 and as described in the related sections below.
  26
 Table
            of Contents
  COST
        OF
        SALES: Total Cost of Sales decreased from $1,508,891 for the twelve months
        ended
        December 31, 2004 to $1,003,386 for the twelve months ended December 31,
        2004.
        Due to the conversion of Reef Ventures, L.P. to a transportation arrangement
        for
        its business versus the purchase and sale of natural gas, its cost of sales
        decreased from $1,299,518 for the twelve months ended December 31, 2004 to
        zero
        ($0) for the twelve months ended December 31, 2005. Cost of sales for Sonterra
        Energy Corporation rose from $209,373 for the twelve months ended December
        31,
        2004 to $1,003,386 for the twelve months ended December 31, 2005, an increase
        of
        $794,013. As stated in the Revenue discussion above, this increase was primarily
        the result of twelve months of operations reported in 2005 versus only three
        months of operations reported in 2004.
  OPERATING
        EXPENSES: Operating expenses from continuing operations which are expenses
        related to the operation of Company assets in an active business segment
        increased from $99,665 for the twelve months ended December 31, 2004 to $202,766
        for the twelve months ended December 31, 2005 which is a total increase of
        $103,101. This increase was primarily from the operating expenses incurred
        by
        Sonterra Energy Corporation. Depreciation expense increased from $244,889
        for
        the twelve months ended December 31, 2004 to $485,481 for the twelve months
        ended December 31, 2005 due to a full year of depreciation being incurred
        in the
        2005 year versus seven months of depreciation expense in 2004 on the natural
        gas
        pipeline owned by Reef Ventures, L.P. and the depreciable assets acquired
        by
        Sonterra Energy Corporation for the operation of the residential propane
        distribution systems in Austin, Texas.
  INTEREST
        EXPENSE: Interest expense increased from $300,566 during the twelve months
        ended
        December 31, 2004 to $611,363 primarily due to twelve months of carrying
        cost in
        2005 for the debt incurred to acquire the natural gas pipeline owned by Reef
        Ventures, L.P. versus seven months of interest cost reported in the 2004
        acquisition year for these assets. As described in Footnote 2, the Company
        has
        restated its December 31, 2004 financial statements and all subsequent quarterly
        financial statements to account for the cost of the embedded beneficial
        conversion feature inherent in the convertible notes issued to the MAG Capital,
        LLC investors on November 18, 2004. This beneficial conversion feature
        represents the difference between the conversion price for the debentures
        and
        the fair market value of the common stock at the commitment date and subsequent
        quarterly measurement dates. This discount was charged to interest expense
        because the conversion feature is at the option of the holder and can be
        exercised at any time. The Company has accordingly recognized interest expense
        in its restated December 31, 2004 financial statements in the amount of
        $3,092,105 and ($756,329) for the twelve months ended December 31, 2005.
        The
        negative figure for 2005 interest expense recognizes the fluctuation in the
        market price of the common stock into which the notes are converted at the
        quarterly measurement dates. The interest cost associated with the issuance
        and
        conversion of these debentures due to this beneficial conversion feature
        is
        limited to the relevant 2004 and 2005 years due to the completed conversion
        of
        all the debentures into common stock in the fourth quarter of 2005.
  SALES,
        GENERAL AND ADMINISTRATIVE: Sales, General and Administrative expense for
        the
        restated twelve months ended December 31, 2004 was $11,022,019. This amount
        includes restated amounts for stock issued for services and finance costs
        associated with the valuation of stock issued as part of the Impact
        International LLC acquisition in 2004. Sales, General & Administrative
        expenses for the twelve months ended December 31, 2005 was $8,033,249 which
        is a
        decrease of $2,988,770 as compared to the twelve months ended December 31,
        2004.
        During 2005, the Company recognized significant decreases in consulting fees
        and
        finance costs which were offset by increased employee expenses, board of
        director compensation, and overhead from full year operations of Sonterra
        Energy
        Corporation in 2005.
  IMPAIRMENT
        LOSSES: As described in Footnote 1, the Company has recognized impairment
        of
        goodwill recorded in connection with the Impact International LLC acquisition
        in
        the amount of $5,200,000 and the impairment of the carrying value of the
        Chittim
        gas plant owned by Rio Bravo Energy LLC and the gas pipeline system connecting
        to the Chittim gas plant owned by Sonora Pipeline LLC in the amount of $392,000
        for the twelve months ended December 31, 2005.
  GAIN
        ON
        REDUCTION OF WARRANT LIABILITY: As part of the Impact International LLC
        acquisition in the year ended December 31, 2004, the Company issued warrants
        at
        a conversion price less than the fair market value of the common stock issueable
        upon the exercise of those warrants. Accordingly, the Company has restated
        its
        December 31, 2004 financial statements to recognize both the additional goodwill
        and the related warrant liability associated with that acquisition. An
        evaluation of the difference between the price of the common stock and the
        warrant exercise price on a quarterly basis was performed resulting in the
        Gain
        on Reduction of Warrant Liability amounts shown in the restated December
        31,
        2004 financial statements ($15,390,000) and the amount shown in the December
        31,
        2005 financial statements ($5,168,000). The warrants originally issued in
        connection with this acquisition have been exercised and all common stock
        related to their exercise has been issued as of the end of the year December
        31,
        2005.
  NET
        LOSS
        FROM OPERATIONS: Net loss of ($14,302,037) for the twelve months ended December
        31, 2004 decreased to ($7,662,904) for the twelve months ended December 31,
        2005, a decrease in the amount of loss of $6,639,133. Included in the net
        loss
        from operations is $4,022,525 of expenses for financing costs, investor
        relations fees, legal fees, director fees and employee compensation paid
        by
        issuance of common stock.
  **YEAR
        ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31,
        2003**
  REVENUES:
        The Company reported revenues of $1,883,838 for the twelve months ended December
        31, 2004 as compared with revenues from continuing operations of $178,856
        for
        the twelve months ended December 31, 2003. The revenue increase resulted
        primarily from the acquisition of a 98% interest in Reef Ventures, L.P. which
        owns and operates a natural gas pipeline serving the Piedras Negras, Coahuila
        market. Natural gas sold ($1,323,459) and transportation fees ($76,767) charged
        from these operations totaled $1,400,227 for the twelve months ended December
        31, 2004. Sales of propane by Sonterra Energy Corporation to its residential
        customer base ($363,413), service call income for its customers ($34,373),
        and
        installation income for new yard lines and meter sets ($2,850) totaled to
        $400,636 for the twelve months ended December 31, 2004. A new revenue source
        from Sonterra Energy Corporation was construction services related to propane
        main lines and tank sites for subdivisions under development, which resulted
        in
        $82,975 of revenues for the twelve months ended December 31, 2004. Other
        Revenues decreased by $178,856 for the twelve months ended December 31, 2004
        as
        compared to the twelve months ended December 31, 2003.
  27
 Table
            of Contents
  TOTAL
        COSTS AND EXPENSES: Total costs and expenses from continuing operations
        increased from $3,061,068 for the twelve months ended December 31, 2003 to
        $31,626,135 for the twelve months ended December 31, 2004. Each category
        of cost
        and expense increased significantly due to the rapid growth in assets and
        operation expenses experienced by the Company during the twelve months ended
        December 31, 2004. Cost of Sales increased from $0 for the twelve months
        ended
        December 31, 2003 to $1,508,891 for the twelve months ended December 31,
        2004.
        Operating Expenses increased from $27,767 for the twelve months ended December
        31, 2003 to $99,665 for the twelve months ended December 31, 2004. Depreciation
        Expense increased from $43,006 for the twelve months ended December 31, 2003
        to
        $244,889 for the twelve months ended December 31, 2004. Interest Expense
        increased from $53,163 for the twelve months ended December 31, 2003 to
        $3,392,671 for the twelve months ended December 31, 2004. Each of these
        increases resulted primarily from growth related to the acquisition of 98%
        of
        the partnership interest in the Reef Ventures, L.P. international pipeline
        operations and the acquisition of the residential propane sales business
        near
        Austin, Texas by Sonterra Energy Corporation. However, $3,092,105 of the
        increase in Interest Expense for the year ended December 31, 2004 was from
        the
        recognition of Beneficial Conversion Feature interest expense associated
        with
        the November 18, 2004 financing transaction in which convertible notes were
        issued to affiliates of MAG Capital, LLC. General and Administrative Expenses
        increased from $2,937,132 for the twelve months ended December 31, 2003 to
        $11,022,019 for the twelve months ended December 31, 2004 due to the startup
        and
        initial operation of the additional business units mentioned above, the addition
        of additional directors and officers combined with the increased use of stock
        based compensation in the employment agreements of officers, and the expenses
        for expanded Company operations associated with the development of new midstream
        energy projects in the U.S. and Mexico during that period.
  COST
        OF
        SALES: Total Cost of Sales increased from $0 for the twelve months ended
        December 31, 2003 to $1,508,891 for the twelve months ended December 31,
        2004.
        Cost of sales increased by $1,299,518 for the purchase cost of natural gas
        resold thru our international pipeline operated by Reef Ventures, L.P. and
        by
        $209,373 for the purchase cost of propane, meter sets and yard lines sold
        to
        residential customers by Sonterra Energy Corporation.
  OPERATING
        EXPENSES: Operating expenses from continuing operations increased from $27,767
        for the twelve months ended December 31, 2003 to $99,665 for the twelve months
        ended December 31, 2004 which is a total increase of $71,898. This increase
        was
        due to the operating expenses incurred for the international pipeline crossing
        operated by Reef Ventures, L.P. and the operating expenses incurred by Sonterra
        Energy Corporation. Depreciation expense increased by $201,883 during the
        twelve
        months ended December 31, 2004 due to the acquisition of the natural gas
        pipeline owned by Reef Ventures, L.P. and the depreciable assets acquired
        by
        Sonterra Energy Corporation for the operation of the residential propane
        distribution systems in Austin, Texas. Interest expense increased by $3,339,508
        during the twelve months ended December 31, 2004 due to the debt incurred
        to
        acquire the natural gas pipeline owned by Reef Ventures, L.P. and the issuance
        of convertible debt to entities associated with the MAG Capital
        LLC.
  SALES,
        GENERAL AND ADMINISTRATIVE: Sales, General & Administrative Expenses
        increased by $8,084,887 during the twelve months ended December 31, 2004
        as
        compared with Sales, General and Administrative expenses for the twelve months
        ended December 31, 2003. Officers & Directors Salaries & Fees increased
        by $1,605,973 during the twelve months ended December 31, 2004 as compared
        to
        the twelve months ended December 31. 2003 as a result of the addition of
        one
        director and two officers to the Company combined with the increased use
        of
        stock based compensation in the employment agreements of officers and directors.
        Consulting fees, legal fees, and financing fees increased by $5,960,039 for
        the
        twelve months ended December 31, 2004 as compared with the twelve months
        ended
        December 31, 2003. This increase resulted primarily from the use of stock
        based
        compensation for these services during a period of higher common stock prices.
        The remaining increase in G & A costs of $518,875 for the twelve months
        ended December 31, 2004 was from increases in travel costs, office rent,
        insurance premiums, entertainment, and payroll plus other expenses associated
        with additional employees. The significant expansion of scope in the business
        plan for the Company and the need to conserve cash working capital for certain
        project predevelopment costs required the use of significant issuances of
        stock
        for general and administrative expenses during the twelve months ended December
        31, 2004.
  GOODWILL
        IMPAIRMENT LOSS: In connection with the acquisition of the Impact International
        LLC partnership interests in May 2004, the Company issued warrants to the
        sellers of the partnership interests at a conversion price that required
        the
        establishment of an asset and offsetting liability account to account for
        the
        difference in the strike price of the warrants versus the price of the common
        stock issuable as of the date of issue on May 24, 2004. The original amount
        of
        $20,558,000 was determined under the procedures of EITF 00-19 (utilizing
        the
        Black-Scholes option pricing method) and was recorded as Goodwill in connection
        with the acquisition on the Company's books for the period ended June 30,
        2004.
        At December 31, 2004, the Company reviewed the value of the Goodwill from
        the
        Impact acquisition and after applying the recognition and measurement guidelines
        stated in SFAS 142 "Goodwill and Other Intangibles" determined that an
        impairment charge to Goodwill of $15,358,000 was necessary.
  GAIN
        ON
        REDUCTION OF WARRANTS LIABILITY: As described in the preceding section, a
        liability for the warrants issued and outstanding at May 24, 2004 was recorded
        in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled In, A Company's Own Stock". As a result
        of
        the mark to market process called for in that guidance, the Company determined
        that a reduction in warrants liability and corresponding gain in the amount
        of
        $15,390,000 should be recorded at December 31, 2004.
  NET
        LOSS:
        Net loss of ($1,348,481) for the twelve months ended December 31, 2003 increased
        to ($14,302,037) for the twelve months ended December 31, 2004, an increase
        in
        the amount of loss of $12,953,556. Included in the net loss from operations
        is
        $9,327,818 of expenses for financing costs, consulting fees, legal fees,
        and
        employee compensation paid by issuance of common stock.
  Contractual
                  Obligations
              
              **Total**
              
              
              **Due
                  in 2007**
              
              
              **Due
                  in 2008-2009**
              
              
              **Due
                  in 2010-2011**
              
              
              **Thereafter**Long-term
                  debt
              $
              9,159,294
              
              $
              225,000
              
              $
              8,934,294Operating
                  Lease obligations:
              $
              312,147
              
              $
              103,793
              
              $
              46,786
              
              $
              41,724
              
              $
              119,844Total
                  Contractual Obligations
              $
              9,471,441
              
              $
              328,793
              
              $
              8,981,080
              
              $
              41,724
              
              $
              119,844
  28
 Table
            of Contents
 **FORWARD-LOOKING
        STATEMENTS:**
  We
        have
        included forward-looking statements in this report. For this purpose, any
        statements contained in this report that are not statements of historical
        fact
        may be deemed to be forward-looking statements. Without limiting the foregoing,
        words such as "may", "will", "expect", "believe", "anticipate", "estimate",
        "plan" or "continue" or the negative or other variations thereof or comparable
        terminology are intended to identify forward-looking statements. These
        statements by their nature involve substantial risks and uncertainties, and
        actual results may differ materially depending on a variety of factors. Factors
        that might cause forward-looking statements to differ materially from actual
        results include, among other things, overall economic and business conditions,
        demand for the Company's products, competitive factors in the industries
        in
        which we compete or intend to compete, natural gas availability and cost
        and
        timing, impact and other uncertainties of our future acquisition
        plans.
  **ITEM
        7A. QUANTITATIVE AND QUALITATIVE ANALYSIS
        ABOUT MARKET
        RISK**
  **Cash
        and Cash Equivalents**
  We
        have
        historically invested our cash and cash equivalents in short-term, fixed
        rate,
        highly rated and highly liquid instruments which are reinvested when they
        mature
        throughout the year. Although our existing investments are not considered
        at
        risk with respect to changes in interest rates or markets for these instruments,
        our rate of return on short-term investments could be affected at the time
        of
        reinvestment as a result of intervening events. As of December 31, 2006,
        we had
        cash and cash equivalents aggregated $367,437.
  We
        do not
        issue or invest in financial instruments or their derivatives for trading
        or
        speculative purposes. Our operations are conducted primarily in the United
        States, and, are not subject to material foreign currency exchange risk.
        Although we have outstanding debt and related interest expense, market risk
        of
        interest rate exposure in the United States is currently not
        material.
  **Debt**
  The
        interest rate on our Impact International debt obligation is generally
        determined based on the prime interest rate plus two percent and may be subject
        to market fluctuation as the prime rate changes.
  **ITEM8.
        FINANCIAL STATEMENTS AND SUPPLEMENTARY
        DATA**
  Our
        Financial Statements, the accompanying Notes to the Financial Statements
        and the
        Report of Independent Registered Public Accounting Firm are filed as part
        of
        this report beginning on the pages immediately following the signature pages
        of
        this Report.
  **ITEM9.
        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE**
  None.
  **ITEM9A.
        CONTROLS AND PROCEDURES**
  Evaluation
        Of Disclosure Controls And Procedures.
  James
        B.
        Smith, our Chief Executive Officer and Chief Financial Officer (Principal
        Executive Officer and Principal Financial Officer) performed an evaluation
        of
        the Company’s disclosure controls and procedures, as that term is defined in
        Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of December 31, 2006 and has concluded that such
        disclosure controls and procedures are effective to ensure that information
        required to be disclosed in our periodic reports filed under the Exchange
        Act is
        recorded, processed, summarized and reported within the time periods specified
        by the Securities and Exchange Commission’s rules and forms.
  Changes
        In Internal Control Over Financial Reporting.
  During
        the quarter ended December 31, 2006, there were no changes in the Company’s
        internal control over financial reporting that have materially affected,
        or are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.
  Limitations.
  Our
        management, including our Principal Executive Officer and Principal Financial
        Officer, does not expect that our disclosure controls or internal controls
        over
        financial reporting will prevent all errors or all instances of fraud. However,
        we believe that our disclosure controls and procedures are designed to provide
        reasonable assurance of achieving this objective. A control system, no matter
        how well designed and operated, can provide only reasonable, not absolute,
        assurance that the control system's objectives will be met. Further, the
        design
        of a control system must reflect the fact that there are resource constraints,
        and the benefits of controls must be considered relative to their costs.
        Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues and instances of fraud,
        if any, within our Company have been detected. These inherent limitations
        include the realities that judgments in decision-making can be faulty, and
        that
        breakdowns can occur because of simple error or mistake. Controls can also
        be
        circumvented by the individual acts of some persons, by collusion of two
        or more
        people, or by management override of the controls. The design of any system
        of
        controls is based in part upon certain assumptions about the likelihood of
        future events, and any design may not succeed in achieving its stated goals
        under all potential future conditions. Over time, controls may become inadequate
        because of changes in conditions or deterioration in the degree of compliance
        with policies or procedures. Because of the inherent limitation of a
        cost-effective control system, misstatements due to error or fraud may occur
        and
        not be detected.
  **ITEM
        9B. OTHER INFORMATION**
  None
  29
 Table
            of Contents
  **PART
        III**
  **ITEM
        10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
        REGISTRANT**
  **Name**
                
                **Age**
                
                **Position**
                
                **Date
                    became director or officer**James
                    B. Smith
                
                53
                
                Director,
                    President, CFO
                
                August
                    16, 2003Robert
                    Dowies
                
                56
                
                V.P.
                
                October
                    18, 2004Julio
                    Bastarrachea
                
                49
                
                V.P.
                
                January
                    16, 2004Carl
                    Hessel
                
                43
                
                Director
                
                January
                    28, 2004Ahmed
                    Karim
                
                34
                
                Director
                    and Secretary
                
                October
                    21, 1998Michael
                    Ward
                
                51
                
                Former
                    Director, President, CEO
                
                October
                    21, 1998 (resigned December
                    2006)
  JAMES
        B.
        SMITH: On December 8, 2006, Mr. Smith was appointed Chief Executive Officer
        and
        President in addition to his role as Chief Financial Officer. Mr. Smith first
        joined Tidelands on August 16, 2003, as a Senior Vice President and Chief
        Financial Officer. Mr. Smith received a Bachelor of Science degree from Texas
        A&M University and a Master of Professional Accounting degree from the
        McCombs School of Business at the University of Texas at Austin. His
        professional experience includes public accounting practice with Ernst &
Young where he was a Tax Manager serving publicly traded and private energy
        clients. He is licensed as a Certified Public Accountant and Real Estate
        Broker
        in Texas and Colorado. From 1992 through 2003, Mr. Smith operated his own
        consulting and tax practice for energy related clients. From 1996 through
        2003,
        he directed the financial affairs and tax planning for several closely held
        corporations engaged in land development in Colorado. During this period,
        Mr.
        Smith also participated as a partner, shareholder and financial officer for
        several closely held entities engaged in natural gas exploration and production
        activities including the operation of a large natural gas gathering system.
        From
        2000 through 2003, he also served as Chief Financial Officer for a major
        produce
        company with significant subsidiaries in real estate development and
        agri-business.
  ROBERT
        W.
        DOWIES: On October 18, 2004, we employed Robert W. Dowies as our Vice President
        of Gas Markets and Supply. Mr. Dowies has 30 years experience in energy
        marketing, ten years as the owner of a natural gas trading company and 20
        years
        with a public utility. Until his employment with Tidelands Oil & Gas
        Corporation, since 1998, Mr. Dowies worked for Trebor Energy Resources, Inc.
        in
        Houston, Texas. His principal responsibilities were the development of financial
        alliances with various energy merchants and producers providing a $50 million
        dollar credit support for gas marketing activities, financial trading accounts,
        pipeline transportation agreements, storage strategies and capital projects.
        He
        developed and implemented marketing strategies which resulted in $40 million
        dollars of annual revenue. He designed and coordinated the construction and
        implementation of a natural gas gathering system.
  JULIO
          BASTARRACHEA: Mr. Bastarrachea joined Terranova Energia, Tidelands Mexican
          subsidiary, as the Director General in 2004. His primary responsibilities
          include project development and administration of the permitting process
          with
          the Mexican regulatory authorities. Prior to assuming the role as Director
          General of Terranova, he served as the Vice President of Business Development
          for Tidelands in San Antonio where he assisted in the early development
          of
          underground natural gas storage projects in Mexico. From 1999 to 2003,
          Mr.
          Bastarrachea was employed with the State Of Texas Commercial Office in
          Mexico
          City where he coordinated the promotion of business opportunities for Texas
          companies in Mexico. In cooperation with the Texas Railroad Commission
          he
          organized a yearly trade mission to Mexico focused on the energy industry.
          From
          1993 to 1999 he served as the Consulate General of Mexico in San Antonio
          and
          with Mexico’s Ministry of Foreign Affairs. He began his career in 1988 as an
          assistant architect with ARP Architects in London. He received a degree
          in
          architecture in 1980 from the University of Yucatan in Yucatan, Mexico.
          He also
          earned a MSc. in Economics of Urban Development in 1986 from the University
          of
          London and a Diploma in International Affairs from the Instituto Matias
          Romero,
          Ministry of Foreign Affairs in Mexico City
  CARL
        HESSEL: On January 28, 2004, Mr. Hessel joined our board of directors. Mr.
        Hessel founded Margaux Investment Management Group, S.A. which is located
        in
        Geneva, Switzerland in 2001. Prior to 2001, he served as Vice President of
        Merrill Lynch where he was responsible for creating global high net worth
        management platform. He began his career at Goldman Sachs and helped build
        the
        Scandinavian ultra-high net worth market. Mr. Hessel received his M.B.A.
        from
        Wharton Business School and a degree in Finance and Management from the
        University of Pennsylvania. He was awarded the Marcus Wallenberg Foundation's
        Scholarship.
  AHMED
          KARIM: Mr. Karim is a director and Secretary of the Company. He is a graduate
          of
          Simon Fraser University. He holds a degree in Business Administration,
          specializing in marketing and international business. Since 1995, his business
          experience includes work with Quest Investments Group and Interworld Trade
          and
          Finance where his responsibilities included marketing, finance and investor
          relations.
  MICHAEL
        WARD: Mr. Ward served as the President, Chief Executive Officer and Chairman
        of
        our Board of Directors from October 1998 until December 2006. Mr. Ward has
        more
        than 25 years of diversified experience as an oil and gas professional. He
        was
        educated in business management and administration at Southwest Texas State
        University and the University of Texas. He has wide experience in the capacity
        in which he successfully served in operating oil and gas companies in the
        United
        States. During the past 20 years, he has been associated with Century Energy
        Corporation where his duties and responsibilities were production and drilling
        superintendent and supervised 300 re-completions and new drills in Duval
        County,
        Texas.
  30
 Table
            of Contents
  **Audit
        Committee and Financial Expert**
  The
        Company has no audit committee financial expert, as defined under Section
        228.401, serving on its audit committee because it has no audit committee
        and is
        not required to have an audit committee because its common stock is not a
        listed
        security as defined in Section 240.10A-3. Accordingly, all material decisions
        affecting the Company's audited financial statements, periodic disclosure
        with
        the SEC and its relationship with its auditors are addressed by the entire
        Board
        of Directors.
  **Compliance
        with Section 16(a) of the Securities Exchange Act of 1934**
  Section
        16(a) of the Securities Exchange Act of 1934 requires the Company's directors
        and executive officers, and persons who own more than 10% of the Company's
        Common Stock, to file with the Securities and Exchange Commission initial
        reports of beneficial ownership and reports of changes in beneficial ownership
        of Common Stock of the Company. Officers, directors and greater than 10%
        shareholders are required by the Securities and Exchange Commission to furnish
        the Company with copies of all section 16(a) reports they file. Based solely
        on
        copies of such forms furnished as provided above, or written representations
        that no Forms 5 were required, the Company believes that during the fiscal
        year
        ended December 31, 2006, the Company’s officers, directors and greater than ten
        percent owners timely filed all reports they were required to file under
        Section
        16(a), except as follows:  a
        Form 4
        relating to four transactions was filed late by Mr. Smith on February 14,
        2006;
        a Form 4 relating to five transactions was filed late by Mr. Smith on March
        27,
        2006; a Form 4 relating to two transactions was filed late by Mr. Smith on
        October 12, 2006; Mr. Smith failed to file one report relating to four
        transactions, but did report the transactions in his year-end report on Form
        5,
        which was timely filed; a Form 4 relating to one transaction was filed late
        by
        Mr. Dowies on June 8, 2006 (as amended on June 9, 2006); and Mr. Karim failed
        to
        file one report relating to one transaction, but did report the transaction
        in
        his year-end report on Form 5, which was timely filed.
  **ITEM
        11. EXECUTIVE COMPENSATION**
  **Compensation
        Discussion and Analysis**
 
 **Compensation
        Philosophy and Objectives.** Our
        Board
        of Directors has the responsibility for establishing and reviewing the Company’s
        compensation philosophy and objectives.  The overall objectives of our
        compensation program for our executive officers are to attract and retain
        highly
        qualified executives committed to our success and our mission, to motivate
        our
        executives to build and grow our business, to reward loyalty and to incentivize
        our officers during both periods of growth, as well as uncertainty, and to
        align
        the interests of our executives with the interests of our stockholders.
        Ultimately, the goal of the compensation committee is to provide our executive
        officers with appropriate annual and longer-term compensation, both equity
        and
        non-equity based, to incentivize these officers and align their interests
        with
        those of our shareholders.  The Board of Directors has not established a
        formula for allocating between cash and non-cash compensation.  We refer to
        our President and Chief Executive Officer, our Chief Financial Officer and
        our
        other officers in the Executive Compensation Table as our named executive
        officers.
 
 **Role
        of Executive Officers and Management.** The
        President and Chief Executive Officer provide recommendations to the Board
        of
        Directors on matters of compensation philosophy, plan design and the general
        guidelines for executive officer compensation.  These recommendations are
        then considered by the Board of Directors.  The President and Chief
        Executive Officer is also a member of the Board of Directors and therefore
        generally attends meetings related to compensation but abstains from voting
        with
        respect his own compensation. In addition, the other members of the Board
        of
        Directors may discuss compensation of the President and Chief Executive Officer
        in sessions where he is not present.
  **Elements
        of Executive Compensation.** The
        compensation we provide to our executive officers primarily consists of the
        following:
  ·  annual
        base salary,
  ·  annual
        cash bonuses which are discretionary and/or based on the achievement of annual
        performance objectives,
  ·  stock
        awards,
  ·  stock
        options,
  ·  perquisites
        and other personal benefits, and
  ·  401K
        with
        certain matching contributions by the Company.
  We
        do not
        offer pension or any other retirement plans for executives. We do not currently
        provide any deferred compensation plan for executives.
  The
        Board
        of Directors has not hired any compensation consultants to assess the current
        salary levels or other compensation elements for our executive officers.
        In the
        future, we anticipate that the Board of Directors may review and consider
        summaries of competitive salary levels prepared by management based on various
        survey data.
  31
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  **Base
        Salary.** The
        Company provides named executive officers and other employees with base salary
        to compensate them for services rendered during the fiscal year.  Base
        salary ranges for named executive officers are determined for each executive
        based on his or her position, leadership, years of experience and level of
        responsibility. Merit increases normally take effect in January **** of
        each
        year.
  During
        its review of base salaries for executives, the Board of Directors primarily
        considers:
  ·  internal
        review of the executive’s compensation, both individually and relative to other
        officers;
  ·  individual
        performance of the executive;
  ·  qualifications
        and experience of the officer; if
  ·  the
        complexity of our operations;
  ·  our
        ability to compete with other companies, including larger, more established
        and
        better capitalized companies, for the recruitment and retention of skilled
        management; and
  ·  the
        financial condition and results of operations of the Company.
  Salary
        levels are typically considered annually as part of the Company’s performance
        review process as well as upon a promotion or other change in job
        responsibility.
  32
 Table
            of Contents
  **Incentive
        Cash Bonuses.** In
        addition to base salary, the Company has maintained a practice of paying
        incentive cash bonuses tied to an executive's performance.  These bonuses
        are discretionary and based upon individual performance as well as Company
        performance.  In 2006, incentive cash bonuses were awarded to the named
        executive officers generally based upon the named executive officer’s base
        salary, with most of the named executive officers receiving the same percentage
        of respect base salaries.
  **Equity
        Awards.** The
        Company believes that equity awards are an important component of executive
        compensation and serve to better align the interests of executives with those
        of
        our stockholders, eliciting maximum effort and dedication from our executive
        officers. The medium and long-term incentive compensation portion of the
        Company’s compensation program consists primarily of grants of stock awards, as
        well as grants of stock options under the Company’s stock grant and option
        plans. These grants and awards are designed to provide incentives for
        longer-term positive performance by the executive and other senior officers
        and
        to align their financial interests with those of the Company’s stockholders by
        providing the opportunity to participate in any appreciation in the stock
        price
        of the Company’s common stock that may occur after the date of grant of stock or
        options. In addition, the Company believes that such equity compensation
        enhances our ability to attract and retain highly qualified executives and
        other
        persons and to motivate them to improve our business results and earnings
        by
        providing them equity holdings in the Company.
  Generally
        all of the stock awards that we are granted to our executive officers have
        been
        fully vested at the time of grant. Stock option grants may be fully vested
        or
        subject to vesting over time and/or other conditions. Generally, stock options
        are granted with an exercise price equal to the fair market value of the
        Company’s common stock on the date of grant; however, under our stock greens and
        option plans, the Board of Directors retains discretion to grant options
        with
        exercise prices either above or below the then-current fair market
        value.
  In
        the
        past, our equity incentive compensation has primarily consisted of stock
        awards,
        with stock options being granted at a lesser rate.  We emphasized stock
        awards primarily as a mechanism to conserve cash, while providing recipients
        with both short-term liquidity, as well as long-term incentives to maximize
        shareholder value and the market value of our common stock. Our Board of
        Directors does not have any preset times during which it issues equity
        compensation, but instead considers recommendations made by senior management
        from time to time throughout the year, as well as performing annual reviews
        with
        respect to compensation and equity compensation.
  **Profit
        and Revenue Sharing** .
        As
        described further under “Employment Agreements”, in 2006 Mr. Ward and Mr. Smith
        were entitled to compensation based on a percentage of our profits and increases
        in sales. Mr. Ward was entitled to two percent of the net profits of the
        Company, after deduction for all taxes and was also entitled to a distribution
        equal to one percent of the increase in sales over the previous year. Mr.
        Smith
        was entitled to one percent of the net profits of the Company, after deduction
        for all taxes and was also entitled to a distribution equal to one percent
        of
        the increase in sales over the previous year. Neither executive received
        any
        compensation pursuant to the use profit and revenue sharing provisions of
        their
        employment agreements, since the Company did not achieve profitability or
        increase its sales in 2006.
  As
        discussed below under “Employment and Severance Agreements”, the Company
        eliminated this profit-and revenue sharing compensation as part of Mr. Smith’s
        new employment agreement in 2007, and increased the number of shares of stock
        to
        be issued to Mr. Smith in 2007. The Company made this shift in compensation
        because the Company believes that incentivizing a short-term focus on increasing
        sales may not be in the best interests of the Company in achieving longer-term
        goals that will maximize shareholder value. The Company believes that the
        long-term viability and success of the Company and maximum shareholder value
        are
        dependent upon the financing and development of various energy infrastructure
        projects. These projects may require a longer-term focus and may not result
        in
        increased sales or revenue in the short term. Therefore, the Company believes
        that our executive officers will have their interests more closely aligned
        with
        that of our shareholders, if a larger portion of their compensation is
        equity-based rather than revenue sharing based.
  **Retirement
        and Other Benefits.**
  The
        Company offers a 401K plan with certain matching contributions by the Company
        to
        all of our employees including the named executive officers.
  We
        also
        offer various fringe benefits to all of our employees, including our named
        executive officers, on a non-discriminatory basis, including group policies
        for
        medical insurance.  Our Chief Executive Officer and Chief Financial Officer
        received an automobile allowance of $12,000 per year.  The compensation
        committee believes such benefits are appropriate and assist such officers
        in
        fulfilling their employment obligations.
  **Stock
        Ownership Guidelines.** The
        Company has not established any formal policies or guidelines addressing
        expected levels of stock ownership by the named executive officers or for
        other
        executive officers.  However, due to purchases, the exercise of options,
        the vesting of restricted stock awards and the allocation of shares under
        the
        Company’s ESOP, our named executive officers, as well as our directors and other
        employees, have a substantial equity interest in the Company.
  33
 Table
            of Contents
  **Tax
        Deductibility of Pay.** Section
        162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), places a
        limit of $1.0 million on the amount of compensation that the Company may
        deduct
        in any one year with respect to each of its five most highly paid executive
        officers. There is an exception to the $1.0 million limitation for
        performance-based compensation meeting certain requirements. Stock options
        are
        performance-based compensation meeting those requirements and, as such, are
        fully deductible. Service-based only stock awards are not considered
        performance-based compensation under Section 162(m) of the Code.
  In
        the
        past, Section 162(m) has prevented the Company from fully deducting the expense
        of the executive compensation paid. To maintain flexibility in compensating
        executive officers in a manner designed to promote varying corporate goals,
        the
        Company has not adopted a policy requiring all compensation to be
        deductible.
  **Other
        Components of Compensation** .
        As
        described below under “Employment and Severance Agreements with Management” that
        Company’s employment agreements with certain executive officers provide for
        severance benefits and change control benefits. The severance payments of
        the
        agreements are intended to align the executive officers’ and the stockholders’
interests by enabling executive officers to consider corporate transactions
        that
        are in the best interests of the stockholders and other constituents of the
        Company without undue concern over whether the transactions may jeopardize
        the
        executive officers’ own employment or impose financial hardship on him or her.
        The grounds under which severance payments are triggered in the employment
        and
        change in control agreements are similar to or the same as those included
        in
        many employment agreements for senior executive officers of comparable
        companies.
  **Employment
        and Severance Agreements with Management**
  James
        B. Smith.
        Mr.
        Smith was appointed Chief Executive Officer and President in December 2006.
        In
        March 15, 2007, we entered into a new employment agreement with Mr. Smith
        in his
        capacities as Chief Executive Officer and President. Mr. Smith’s employment
        agreement has a term of five (5) years, with an annual cash salary of $300,000.
        In addition, Mr. Smith is entitled to an annual stock grant with a fair market
        value of $1 million. Therefore, the number of shares granted to Mr. Smith
        each
        year will vary based on our stock price. Mr. Smith is entitled to all employee
        benefits generally provided by the Company to employees. He is also entitled
        to
        four weeks paid vacation, an annual automobile allowance of $12,000,
        supplemental disability insurance and a life insurance policy payable to
        his
        heirs in the amount of $2 million. Mr. Smith continues to serve as Chief
        Financial Officer, but does not receive any additional compensation specifically
        for such duties. If the Company terminates Mr. Smith’s employment without cause,
        as defined in the employment agreement, Mr. Smith is entitled to continue
        to
        receive payment of his cash and annual equity compensation for the remainder
        of
        the five year term. Mr. Smith joined our board of directors on June 27,
        2005.
  During
        all of 2006, and through March 15, 2007, Mr. Smith served under his prior
        employment agreement, which was entered into in October 2004 in his capacity
        of
        Chief Financial Officer. Under the terms of Mr. Smith's prior employment
        agreement, his base annual salary in 2006 was $168,000, and was subject to
        increases from year to year, as determined by our Board of Directors, by
        at
        least the Consumer Price Index. As additional compensation, Mr. Smith received
        his annual stock grant of 500,000 shares in accordance with the terms of
        the
        prior employment agreement. As incentive compensation, Mr. Smith was entitled
        to
        additional compensation equal to one percent of our net profits and one percent
        of the increase in sales over a previous year's sales, effective October
        1,
        2004. As with his new employment agreement, Mr. Smith was entitled to four
        weeks
        paid vacation and an annual automobile allowance of $12,000.
   Robert
        W. Dowies .
        We
        employed Mr. Dowies on October 26, 2004 as our Vice President of Gas Markets
        and
        Supply. His employment agreement is for a term of three (3) years. His annual
        salary is $100,000. He is entitled to an annual stock grant of 100,000 common
        shares. The first 50,000 shares will vest and be payable April 18, 2005.
        Thereafter, stock grants will be payable every six months, October 18 and
        April
        18 for the term of the employment agreement. Mr. Dowies is entitled to two
        (2)
        weeks paid vacation and all employee benefits as provided by the
        Company.
  34
 Table
            of Contents
  Michael
          Ward .
          Mr.
          Ward resigned from all positions with the Company in December 2006 and
          entered
          into an agreement regarding his separation from the Company, severance
          amounts
          and certain other matters. Pursuant to this agreement, Mr. Ward has agreed
          to
          repay the Company for certain amounts owed under promissory notes. In addition,
          Mr. Ward agreed to bring current and assume all obligations of not Company
          under
          that certain SBC Center Terrace Suite License Agreement between TIDE and
          San
          Antonio Spurs, LLC. Under this agreement, the Company will pay Mr. Ward
          the
          total sum of $134,415.72 representing six (6) months salary, plus COBRA
          payments
          for the same period of time, commencing January 1, 2007 according to the
          Company's payroll schedule. If Mr. Ward had been unable to secure an assignment
          of the Skybox Agreement, the salary and COBRA payments could have been
          suspended
          by the Company until the contemplated assignment was completed. In addition,
          the
          Company agreed to issue Mr. Ward the 500,000 shares of common stock due
          under
          his employment agreement on December 31, 2006. Mr. Ward was successful
          in having
          the Skybox Agreement assigned in January 2007, and therefore, the 500,000
          shares
          were released to him at that time. However, the Company has suspended making
          required payments under the separation and severance agreement until such
          time
          as the sale of the Tidelands Exploration & Production Corporation’s
          properties for original value has been completed.
  Prior
        to
        his resignation, under the terms of Mr. Ward's employment agreement, commencing
        January 1, 2004, he was employed as the Company's President and Chief Executive
        Officer for a term of five (5) years. His base annual salary in 2006 is
        $252,000. As additional compensation, Mr. Ward was entitled to an annual
        stock
        grant of One Million (1,000,000) shares. Stock grant dates were June 30 and
        December 31 each year. As incentive compensation, Mr. Ward was entitled to
        additional compensation equal to two percent of our net profits and one percent
        of the increase in sales over a previous year's sales, effective with the
        fiscal
        year ending 2004. Mr. Ward was entitled to all employee benefits as provided
        by
        the Company. He was entitled to four weeks paid vacation and an annual
        automobile allowance of $12,000.
  **Change
        of control agreements**
  We
        do not
        have any agreements providing for compensation or benefits to our employees
        in
        the event of a change of control of the Company.
  **Summary
        Compensation Table**
  The
        following table contains compensation data for our named executive officers
        for
        the fiscal year ended December 31, 2006.
 
 **Name
                  and Principal Position**
              ****
              **Fiscal
                  Year**
              ****
              **Salary
                  ($)**
              ****
              **Bonus
                  ($)**
              ****
              **Stock
                  Awards ($) (3)**
              ****
              **All
                  Other Compensation**
                **($)
                  (4)**
              ****
              **Total
                  ($)**James
                  B Smith
                President,
                  CEO and CFO (1)
              
              
              2006
              
              
              185,880
              
              
              7,745
              
              
              324,500
              
              
              14,220
              
              
              532,345Michael
                  R. Ward
                CEO
                  (2)
              
              
              2006
              
              
              253,333
              
              
              11,015
              
              
              1,219,500
              
              
              169,752
              
              
              1,653,600Julio
                  Bastarrachea
              
              
              2006
              
              
              61,909
              
              
              2,579
              
              
              142,500
              
              
              1,158
              
              
              208,146Robert
                  W. Dowies
                V.P.
                  Marketing
              
              
              2006
              
              
              99,999
              
              
              4,167
              
              
              63,400
              
              
              1,742
              
              
              169,308(1)
                  Appointed Chief Executive Officer and President on December 8,
                  2006.(2)
                  Resigned on December 6, 2006.(3)
                  For each of Mr. Smith and Mr. Ward, this amount includes a stock
                  award of
                  150,000 shares each on September 25, 2006, with a value of $87,000,
                  for
                  services rendered in their capacities as members of the Board of
                  Directors.(4)
                  Includes a $12,000 per year automobile allowance for each of Mr.
                  Smith and
                  Mr. Ward, and severance of $145,431 that accrued in 2006 for Mr.
                  Ward.
                  Also includes matching 401(k) contributions for each executive
                  officer.
 
  35
 Table
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 **GRANTS
                  OF PLAN-BASED AWARDS****Estimated
                  Future Payouts Under Equity Incentive Plan Awards******
                **Name**
              
              ****
                **Grant
                  Date**
              
              **Threshold**(#)
              
              **Target(#)**
              
              **Maximum(#)**
              
              **All
                  Other Stock Awards: Number of Shares of Stock**
              
              **All
                  Other Option Awards; Number of Securities Underlying
                  Options**
              
              **Exercise
                  or Base Price of Option Awards ($/sh)**
              
              **Grant
                  Date Fair Value of Stock and Option Awards (1)**James
                  B Smith
              
              1/3/2006
              
              
              
              
              
              
              
              500,000
              
              
              
              
              
              $445,0009/18/2006
              
              
              
              
              
              
              
              150,000
                  (2)
              
              
              
              
              
              $87,00010/11/2006
              
              
              
              
              
              
              
              500,000
              
              
              
              
              
              $237,500Michael
                  R. Ward
              
              1/2/2006
              
              
              
              
              
              
              
              500,000
              
              
              
              
              
              $455,0006/7/2006
              
              
              
              
              
              
              
              500,000
              
              
              
              
              
              $542,5009/25/2006
              
              
              
              
              
              
              
              150,000
                  (2)
              
              
              
              
              
              $87,000Julio
                  Bastarrachea
              
              1/30/2006
              
              
              
              
              
              
              
              150,000
              
              
              
              
              
              $142,500Robert
                  W. Dowies
              
              5/10/2006
              
              
              
              
              
              
              
              60,000
              
              
              
              
              
              $47,40011/27/2006
              
              
              
              
              
              
              
              40,000
              
              
              
              
              
              $16,000(1)
                  This column reflects the grant date fair value of stock awards
                  under SFAS
                  123R. With respect to stock awards, the value was calculated as
                  the number
                  of shares multiplied by the closing price on grant
                  date.(2)
                  Stock award granted as compensation for services as a member of
                  the Board
                  of Directors.
 
 **Outstanding
        Equity Awards at Fiscal Year End**
 
 As
        of
        December 31, 2006, none of our named executive officers had any outstanding,
        unexercised options or any unvested stock awards.
  36
 Table
            of Contents
  
 **Option
        Exercises and Vested Stock**
 
 **OPTION
                  EXERCISES AND STOCK VESTED****Option
                  Awards**
              ****
              **Stock
                  Awards****Name**
              ****
              **Number
                  of Shares**
                **Acquired
                  on**
                **Exercise**
                **(#)**
              ****
              **Value
                  Realized**
                **on
                  Exercise**
                **($)**
              ****
              **Number
                  of Shares Acquired on Vesting (1)**
              ****
              **Value
                  Realized on Vesting (2)**James
                  B Smith
              
              -
              
              -
              
              500,000
              
              $445,000-
              
              -
              
              150,000
                  (3)
              
              $87,000-
              
              -
              
              500,000
              
              $237,500Michael
                  R. Ward
              
              -
              
              -
              
              500,000
              
              $455,000-
              
              -
              
              500,000
              
              $542,500-
              
              -
              
              150,000
                  (3)
              
              $87,000Julio
                  Bastarrachea
              
              -
              
              -
              
              150,000
              
              $142,500Robert
                  W. Dowies
              
              -
              
              -
              
              60,000
              
              $47,400-
              
              -
              
              40,000
              
              $16,000(1)
                  All stock awards were fully vested at the time of
                  grant.(2)
                  This column reflects the grant date fair value of stock awards
                  under SFAS123R.With respect to stock awards, the value was calculated as the number
                  of
                  shares multiplied by the closing price on grant date.(3)
                  Stock award granted as compensation for services as a member of
                  the Board
                  of Directors.
 
  37
 Table
            of Contents
  **Director
        Compensation**
 
 **Name**
              ****
              **Fees
                  Earned or Paid in Cash ($)**
              ****
              **Stock
                  Awards ($) (1)**
              ****
              **Option
                  Awards ($)**
              ****
              **All
                  Other Compensation ($)**
              ****
              **Total
                  ($)**James
                  B Smith
              
              
              
              87,000
              
              
              
              
              
              87,000Ahmed
                  Karim
              
              36,000
              
              87,000
              
              
              
              
              
              123,000Carl
                  Hessel
              
              
              
              87,000
              
              
              
              
              
              87,000Michael
                  Ward
              
              
              
              87,000
              
              
              
              
              
              87,000(1)
                  On September 25, 2006, each director received a grant of 150,000
                  shares of
                  our common stock, valued at $0.58 per share. These awards vested
                  immediately upon grant. Accordingly, the grant date fair value
                  of each of
                  these awards, calculated in accordance with Financial Accounting
                  Standards
                  Board Statement of Financial Accounting Standards No. 123 Share
                  Based
                  Payment (FAS 123(R)), is the same as the amount of compensation
                  expense we
                  reflected in our financial statements with respect to each of these
                  awards. The grant date fair value of each of these awards is estimated
                  based on the fair market value of our common stock at the time
                  of the
                  grant.
 
  **Committees
        of the Board of Directors**
  Tidelands
        does not have a Compensation committee. The Board of Directors acts as the
        Compensation Committee. Tidelands has no compensation written policies outlining
        factors and criteria underlying awards or payments in relation to executive
        officers.
  **Code
        of Ethical Conduct**
  Our
        board
        of directors adopted a Code of Ethical Conduct which applies to all our Company
        directors, officers and employees, including our principal executive officer
        and
        principal financial officer, principal accounting officer or comptroller,
        or
        other persons performing similar functions.
  38
 Table
            of Contents
  **ITEM
        12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT AND RELATED STOCKHOLDER MATTERS**
 
 The
        following table sets forth certain information with respect to beneficial
        ownership of shares of the Company's common stock as of March 30, 2007 for
        (i) each person who is known by the Company to own beneficially more than
        five percent of the outstanding shares of common stock, (ii) each director
        and named executive officers and (iv) all directors and executive officers
        of the Company as a group. The information is the table is based on our records,
        information filed with the Securities and Exchange Commission and information
        provided to us. Except as otherwise indicated, we believe that the persons
        named
        in this table have sole voting and investment power with respect to all
        shares.
 
 Impact
                  International, LLC (1)
              8,812,980
              8.38%111
                  W. 5thSt. Ste.720Tulsa,
                  OK 74103M.A.G.
                  Capital, LLC (2)
              6,578,898
              5.89%555
                  S. Flower St.Suite
                  4500Los
                  Angeles, CA 90071David
                  Firestone (2)
              6,578,898
              5.89%555
                  S. Flower St.Suite
                  4500Los
                  Angeles, CA 90071Robinson
                  Reed, Inc. (2)
              246,710
              0.23%AV.DU
                  Leman 8BCH-1003-LausanneSwitzerlandMonarch
                  Pointe Fund, Ltd. (2)(3)
              3,615,708
              3.33%555
                  S. Flower St.Suite
                  4500Los
                  Angeles, CA 90071Mercator
                  Momentum Fund, LP (2)(34)
              1,608,338
              1.51%555
                  S. Flower St.Suite
                  4500Los
                  Angeles, CA 90071Mercator
                  Momentum Fund III, LP(2)(5)
              1,108,142
              1.04%555
                  S. Flower St.Suite
                  4500Los
                  Angeles, CA 90071James
                  B. Smith (6)
              9,065,585
              8.2%1862
                  W. Bitters Rd.San
                  Antonio, TX 78248Ahmed
                  Karim (7)
              9,445,358
              8.6%1463
                  Terrace AveVancouver
                  A1 V7R 1B5Carl
                  Hessel (8)
              11,282,079
              10.3%c/o
                  Margaux InvestmentManagement
                  Group, S.A.9
                  Rue de CommerceCH
                  1211 Geneva 11SwitzerlandRobert
                  W. Dowies
              240,000
              0.2%1862
                  W. Bitters Rd.San
                  Antonio, TX 78248Julio
                  Bastarrachea
              150,000
              0.1%1862
                  W. Bitters Rd.San
                  Antonio, TX 78248Michael
                  Ward
              8,192,038
              7.8%1862
                  W. Bitters Rd.San
                  Antonio, TX 78248All
                  Directors & officers
              38,375,060
              32.2%as
                  a group (6 persons)
 
 (1)
        Based
        on Schedule 13D filed on January 22, 2007.
 (2) M.A.G.
        Capital, LLC is the General Partner and Manager of the following funds: Robinson
        Reed, Inc., Monarch Pointe Fund, Ltd., Mercator Momentum Fund, LP and Mercator
        Momentum Fund III, LP. David Firestone is the Managing Member of M.A.G. Capital,
        LLC. To our knowledge, David Firestone and M.A.G. Capital LLC do not own
        any of
        our securities directly.
 (3)
        Monarch Pointe Fund, Ltd. owns warrants to purchase 3,615,708 shares of our
        common stock. Half of the warrants are exercisable at $.80 per share and
        half
        are exercisable at $.87 per share.
 (4)
        Mercator Momentum Fund, LP owns warrants to purchase 1,608,338 shares of
        our
        common stock. Half of the warrants are exercisable at $.80 per share and
        half
        are exercisable at $.87 per share.
 (5)
        Mercator Momentum Fund III, LP owns warrants to purchase 1,108,142 shares
        of our
        common stock. Half of the warrants are exercisable at $.80 per share and
        half
        are exercisable at $.87 per share.
 (6)
        Includes options to purchase 5,000,000 shares of our common stock.
 (7)
        Includes options to purchase 5,000,000 shares of our common stock.
 (8)
        Includes options to purchase 4,047,619 shares of our common stock.
 
 39
 Table
            of Contents
 
 **Securities
        Authorized for Issuance under Equity Compensation Plans**
 
 The
        following table summarizes our equity compensation plan information as of
        December 31, 2006.
  **Equity
                      Compensation Plan Information****Plan
                      Category**
                  **Number
                      of Securities to be issued upon exercise of outstanding options,
                      warrants
                      and rights**
                  **Weighted-average
                      Exercise price of outstanding options, warrants and
                      rights**
                  **Number
                      of Securities remaining available for future issuance under
                      equity
                      compensation plans (excluding securities reflected in first
                      column)**Equity
                      Compensation Plans approved by security holders
                  None
                  None
                  NoneEquity
                      Compensation Plans not approved by security holders
                  5,000,000
                      (1)
                  N.A.
                      (No options outstanding)
                  -0-5,000,000
                      (2)
                  N.A.
                      (No options outstanding)
                  2,850,122Total
                  10,000,000
                  
                  2,850,122(1)
                      On May 27, 2003, the Company adopted the 2003 Non-Qualified
                      Stock Grant
                      and Option Plan. The Plan reserved 5,000,000 shares. The Plan
                      is
                      administered by our Board of Directors. Directors, officers,
                      employees,
                      consultants, attorneys, and others who provide services to
                      our Company are
                      eligible participants. Participants are eligible to be granted
                      warrants,
                      options, common stock as compensation. The purpose of this
                      Plan is to
                      provide these persons with equity-based compensation and incentives
                      to
                      make significant contributions to our long-term performance
                      and growth by
                      aligning their economic interests more closely with those of
                      our
                      shareholders, and to attract and retain personnel.(2)
                      On November 2, 2004, the Company adopted the 2004 Non-Qualified
                      Stock
                      Grant and Option Plan. The Plan reserved 5,000,000 shares.
                      The Plan is
                      administered by our Board of Directors. Directors, officers,
                      employees,
                      consultants, attorneys, and others who provide services to
                      our Company are
                      eligible participants. Participants are eligible to be granted
                      warrants,
                      options, common stock as compensation. The purpose of this
                      Plan is to
                      provide these persons with equity-based compensation and incentives
                      to
                      make significant contributions to our long-term performance
                      and growth by
                      aligning their economic interests more closely with those of
                      our
                      shareholders, and to attract and retain personnel. In some
                      instances,
                      awards under the Plan may also be used to conserve cash by
                      paying all or a
                      portion of an individual’s and other service provider’s fees in
                      stock.
  **ITEM
        13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
        DIRECTOR INDEPENDENCE**
  On
        February 5, 2003, we granted Royis Ward common stock options to purchase
        500,000
        shares at $0.22 per share. The options were exercised on September 14, 2004
        and
        payment was made by promissory note for $110,000 bearing interest at the
        annual
        rate of Five percent. Presently, Royis Ward, formerly an officer and director
        of
        the Company, and father of Michael Ward (our former CEO), is indebted to
        the
        Company as outlined above.
  The
        Company executed an agreement in January 2004 with Royis Ward, formerly an
        officer and director of the Company and the father of Michael R. Ward, who
        was
        President and CEO at that time, 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, 2006, the loan balance was
        $287,432, including accrued interest, and was paid in full on that date by
        Michael R. Ward, who had subsequently acquired the airplane from Royis Ward
        after the initial transaction.
 
 40
 Table
            of Contents
  **Policies
        and Procedures for Related Party Transactions**
  The
        Company conducts an appropriate review of all related party transactions
        that
        are required to be disclosed pursuant to Regulation S-K, Item 404 for potential
        conflict of interest situations on an ongoing basis and all such transactions
        must be disclosed to and approved by the entire Board of Directors of the
        Company.
 
  **Director
        Independence**
  Our
        Board
        of Directors is currently composed of three directors, none of whom would
        qualify as an independent director based on the definition of independent
        director set forth in Rule 4200(a)(15) of the Nasdaq Marketplace rules. Because
        our common stock is traded on the NASD OTC
        Electronic Bulletin Board ,
        which
        is not a securities exchange, we are not subject to corporate governance
        rules
        that require that a board of directors be composed of a majority of independent
        directors.
   **ITEM
        14. PRINCIPAL ACCOUNTING FEES AND
        SERVICES**
  The
        Company paid or accrued the following fees in each of the prior two fiscal
        years
        to its principal accountant, Baum & Co., P.A. of Coral Springs,
        Florida.
  ****
              **Year
                  End 12-31-06**
              ****
              **Year
                  End
                  12-31-05**(1)
                Audit Fees
              $
              114,350
              
              $
              102,553(2)
                Audit-related Fees
              
              53,625
              
              
              -0-(3)
                Tax Fees
              
              -0-
              
              
              -0-(4)
                All other fees
              
              -0-
              
              
              -0-Total
                Fees
              $
              167,975
              
              $
              102,553
 
 The
        Company's principal accountant, Baum & Co., P.A. did not engage any other
        persons or firms other than the principal accountant's full-time, permanent
        employees.
  AUDIT
        FEES. Audit fees consist of fees billed for professional services rendered
        for
        the audit of the Company's consolidated financial statements and review of
        the
        interim consolidated financial statements included in quarterly reports and
        services that are normally provided by the Company's principal accountants
        in
        connection with statutory and regulatory filings or engagements.
  AUDIT-RELATED
        FEES. Audit related fees consist of fees billed for assurance and related
        services that are reasonably related to the performance of the audit or review
        of the Company's consolidated financial statements and are not reported under
        "Audit Fees."
  TAX
        FEES.
        Tax fees are fees billed for professional services for tax compliance, tax
        advice and tax planning.
  ALL
        OTHER
        FEES. All other fees include fees for products and services other than the
        services reported above. There were no management consulting services provided
        in fiscal 2006 or 2005.
  Policy
        on
        Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
        of
        Independent Auditors
  The
        Company currently does not have a designated Audit Committee. However, as
        defined in Sarbanes-Oxley Act of 2002, the entire Board of Directors is the
        Company's de facto audit committee.
  Accordingly,
        the Company's Board of Directors' policy is to pre-approve all audit and
        permissible non-audit services provided by the independent auditors. These
        services may include audit services, audit-related services, tax services
        and
        other services. Pre-approval is generally provided for up to one year and
        any
        pre-approval is detailed as to the particular service or category of services
        and is generally subject to a specific budget. The independent auditors and
        management are required to periodically report to the Company's Board of
        Directors regarding the extent of services provided by the independent auditors
        in accordance with this pre-approval, and the fees for the services performed
        to
        date. The Board of Directors may also pre-approve particular services on
        a
        case-by-case basis.
  41
 Table
            of Contents
  **PART
        IV**
  **ITEM
        15. EXHIBITS AND FINANCIAL STATEMENT
        SCHEDULES**
  **(a)
        Financial Statements and Schedules**
 
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 CONSOLIDATED
        BALANCE SHEETS
 
 Years
        Ended December 31, 2006 and 2005
 
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 Years
        Ended December 31, 2006, 2005 and 2004
 
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 Years
        Ended December 31, 2006, 2005 and 2004
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 Years
        Ended December 31, 2006, 2005 and 2004
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  The
        Consolidated Financial Statements, the Notes and the Report of Independent
        Registered Public Accounting Firm listed above are filed as part of this
        Report
        and are set forth on the pages immediately following the signature pages
        of this
        Report.
  **(b)
        Exhibit Listing**
  **Exhibit**
                ****
                **Description**
                ****
                **Location
                    of Exhibit**2.0
                
                Amendment
                    No. 2 to the Asset Purchase and Sale and between Sonterra Energy
                    Corporation and Oneok Propane Distribution Company.
                
                Incorporated
                    by reference to Exhibit 10.18-K
                    filed November 15, 20042.1
                
                Amendment
                    No. 1 to the Asset Purchase and Sale and between Sonterra Energy
                    Corporation and Oneok Propane Distribution Company.
                
                Incorporated
                    by reference to Exhibit 10.28-K
                    filed November 15, 20042.3
                
                Asset
                    Purchase and Sale Agreement by and between Sonterra Energy Corporation
                    and
                    Oneok Propane Distribution Company.
                
                Incorporated
                    by reference to Exhibit 10.38-K
                    filed November 15, 20042.4
                
                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”) dated May 25,
                    2004 with Exhibits.
                
                Incorporated
                    by reference Exhibit 10 to 8-K filed June 25, 20042.5
                
                Purchase
                    and Sale Agreement for Reef Marketing, L.L.C. and Reef International,
                    L.L.C. by and between Tidelands Oil & Gas Corporation and Impact
                    International, L.L.C and Coahuila Pipeline, L.L.C. dated April
                    16,
                    2003.
                
                Incorporated
                    by reference to Exhibit 10.1 to 8-K filed on May 8,
                    20032.6
                
                Agreement
                    of Limited Partnership of Reef Ventures, L.P.
                
                Incorporated
                    by reference to Exhibit 10.2 to 8-K filed on May 8, 20033.0
                
                Certificates
                    of Amendment to Articles of Incorporation
                
                Incorporated
                    by reference to Exhibit 3.0 to 8-K filed on April 24,
                    20063.1
                
                Restated
                    Articles of Incorporation of Tidelands Oil & Gas Corporation., a
                    Nevada corporation.
                
                Incorporated
                    by reference to Exhibit 3.0 to SB-2 filed on December 17,
                    20043.2
                
                Restated
                    Bylaws of Tidelands Oil & Gas Corporation.
                
                Incorporated
                    by reference to Exhibit 3.1 to SB-2 filed on December 17,
                    20044.0
                
                Form
                    of Original Issue Discount Convertible Debentures with Palisades
                    Master
                    Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master Fund,
                    Ltd
                
                Incorporated
                    be reference to Exhibit 10.2 to 8-K filed on January 25,
                    20064.1
                
                7%
                    Convertible Debenture Mercator Momentum Fund, LP
                
                Incorporated
                    by reference to Exhibit 10.2 to 8-K filed on December 3,
                    20044.2
                
                7%
                    Convertible Debenture Mercator Momentum Fund III, LP
                
                Incorporated
                    by reference to Exhibit 10.3 to 8-K filed on December 3,
                    20044.3
                
                7%
                    Convertible Debenture Monarch Pointe Fund, LP
                
                Incorporated
                    by reference to Exhibit 10.4 to 8-K filed on December 3,
                    200410.1
                
                Form
                    of Series “A” Common Stock Purchase Warrant Palisades Master Fund,
                    Crescent International, Ltd., Double U Master Fund, LP, JGB Capital,
                    LP,
                    Nite Capital, LP and RHP MasterFund,
                    Ltd.
                
                Incorporated
                    by reference to Exhibit 10.4 to 8-K filed on January 25,
                    200610.2
                
                Form
                    of Securities Purchase Agreement with Palisades Master Fund,
                    Crescent
                    International, Ltd., Double U Master Fund, LP, JGB Capital, LP,
                    Nite
                    Capital, LP and RHP Master Fund, Ltd.
                
                Incorporated
                    by reference to Exhibit 10.2 to 8-K filed on January 25,
                    200610.3
                
                Form
                    of Series “A” Common Stock Purchase Warrant Palisades Master Fund,
                    Crescent International, Ltd., Double U Master Fund, LP, JGB Capital,
                    LP,
                    Nite Capital, LP and RHP MasterFund,
                    Ltd.
                
                Incorporated
                    by reference to Exhibit 10.4 to 8-K filed on January 25, 200610.4
                
                Form
                    of Series “B” Common Stock Purchase Warrant Palisades Master Fund,
                    Crescent International, Ltd., Double U Master Fund, LP, JGB Capital,
                    LP,
                    Nite Capital, LP and RHP Master Fund, Ltd.
                
                Incorporated
                    by reference to Exhibit 10.5 to 8-K filed on January 25,
                    200610.5
                
                Form
                    of Registration Rights Agreement with Palisades Master Fund,
                    Crescent
                    International, Ltd., Double U Master, LP, JGB Capital, LP, Nite
                    Capital,
                    LP and RHP Master Ltd.
                
                Incorporated
                    by reference to Exhibit 10.2 to 8-K filed on January 25,
                    200610.6
                
                Employment
                    Agreement with James B. Smith as CEO and President *
                
                Incorporated
                    by reference to Exhibit 10.1 to 8-K filed April 3, 200710.7
                
                Employment
                    Agreement with Michael Ward *
                
                Incorporated
                    by reference to Exhibit 10.0 of SB-2 filed December 17,
                    200410.8
                
                Employment
                    Agreement with James B. Smith (as CFO) *
                
                Incorporated
                    by reference to Exhibit 10.1 of SB-2 filed December 17,
                    200410.9
                
                Employment
                    Agreement with Robert Dowies *
                
                Incorporated
                    by reference to Exhibit 10.2 of SB-2 filed December 17,
                    200410.10
                
                2003
                    Non-Qualified Stock Grant and Option Plan *
                
                Incorporated
                    by reference to Exhibit 10 of Form S-8 filed on June 11,
                    200310.11
                
                2004
                    Non-Qualified Stock Grant and Option Plan *
                
                Incorporated
                    by reference to Exhibit 10 of Form S-8 filed on June 11,
                    200310.12
                
                2007
                    Non-Qualified Stock Grant and Option Plan *
                
                Incorporated
                    by reference to Exhibit 10.1 of Form S-8 filed on February 16,
                    200710.13
                
                Form
                    of Option Grant under 2007 Non-Qualified Stock Grant and Option
                    Plan
                    *
                
                Incorporated
                    by reference to Exhibit 10.2 of Form S-8 filed on February 16,
                    200710.14
                
                Form
                    of Stock Award Agreement under 2007 Non-Qualified Stock Grant
                    and Option
                    Plan *
                
                Incorporated
                    by reference to Exhibit 10.3 of Form S-8 filed on February 16,
                    200710.15
                
                Securities
                    Purchase Agreement
                
                Incorporated
                  by reference to Exhibit 10.1 to 8-K/A filed on December 3,
                  200410.16
                
                Warrant
                    Margaux
                
                Incorporated
                    by reference to Exhibit 10.5 of SB-2 filed December 17,
                    200410.17
                
                Warrant
                    Margaux
                
                Incorporated
                    by reference to Exhibit 10.6 of SB-2 filed December 17,
                    200410.18
                
                Stock
                    Purchase Warrant Impact
                
                Incorporated
                    by reference to Exhibit 10.3 to 8-K filed on May 8,
                    200310.19
                
                Registration
                    Rights Agreement Impact
                
                Incorporated
                    by reference to Exhibit 10.4 to 8-K filed on May 8,
                    200310.20
                
                Amended
                    Stock Purchase Warrant Impact International
                
                Incorporated
                    by reference to Exhibit 10 to 8-K filed on June 25,
                    200410.21
                
                Registration
                    Rights Agreement with Mercator Group
                
                Incorporated
                    by reference to Exhibit 10.5 to 8-K filed on December 3,
                    200410.22
                
                Warrant
                    to Purchase Common Stock Mercator Momentum Funds, LP $0.87
                
                Incorporated
                    by reference to Exhibit 10.6 to 8-K filed on December 3,
                    200410.23
                
                Warrant
                    to Purchase Common Stock Mercator MomentumFunds,
                    LP $0.80
                
                Incorporated
                    by reference to Exhibit 10.7 to 8-K filed on December 3,
                    200410.24
                
                Warrant
                    to Purchase Common Stock Mercator MomentumFund,
                    III, LP $0.87
                
                Incorporated
                    by reference to Exhibit 10.8 to 8-K filed on December 3,
                    200410.25
                
                Warrant
                    to Purchase Common Stock Mercator MomentumFund
                    III, LP $0.80
                
                Incorporated
                    by reference to Exhibit 10.9 to 8-K filed on December 3,
                    200410.26
                
                Warrant
                    to Purchase Common Stock Monarch PointeFund
                    III, LP $0.87
                
                Incorporated
                    by reference to Exhibit 10.10 to 8-K filed on December 3,
                    200410.27
                
                Warrant
                    to Purchase Common Stock Monarch PointeFund
                    III, LP $0.80
                
                Incorporated
                    by reference to Exhibit 10.11 to 8-K filed on December 3,
                    200410.28
                
                Warrant
                    to Purchase Common Stock Mercator AdvisoryGroup,
                    LLC. $0.87
                
                Incorporated
                    by reference to Exhibit 10.12 to 8-K filed on December 3,
                    200410.29
                
                Warrant
                    to Purchase Common Stock Mercator Advisory Group, LLC
                    $0.80
                
                Incorporated
                    by reference to Exhibit 10.13 to 8-K filed on December 3,
                    200410.30
                
                Promissory
                    Note for Aircraft Prepaid Lease
                
                Incorporated
                    by reference to Exhibit 10.4 to 10-Q filed on August 21,
                    200610.31
                
                Aircraft
                    Prepaid Lease/Use Agreement
                
                Incorporated
                    by reference to Exhibit 10.3 to 10-Q filed on August 21,
                    200621
                
                List
                    of Subsidiaries
                
                Included
                    with this filing24.1
                
                Power
                    of Attorney
                
                Included
                    with signature page31.1
                
                Chief
                    Executive Officer and Chief Financial Officer Section 302 Certification
                    pursuant to Sarbanes - Oxley Act.
                
                Included
                    with this filing32.1
                
                Chief
                    Executive Officer-Section 906 Certification pursuant To Sarbanes-Oxley
                    Act
                
                Furnished
                    herewith
  *
        Management or compensatory plan or arrangement.
  42
 Table
            of Contents
   **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-K Report for the period ending
        December 31, 2006 to be signed on its behalf by the undersigned, thereunto
        duly
        authorized.
  **TIDELANDS
                OIL & GAS CORPORATION**Date: April
                17, 2007
              By:
              /s/  James
                B.
                SmithJames B. Smith, President and Chief
                Executive
                Officer
   KNOWN
        BY
        ALL PERSONS THESE PRESENTS, that each person whose signature appears below
        constitutes and appoints James B. Smith their attorneys-in-fact and agents
        with
        full power of substitution and re-substitution, for him and his name, place
        and
        stead, in any and all capacities, to sign any or all amendments to this Annual
        Report on Form 10-K and to file the same, with all exhibits thereto, and
        other
        documents in connection therewith, with the Securities and Exchange Commission,
        granting unto said attorney-in-fact and agent full power and authority to
        do and
        perform each and every act and thing requisite and necessary to be done in
        and
        about the foregoing, as fully to all intents and purposes as he might or
        could
        do in person, hereby ratifying and confirming all that said attorney-in-fact
        and
        agent, or his substitutes, may lawfully do or cause to be done by virtue
        hereof.
  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.
   **TIDELANDS
                OIL & GAS CORPORATION**Date: April
                17, 2007
              By:
              /s/
                James B.
                Smith,James B. Smith, President, CEO (Principal
                Executive Officer), CFO (Principal Financial and Accounting Officer)
                and Director
 Date: April
                  17, 2007
                By:
                /s/
                  Ahmed
                  KarimAhmed Karim, Director


Date: April
                  17, 2007
                By:
                /s/
                  Carl
                  HesselCarl Hessel, Director


43
 Table
            of Contents












**TIDELANDS
      OIL & GAS CORPORATION**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**YEARS
      ENDED DECEMBER 31, 2006, 2005 AND 2004 (RESTATED)**











Table
          of Contents







**TIDELANDS
      OIL & GAS CORPORATION**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
              F-1**CONSOLIDATED BALANCE
                SHEETS**Years
                  Ended December 31, 2006 and
                  2005
              F-2**CONSOLIDATED STATEMENTS
                OF
                OPERATIONS**Years
                  Ended December 31, 2006, 2005 and
                  2004
              F-3**CONSOLIDATED STATEMENTS
                OF
                STOCKHOLDERS’ EQUITY**Years
                  Ended December 31, 2006, 2005 and
                  2004
              F-4**CONSOLIDATED STATEMENTS
                OF CASH
                FLOWS**Years
                  Ended December 31, 2006, 2005 and
                  2004
              F-5
                  , F-6**NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS**
              F-7
                  -
                  F-30












Table
          of Contents





**BAUM&
COMPANY,
      P.A.**


**1515
      UNIVERSITY DRIVE, SUITE 209**


**CORAL
      SPRINGS, FLORIDA 33071**




**INDEPENDENT
      AUDITOR’S REPORT**











Board
      of
      Directors


Tidelands
      Oil & Gas Corporation


San
      Antonio, Texas





We
      have
      audited the accompanying consolidated balance sheets of Tidelands Oil & Gas
      Corporation as of December 31, 2006 and 2005, and the related statements of
      consolidated stockholders’ equity, operations, and cash flows for the years
      ended December 31, 2006, 2005 and 2004 (Restated). 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, 2006 and 2005, and the results of their
      consolidated operations and their consolidated cash flows for the years ended
      December 31, 2006, 2005 and 2004 (Restated) in conformity with accounting
      principles generally accepted in the United States of America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 2 to the financial
      statements, the Company has suffered recurring losses from operations and has
      a
      net working capital deficiency that raise substantial doubt about its ability
      to
      continue as a going concern. Management’s plans in regard to these matters are
      also described in Note 2. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





Baum
      & Company, P.A.


Coral
      Springs, Florida


April
      13,
      2007








F-1
 Table
          of Contents





**TIDELANDSOIL
&
GAS
      CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**YEARS
      ENDED**






**ASSETS**


**December
                      31,****2006**
                  ****
                  **2005**Current
                      Assets:Cash
                  $
                  367,437
                  
                  $
                  1,113,911Accounts
                      and Other Receivable
                  
                  388,754
                  
                  
                  468,458Inventory
                  
                  84,030
                  
                  
                  142,204Prepaid
                      Expenses
                  
                  148,551
                  
                  
                  183,938Total
                      Current Assets
                  
                  988,772
                  
                  
                  1,908,511Property
                      Plant and Equipment, Net
                  
                  12,364,359
                  
                  
                  10,042,088Other
                      Assets:Deposits
                  
                  56,708
                  
                  
                  14,004Cash
                      Restricted
                  
                  52,642
                  
                  
                  76,803Deferred
                      Charges
                  
                  565,221
                  
                  
                  0Note
                      Receivable
                  
                  0
                  
                  
                  288,506Goodwill
                  
                  1,158,937
                  
                  
                  1,158,937Total
                      Other Assets
                  
                  1,833,508
                  
                  
                  1,538,250Total
                      Assets
                  $
                  15,186,639
                  
                  $
                  13,488,849**LIABILITIES
                      AND STOCKHOLDERS’ EQUITY**Current
                      Liabilities:Current
                      Maturities - Note Payable
                  $
                  225,000
                  
                  $
                  225,000Accounts
                      Payable and Accrued Expenses
                  
                  1,624,752
                  
                  
                  1,225,554Reserve
                      for Litigation
                  
                  2,250,000
                  
                  
                  0Total
                      Current Liabilities
                  
                  4,099,752
                  
                  
                  1,450,554Long-Term
                      Debt
                  
                  8,934,294
                  
                  
                  4,271,768Total
                      Liabilities
                  
                  13,034,046
                  
                  
                  5,722,322Stockholders’
                      Equity:Common
                      Stock, $.001 Par Value per Share,250,000,000 Shares
                        Authorized, 86,457,922and
                      78,495,815 Shares Issued andOutstanding
                      at 2006 and 2005 Respectively
                  
                  86,459
                  
                  
                  78,497Additional
                      Paid-in Capital
                  
                  46,703,202
                  
                  
                  40,818,174Subscriptions
                      Receivable
                  
                  (220,000
                  )
                  
                  (550,000
                  )Minority
                      Interest
                  
                  -
                  
                  
                  -Accumulated
                      (Deficit)
                  
                  (44,417,068
                  )
                  
                  (32,580,144
                  )Total
                      Stockholders’ Equity
                  
                  2,152,593
                  
                  
                  7,766,527Total
                      Liabilities and Stockholders’ Equity
                  $
                  15,186,639
                  
                  $
                  13,488,849





See
      Accompanying Notes to Consolidated Financial Statements






F-2
 Table
          of Contents







**TIDELANDSOIL
&
GAS
      CORPORATION**


**STATEMENTS
      OF CONSOLIDATED OPERATIONS**


**YEARS
      ENDED**





**December
                  31,****2006**
              
              **2005**
              
              **2004****(Restated)**Revenues:Gas
                  Sales and Pipeline Fees
              
              $
              2,041,705
              
              $
              1,725,756
              
              $
              1,800,863Construction
                  Service
              
              
              180,893
              
              
              135,567
              
              
              82,975Total
                  Revenues
              
              
              2,222,598
              
              
              1,861,323
              
              
              1,883,838Expenses:Cost
                  of Sales
              
              
              1,173,561
              
              
              1,003,386
              
              
              1,508,891Operating
                  Expenses
              
              
              420,200
              
              
              202,766
              
              
              99,665Depreciation
              
              
              466,241
              
              
              485,481
              
              
              244,889Interest
              
              
              3,405,778
              
              
              611,363
              
              
              300,566Beneficial
                  Conversion Feature Interest
              
              
              0
              
              
              (756,329
              )
              
              3,092,105Sales,
                  General and Administrative
              
              
              6,446,652
              
              
              8,033,249
              
              
              11,022,019Impairment
                  Losses - Long-Lived Assets
              
              
              0
              
              
              392,000
              
              
              0Impairment
                  Losses - Goodwill
              
              
              0
              
              
              5,200,000
              
              
              15,358,000Reserve
                  for Litigation
              
              
              2,250,000
              
              
              0
              
              
              0Total
                  Expenses
              
              
              14,162,432
              
              
              15,171,916
              
              
              31,626,135(Loss)
                  from Operations
              
              
              (11,939,834
              )
              
              (13,310,593
              )
              
              (29,742,297
              )Gain
                  on Reduction of Derivative Liability
              
              
              0
              
              
              5,168,000
              
              
              15,390,000Loss
                  on Asset Sales
              
              
              (5,907
              )
              
              (3,167
              )
              
              0Other
                  Income/ (Expense)
              
              
              (6,605
              )
              
              61,956
              
              
              0Interest
                  and Dividend Income
              
              
              115,421
              
              
              123,075
              
              
              50,260Minority
                  Interest
              
              
              -
              
              
              -
              
              
              -Litigation
                  Settlement
              
              
              0
              
              
              297,825
              
              
              0Net
                  (Loss)
              
              $
              (11,836,925
              )
              $
              (7,662,904
              )
              $
              (14,302,037
              )Net
                  (Loss) Per Common Share:Basic
                  and Diluted
              
              $
              (0.15
              )
              $
              (0.11
              )
              $
              (0.27
              )Weighted
                  Average Number of CommonShares
                    Outstanding -Basic
                    and Diluted
              
              
              80,475,359
              
              
              70,049,587
              
              
              53,214,230







See
      Accompanying Notes to Consolidated Financial Statements





F-3
 Table
          of Contents




**TIDELANDSOIL
      AND GAS CORPORATION**


**STATEMENTS
      OF CONSOLIDATED STOCKHOLDERS’ EQUITY**


**YEARS
      ENDED DECEMBER 31, 2006, 2005 AND 2004 (RESTATED)**







**CommonShares**
              
              **Stock
                  Amount**
              
              **Additional
                  Paid-In
                  Capital**
              ****
              **Subscription
                  Receivable**
              ****
              **Accumulated
                  (Deficit)**
              ****
              **Stockholders’ Equity**Balance
                    December 1, 2003
              44,825,302
              
              $
              44,826
              
              
              $
              11,072,987
              
              $
              (18,000
              )
              $
              (10,615,203
              )
              $
              484,610Common
                    Stock Issued for Cash
              6,725,545
              
              
              6,725
              
              
              
              6,081,592
              
              
              --
              
              
              --
              
              
              6,088,317Common
                    Stock Issued for Services Regarding$4,083,335 Sale
                  of Stock
              300,000
              
              
              300
              
              
              
              449,700
              
              
              --
              
              
              --
              
              
              450,000Fee
                  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
              
              
              --
              
              
              --
              
              
              9,327,816Issuance
                  of Common Stock
                  for Subscription
              2,500,000
              
              
              2,500
              
              
              
              547,500
              
              
              (550,000
              )
              
              --
              
              
              --Issuance
                  of Common Stock
                  for Conversion ofNote
                  Payable and Accrued
                  Interest
              75,000
              
              
              75
              
              
              
              113,236
              
              
              --
              
              
              --
              
              
              113,311Beneficial
                      Conversion Feature - Convertible Debentures
              --
              
              
              --
              
              
              
              3,092,105
              
              
              --
              
              
              --
              
              
              3,092,105Write
                    Off Stock Subscription Receivable
              --
              
              
              --
              
              
              
              --
              
              
              18,000
              
              
              --
              
              
              18,000Issuance
                  of Common Stock to
                  Acquire 50% of Sonterra
                  Energy Corp.
              574,712
              
              
              575
              
              
              
              125,862
              
              
              --
              
              
              --
              
              
              126,437Net
                  Loss
              --
              
              
              --
              
              
              
              --
              
              
              --
              
              
              (14,302,037
              )
              
              (14,302,037
              )Balance
                    December 31, 2004
              61,603,359
              
              $
              61,604
              
              
              $
              30,354,195
              
              $
              (550,000
              )
              $
              (24,917,240
              )
              $
              $4,948,559Issuance
                    of CommonStock
                    for Services
              2,970,000
              
              
              2,971
              
              
              
              4,019,554
              
              
              --
              
              
              --
              
              
              4,022,525Issuance
                      of Common Stock for Conversion of Convertible
                      Debentures
              6,707,456
              
              
              6,707
              
              
              
              4,993,293
              
              
              --
              
              
              --
              
              
              5,000,000Beneficial
                      ConversionFeature
                      -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
              
              
              --
              
              
              --
              
              
              2,512,500Net
                  Loss
              --
              
              
              --
              
              
              
              --
              
              
              --
              
              
              (7,662,904
              )
              
              (7,662,904
              )Balance
                    December 31, 2005
              78,495,815
              
              $
              78,497
              
              
              $
              40,818,174
              
              $
              (550,000
              )
              $
              (32,580,144
              )
              $
              7,766,527Issuance
                    of Common Stock for Services
              2,810,000
              
              
              2,810
              
              
              
              2,161,490
              
              
              --
              
              
              --
              
              
              2,164,300Issuance
                      of Common Stock in Payment of Interest Based Liquidated
                      Damages
              2,828,304
              
              
              2,828
              
              
              
              1,694,154
              
              
              --
              
              
              --
              
              
              1,696,982Issuance
                    of Common Stock for Repayment of Convertible
                    Debentures
              1,823,803
              
              
              1,824
              
              
              
              1,584,885
              
              
              --
              
              
              --
              
              
              1,586,709Issuance
                    of Common Stock for Repayment of Accrued Expense
              500,000
              
              
              500
              
              
              
              444,500
              
              
              --
              
              
              --
              
              
              445,000Collection
                  of Stock Subscriptions
              --
              
              
              --
              
              
              
              --
              
              
              330,000
              
              
              --
              
              
              330,000Rounding
              --
              
              
              --
              
              
              
              (1
              )
              
              --
              
              
              1
              
              
              --Net
                  Loss
              --
              
              
              --
              
              
              
              --
              
              
              --
              
              
              (11,836,925
              )
              
              (11,836,925
              )Balance
                    December 31, 2006
              86,457,922
              
              $
              86,459
              
              
              $
              46,703,202
              
              $
              (220,000
              )
              $
              (44,417,068
              )
              $
              2,152,593


See
      Accompanying Notes to Consolidated Financial Statements





F-4
 Table
          of Contents







**TIDELANDSOIL
&
GAS
      CORPORATION**


**STATEMENTS
      OF CONSOLIDATED CASH FLOWS**


**YEARS
      ENDED**





**December
                  31,****2006**
              
              
              **2005**
              
              
              **2004****(Restated)**Cash
                  Flows Provided (Required)By
                  Operating Activities:Net
                  (Loss)
              
              $
              (11,836,925
              )
              $
              (7,662,904
              )
              $
              (14,302,037
              )Adjustments
                  to Reconcile Net (Loss)To
                  Net Cash Provided (Required) ByOperating
                    Activities:Depreciation
              
              
              466,241
              
              
              485,481
              
              
              244,889Goodwill
              
              
              0
              
              
              0
              
              
              (5,200,000
              )Impairment
                  Losses
              
              
              0
              
              
              5,592,000
              
              
              15,358,000Change
                  in Derivative Instrument
              
              
              0
              
              
              (5,168,000
              )
              
              (10,222,000
              )Loss
                  on Disposal of Equipment
              
              
              4,500
              
              
              3,167
              
              
              0Issuance
                  of Common Stock:For
                    Services Provided
              
              
              2,164,300
              
              
              4,022,525
              
              
              9,327,816For
                  Payment of Interest
              
              
              1,696,982
              
              
              0
              
              
              0Beneficial
                  Conversion Feature - Interest
              
              
              0
              
              
              (756,329
              )
              
              3,092,105Return
                  of Issued StockLitigation
                  Settlement
              
              
              0
              
              
              (297,825
              )
              
              0Changes
                  In:Accounts
                  Receivable
              
              
              79,704
              
              
              47,929
              
              
              (516,159
              )Inventory
              
              
              58,174
              
              
              (59,681
              )
              
              (82,523
              )Prepaid
                  Expenses
              
              
              35,387
              
              
              303,550
              
              
              (465,279
              )Restricted
                  Cash
              
              
              24,161
              
              
              0
              
              
              0Deposits
              
              
              (565,221
              )
              
              (61,699
              )
              
              (25,308
              )Deferred
                  Charges
              
              
              (42,704
              )
              
              116,250
              
              
              (116,250
              )Accounts
                  Payable and Accrued Expenses
              
              
              844,198
              
              
              651,330
              
              
              (201,370
              )Reserve
                  for Litigation
              
              
              2,250,000
              
              
              0
              
              
              0Net
                  Cash (Required)By
                  Operating Activities
              
              
              (4,821,203
              )
              
              (2,784,206
              )
              
              (3,108,116
              )Cash
                  Flows Provided (Required)By
                  Investing Activities:(Increase)
                  In Investments
              
              
              0
              
              
              0
              
              
              (901,871
              )Acquisitions
                  of Property, Plant & Equipment
              
              
              (2,814,512
              )
              
              (1,837,222
              )
              
              (8,727,010
              )Disposals
                  of Equipment
              
              
              21,500
              
              
              800
              
              
              0Net
                  Cash (Required)By
                  Investing Activities
              
              
              (2,793,012
              )
              
              (1,836,422
              )
              
              (9,628,881
              )







See
      Accompanying Notes to Consolidated Financial Statements




F-5
 Table
          of Contents





**TIDELANDSOIL
&
GAS
      CORPORATION**


**STATEMENTS
      OF CONSOLIDATED CASH FLOWS**


**(CONTINUED)**


**YEARS
      ENDED**





**December
                    31,****2006**
                
                
                **2005**
                
                
                **2004****(Restated)**


Cash
                  Flows Provided (Required)By
                  Financing Activities:Proceeds
                  from Issuance of Common Stock
              
              
              0
              
              
              0
              
              
              6,088,317Proceeds
                  from Long-Term Loans
              
              
              288,235
              
              
              277,385
              
              
              6,731,883Proceeds
                  from Issuance ofConvertible
                  Debentures
              
              
              6,569,750
              
              
              0
              
              
              5,000,000Repayment
                  of Convertible Debentures
              
              
              (608,750
              )
              
              0
              
              
              0Repayment
                  of Short-Term Loans
              
              
              0
              
              
              0
              
              
              (250,000
              )Proceeds
                  from Stock Subscriptions Receivable
              
              
              330,000
              
              
              0
              
              
              18,000Repayment
                  of Loan to Related Party
              
              
              288,506
              
              
              (1,900
              )
              
              (286,606
              )Net
                  Cash ProvidedBy
                  Financing Activities
              
              
              6,867,741
              
              
              275,485
              
              
              17,301,594Net
                  Increase (Decrease) in Cash
              
              
              (746,474
              )
              
              (4,345,143
              )
              
              4,564,597Cash
                  at Beginning of Period
              
              
              1,113,911
              
              
              5,459,054
              
              
              894,457Cash
                  at End of Period
              
              $
              367,437
              
              $
              1,113,911
              
              $
              5,459,054Supplemental
                  Disclosures ofCash
                  Flow Information:Cash
                  Payments for Interest
              
              $
              1,409,645
              
              $
              356,504
              
              $
              38,320Cash
                  Payments for Income Taxes
              
              $
              0
              
              $
              0
              
              $
              0Non-Cash
                  Financing Activities:Return
                  of Issued Stock ForBeneficial
                  Conversion Feature - Interest
              
              $
              0
              
              $
              (756,329
              )
              $
              3,092,105Litigation
                  Settlements
              
              
              0
              
              
              (297,825
              )
              
              0Increase
                  of Stock Subscription Receivable
              
              
              -
              
              
              -
              
              
              550,000Issuance
                  of Common Stock:Operating
                  Activities
              
              
              3,861,282
              
              
              4,022,525
              
              
              9,327,816Repayment
                  of Notes
              
              
              0
              
              
              2,512,500
              
              
              75,000Conversion
                  of Debentures
              
              
              1,586,709
              
              
              5,000,000
              
              
              0Payment
                  of Accounts Payable
              
              
              445,000
              
              
              0
              
              
              38,311Acquisition
                  Cost
              
              
              0
              
              
              0
              
              
              126,437Total
                  Non-Cash Financing Activities
              
              $
              5,892,991
              
              $
              10,480,871
              
              $
              13,209,669


See
      Accompanying Notes to Consolidated Financial Statements




F-6
 Table
          of Contents





**TIDELANDSOIL
&
GAS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





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. Rio Bravo Energy, LLC, and its wholly-owned subsidiary, Sonora
      Pipeline, LLC, no longer operate their gas processing plant and pipeline
      system.





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 propane gas distribution organization serving residential
      customers in the Austin, Texas area.





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) that operate a natural gas pipeline between Eagle
      Pass,
      Texas and Piedras Negras, Mexico.




During
      2004, the Company formed Terranova Energia S. De R.L. De C.V. (“Terranova”), a
      Mexican subsidiary wholly-owned by certain of the Company’s other wholly-owned
      subsidiaries. Terranova is engaged in the development of natural gas storage
      facilities in Mexico and other natural gas pipelines between the United States
      and Mexico.





On
      March
      27, 2006, the Company organized Esperanza Energy, LLC, a wholly-owned
      subsidiary, for the purpose of developing and operating an offshore California
      natural gas (LNG) receiving terminal.




On
        July
        9, 2006, the Company acquired a 50% interest in a 26-mile natural gas pipeline
        located in South Texas along with a 50% working interest in two leases with
        five
        re-completed natural gas wells on 1,000 acres which can be serviced by the
        pipeline described above. The Company utilized Tidelands Exploration &
Production Corporation, a wholly-owned subsidiary, to acquire the pipeline
        and
        gas well assets.







F-7
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      1 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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.





Cash
      and Cash Equivalents





The
      Company considers all highly liquid instruments purchased with an original
      maturity of three months or less to be cash equivalents.





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.








F-8
 Table
          of Contents








**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      1 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Long-Lived
      Assets





Statement
      of Financial Accounting Standards No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets” (“SFAS No. 144”), 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 No. 144 and the evaluation by the Company’s management did
      not determine any material adverse effects to the consolidated financial
      statements.





Income
      Taxes





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”),
      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.





Net
      (Loss) Per Common Share





The
      Company accounts for net (loss) per share in accordance with Statement of
      Financial Accounting Standard No. 128, “Earnings Per Share” (“SFAS No. 128”).
      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.










F-9
 Table
          of Contents










**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      1 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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, “Goodwill and Other
      Intangible Assets” (“SFAS No. 142”), 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 No. 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 2005 and 2006, the Company recognized impairment losses of
      $5,200,000 and $0 in 2005 and 2006 respectively.





Revenue
      Recognition





The
      Company’s revenues for 2006 were derived principally (79%) from the sale of
      propane gas to residential customers, as well as charges generated from
      transportation fees (13%). 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, 8%
      and
      7% in 2006 and 2005 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.











F-10
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      1 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





New
      Accounting Standards and Recently Issued Accounting
      Pronouncements





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.





In
      April
      2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 On Derivative
      Instruments And Hedging Activities” (“SFAS No. 149”). 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”). 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
      No.
      149 and SFAS No. 150 in 2003. The adoption of these standards have resulted
      in
      beneficial conversion feature charges (credits) of $392,000 and ($0) in 2005
      and
      2006 respectively.





In
      November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      151, “Inventory Costs - an amendment of ARB No. 43” (“SFAS No. 151”) which is
      the result of its efforts to converge U.S. accounting standards for inventories
      with International Accounting Standards. SFAS No. 151 requires idle facility
      expenses, freight, handling costs and wasted material (spoilage) costs to be
      recognized as current-period charges. It also requires that allocation of fixed
      production overheads to the costs of conversion be based on the normal capacity
      of the production facilities. SFAS No. 151 will be effective for inventory
      costs
      incurred during fiscal years beginning after June 15, 2005. The Company has
      evaluated the impact of this standard on its consolidated financial statements
      and does not believe the adoption of SFAS No. 151 will have a material impact
      on
      its results of operations.






F-11
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      1 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





New
      Accounting Standards and Recently Issued Accounting Pronouncements
      (Continued)





In
      June
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
      a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”).
      Opinion No. 20 previously required that most voluntary changes in accounting
      principle be recognized by including in net income of the period of the change
      the cumulative effect of changing to the new accounting principle. SFAS No.
      154
      requires retrospective application to prior periods’ financial statements of
      changes in accounting principle, unless it is impracticable to determine either
      the period-specific effects or the cumulative effect of the change. SFAS No.
      154
      is effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. The Company does not expect the
      adoption of SFAS No. 154 to have an impact on its consolidated financial
      statements.





NOTE
      2 - GOING
      CONCERN





The
      accompanying audited consolidated financial statements have been prepared on
      a
      going concern basis, which anticipates the realization of assets and the
      liquidation of liabilities during the normal course of operations. However,
      as
      shown in these consolidated financial statements, the Company during the year
      ended December 31, 2006, incurred a net loss of $ 11,836,925 ,
      although as of that date, the Company’s total assets exceeded its total
      liabilities by $2,152,593. In addition, the Company has an accumulated deficit
      of $44,417,068. These factors raise doubt about the Company’s ability to
      continue as a going concern if changes in operations are not forthcoming.





The
      Company’s ability to continue as a going concern will depend on management’s
      ability to successfully implement a business plan which will increase revenues,
      control costs, and obtain additional forms of debt and/or equity financing.
      These financial statements do not include any adjustments that might be
      necessary if the Company is unable to continue as a going concern.







F-12
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      3 - 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. 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. 
 (B)
            Issuance
                of convertible debentures with freestanding warrants and embedded
                beneficial conversion features. Management, after reviewing SFAS
                No. 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 No. 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 did not affect
      the Company’s revenues, cash flows from operations or liquidity.





F-13
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





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








**SUMMARY
      OF RESTATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**Previously**
                      **Reported**
                
                **Restatement**
                      **Adjustment**
                
                **Restated**
                    **Total**Consolidated
                    Balance Sheets:Total
                    Assets
                
                $
                17,222,666
                (1)
                $
                5,200,000
                
                $
                22,422,666Total
                    Liabilities
                
                
                12,306,107
                (2)
                
                5,168,000
                
                
                17,474,107Stockholders’
                    Equity
                
                $
                4,916,559
                
                $
                32,000
                
                $
                4,948,559Consolidated
                    Results of Operations:Revenues
                
                $
                1,883,838
                
                $
                0
                
                $
                1,883,838Expenses
                
                
                8,451,280
                (3,4)
                
                23,174,855
                
                
                31,626,135Net
                    (Loss) from Operations
                
                
                (6,567,442
                )
                
                (23,174,855
                )
                
                (29,742,297
                )Derivative
                    Gain
                
                
                0
                (5)
                
                15,390,000
                
                
                15,390,000Other
                    Income
                
                
                50,260
                
                
                0
                
                
                50,260Net
                    (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




F-14
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





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








**SUMMARY
      OF RESTATED INTERIM REPORTS - 2005**




**March
                  31, 2005**
              
              
              **June
                  30, 2005**
              
              
              **September
                  30, 2005******Previously**Reported**
              
              
              
              ****Restatement**Adjustment**
              
              ****Restated**Total**
              
              ****Previously**Reported**
              
              ****Restatement**Adjustment**
              
              ****Restated**Total**
              
              ****Previously**Reported**
              
              ****Restatement**Adjustment**
              
              **Total****ASSETS**Current
                  Assets:Cash
                  and Cash Equivalents
              
              $
              4,623,198
              
              
              
              
              
              
              $
              4,623,198
              
              $
              3,468,839
              
              
              
              
              $
              3,468,839
              
              $
              2,336,430
              
              
              
              
              $
              2,336,430Accounts
                  and Loans Receivable
              
              
              404,488
              
              
              
              
              
              
              
              404,488
              
              
              309,323
              
              
              
              
              
              309,323
              
              
              208,668
              
              
              
              
              
              208,668Inventory
              
              
              60,159
              
              
              
              
              
              
              
              60,159
              
              
              75,573
              
              
              
              
              
              75,573
              
              
              90,332
              
              
              
              
              
              90,332Prepaid
                  Expenses
              
              
              418,362
              
              
              
              
              
              
              
              418,362
              
              
              302,531
              
              
              
              
              
              302,531
              
              
              208,879
              
              
              
              
              
              208,879Total
                  Current Assets
              
              
              5,506,207
              
              
              
              
              -
              
              
              5,506,207
              
              
              4,156,266
              
              
              -
              
              
              4,156,266
              
              
              2,844,309
              
              
              -
              
              
              2,844,309Property,
                  Plant and Equipment, Net
              
              
              9,245,326
              
              
              
              
              -
              
              
              9,245,326
              
              
              9,630,591
              
              
              -
              
              
              9,630,591
              
              
              10,097,779
              
              
              -
              
              
              10,097,779Other
                  Assets:Deposits
              
              
              6,608
              
              
              
              
              
              
              
              6,608
              
              
              6,608
              
              
              
              
              
              6,608
              
              
              6,708
              
              
              
              
              
              6,708Deferred
                  Charges
              
              
              38,750
              
              
              
              
              
              
              
              38,750
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -Restricted
                  Cash
              
              
              75,000
              
              
              
              
              
              
              
              75,000
              
              
              75,846
              
              
              
              
              
              75,846
              
              
              101,471
              
              
              
              
              
              101,471Note
                  Receivable
              
              
              287,170
              
              
              
              
              
              
              
              287,170
              
              
              286,114
              
              
              
              
              
              286,114
              
              
              284,944
              
              
              
              
              
              284,944Goodwill
              
              
              1,158,937
              
              (1
              )
              
              5,200,000
              
              
              6,358,937
              
              
              1,158,937
              
              
              -
              
              
              1,158,937
              
              
              1,158,937
              
              
              -
              
              
              1,158,937Total
                  Other Assets
              
              
              1,566,465
              
              
              
              
              5,200,000
              
              
              6,766,465
              
              
              1,527,505
              
              
              -
              
              
              1,527,505
              
              
              1,552,060
              
              
              -
              
              
              1,552,060Total
                  Assets
              
              $
              16,317,998
              
              
              
              $
              5,200,000
              
              $
              21,517,998
              
              $
              15,314,362
              
              $
              -
              
              $
              15,314,362
              
              $
              14,494,148
              
              $
              -
              
              $
              14,494,148**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  Liabilities:Current
                  Maturities of Note Payable
              
              $
              225,000
              
              
              
              $
              -
              
              $
              225,000
              
              $
              112,500
              
              $
              -
              
              $
              112,500
              
              $
              168,750
              
              $
              -
              
              $
              168,750Convertible
                  Debenture Payable
              
              
              5,000,000
              
              
              
              
              
              
              
              5,000,000
              
              
              2,480,000
              
              
              
              
              
              2,480,000
              
              
              980,000
              
              
              
              
              
              980,000Accounts
                  Payable and Accrued Expenses
              
              
              438,830
              
              
              
              
              
              
              
              438,830
              
              
              656,302
              
              
              
              
              
              656,302
              
              
              642,457
              
              
              
              
              
              642,457Derivative
                  Liability
              
              
              -
              
              (2
              )
              
              8,062,500
              
              
              8,062,500
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  Current Liabilities
              
              
              5,663,830
              
              
              
              
              8,062,500
              
              
              13,726,330
              
              
              3,248,802
              
              
              -
              
              
              3,248,802
              
              
              1,791,207
              
              
              -
              
              
              1,791,207Long-Term
                  Debt:Note
                  Payable, less Current Maturities
              
              
              6,592,301
              
              
              
              
              -
              
              
              6,592,301
              
              
              4,255,990
              
              
              -
              
              
              4,255,990
              
              
              4,252,304
              
              
              -
              
              
              4,252,304Total
                  Liabilities
              
              
              12,256,131
              
              
              
              
              8,062,500
              
              
              20,318,631
              
              
              7,504,792
              
              
              -
              
              
              7,504,792
              
              
              6,043,511
              
              
              -
              
              
              6,043,511Stockholders’
                  Equity:Common
                  Stock
              
              
              62,364
              
              
              
              
              
              
              
              62,364
              
              
              74,281
              
              
              
              
              
              74,281
              
              
              77,157
              
              
              
              
              
              77,157Additional
                  Paid-in Capital
              
              
              22,918,580
              
              
              
              
              13,151,198
              
              
              36,069,778
              
              
              28,655,789
              
              
              9,531,144
              
              
              38,186,933
              
              
              30,369,493
              
              
              9,682,940
              
              
              40,052,433Subscriptions
                  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
              )
              
              (21,446,013
              )
              
              (9,682,940
              )
              
              (31,128,953
              )Total
                  Stockholders’ Equity
              
              
              4,061,867
              
              
              
              
              (2,862,500
              )
              
              1,199,367
              
              
              7,809,570
              
              
              -
              
              
              7,809,570
              
              
              8,450,637
              
              
              -
              
              
              8,450,637Total
                  Liabilities and Stockholders’ Equity
              
              $
              16,317,998
              
              
              
              $
              5,200,000
              
              $
              21,517,998
              
              $
              15,314,362
              
              $
              -
              
              $
              15,314,362
              
              $
              14,494,148
              
              $
              -
              
              $
              14,494,148











F-15
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      3 - 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**
              
              **Nine
                  Months Ended September 30, 2005******Previously******Reported**
              
              
              
              ****Restatement****
                **Adjustment**
              
              ****Restated******Total**
              
              ****Previously**Reported**
              
              
              
              ****Restatement**Adjustment**
              
              ****Restated**Total**
              
              ****Previously**Reported**
              
              
              
              ****Restatement**Adjustment**
              
              **Total**Revenues:Gas
                  Sales and Pipeline Fees
              
              $
              586,949
              
              
              
              $
              -
              
              $
              586,949
              
              $
              849,490
              
              
              
              $
              -
              
              $
              849,490
              
              $
              1,097,505
              
              
              
              $
              -
              
              $
              1,097,505Construction
                  Services
              
              
              41,126
              
              
              
              
              
              
              
              41,126
              
              
              119,121
              
              
              
              
              
              
              
              119,121
              
              
              119,121
              
              
              
              
              
              
              
              119,121Total
                  Revenues
              
              
              628,075
              
              
              
              
              -
              
              
              628,075
              
              
              968,611
              
              
              
              
              -
              
              
              968,611
              
              
              1,216,626
              
              
              
              
              -
              
              
              1,216,626Expenses:Cost
                  of Sales
              
              
              284,679
              
              
              
              
              
              
              
              284,679
              
              
              415,248
              
              
              
              
              
              
              
              415,248
              
              
              635,113
              
              
              
              
              
              
              
              635,113Operating
                  Expenses
              
              
              66,774
              
              
              
              
              
              
              
              66,774
              
              
              129,137
              
              
              
              
              
              
              
              129,137
              
              
              210,545
              
              
              
              
              
              
              
              210,545Depreciation
              
              
              115,441
              
              
              
              
              
              
              
              115,441
              
              
              236,395
              
              
              
              
              
              
              
              236,395
              
              
              360,817
              
              
              
              
              
              
              
              360,817Interest
              
              
              209,787
              
              
              
              
              
              
              
              209,787
              
              
              393,860
              
              
              
              
              
              
              
              393,860
              
              
              503,950
              
              
              
              
              
              
              
              503,950Beneficial
                  Conversion Feature Interest
              
              
              -
              
              (3
              )
              
              4,736,843
              
              
              4,736,843
              
              
              -
              
              (3
              )
              
              135,789
              
              
              135,789
              
              
              -
              
              (3
              )
              
              (501,659
              )
              
              (501,659
              )Sales,
                  General and Administrative
              
              
              1,220,911
              
              (4
              )
              
              597,500
              
              
              1,818,411
              
              
              3,098,570
              
              (4
              )
              
              1,578,500
              
              
              4,677,070
              
              
              4,022,271
              
              (4
              )
              
              2,556,200
              
              
              6,578,471Impairment
                  Losses
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              -
              
              (1
              )
              
              5,200,000
              
              
              5,200,000
              
              
              -
              
              (1
              )
              
              5,200,000
              
              
              5,200,000Total
                  Expenses
              
              
              1,897,592
              
              
              
              
              5,334,343
              
              
              7,231,935
              
              
              4,273,210
              
              
              
              
              6,914,289
              
              
              11,187,499
              
              
              5,732,696
              
              
              
              
              7,254,541
              
              
              12,987,237(Loss)
                  from Operations
              
              
              (1,269,517
              )
              
              
              
              (5,334,343
              )
              
              (6,603,860
              )
              
              (3,304,599
              )
              
              
              
              (6,914,289
              )
              
              (10,218,888
              )
              
              (4,516,070
              )
              
              
              
              (7,254,541
              )
              
              (11,770,611
              )Derivative
                  Gain/(Loss)
              
              
              -
              
              (5
              )
              
              (2,894,500
              )
              
              (2,894,500
              )
              
              -
              
              (5
              )
              
              5,168,000
              
              
              5,168,000
              
              
              
              
              (5
              )
              
              5,168,000
              
              
              5,168,000Gain
                  (Loss) on Equipment Sale
              
              
              (3,167
              )
              
              
              
              
              
              
              (3,167
              )
              
              (3,167
              )
              
              
              
              
              
              
              (3,167
              )
              
              (3,167
              )
              
              
              
              
              
              
              (3,167
              )Interest
                  and Dividend Income
              
              
              35,992
              
              
              
              
              
              
              
              35,992
              
              
              69,651
              
              
              
              
              
              
              
              69,651
              
              
              96,240
              
              
              
              
              
              
              
              96,240Minority
                  Interest
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              -Litigation
                  Settlement
              
              
              -
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              109,369
              
              
              
              
              188,456
              
              
              297,825Net
                  (Loss)
              
              $
              (1,236,692
              )
              
              
              $
              (8,228,843
              )
              $
              (9,465,535
              )
              $
              (3,238,115
              )
              
              
              $
              (1,746,289
              )
              $
              (4,984,404
              )
              $
              (4,313,628
              )
              
              
              $
              (1,898,085
              )
              $
              (6,211,713
              )Net
                  (Loss) Per Common Share, Basic and Diluted:
              
              $
              (0.02
              )
              
              
              $
              -
              
              $
              (0.15
              )
              $
              (0.05
              )
              
              
              $
              -
              
              $
              (0.07
              )
              $
              (0.06
              )
              
              
              $
              -
              
              $
              (0.09
              )Weighted
                  Average Number of Common Shares Outstanding, Basic and
                  Diluted:
              
              
              61,893,359
              
              
              
              
              -
              
              
              61,893,359
              
              
              67,941,251
              
              
              
              
              -
              
              
              67,941,251
              
              
              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.












F-16
 Table
          of Contents








**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      4 - PREPAID
      EXPENSES





A
      summary
      of prepaid expenses at December 31, 2006 and December 31, 2005 is as
      follows:






**December
                    31,****2006**
                
                
                **2005**Prepaid
                    Expenses-Other
                $
                19,341
                
                $
                2,741Prepaid
                    Insurance
                
                116,122
                
                
                88,340Prepaid
                    License Fee
                
                0
                
                
                84,270Prepaid
                    Rent
                
                11,508
                
                
                7,500Prepaid
                    Interest
                
                1,580
                
                
                1,087$
                148,551
                
                $
                183,938






NOTE
      5 - PROPERTY,
      PLANT AND EQUIPMENT




A
      summary of
      property, plant and equipment at December 31, 2006 and December 31, 2005 is
      as
      follows:




**December
                  31,****2006**
              
              **2005**
              
              **Estimated Economic
                  Life**Pre-Construction
                  Costs:International
                  Crossings to Mexico
              $
              818,271
              
              $
              540,880
              
              N/AMexican
                    Gas Storage Facilityand
                    Related Pipelines
              
              2,359,451
              
              
              1,926,616
              
              N/ADomestic
                  LNG System
              
              1,567,642
              
              
              18,319
              
              N/ATotal
              
              4,745,364
              
              
              2,485,815Office
                    Furniture, Equipment and Leasehold Improvements
              
              185,174
              
              
              174,412
              
              5
                  YearsPipeline
                  - Eagle Pass, TX to PiedrasNegras, Mexico
              
              6,106,255
              
              
              6,106,255
              
              20
                  YearsTanks
                      & Lines - Propane Distribution System
              
              1,908,247
              
              
              1,895,494
              
              5
                  YearsMachinery
                  and Equipment
              
              67,357
              
              
              66,493
              
              5
                  YearsTrucks,
                  Autos and Trailers
              
              126,464
              
              
              136,940
              
              5
                  YearsPipeline
                  - South TX Gas Production
              
              490,000
              
              
              0
              
              15
                  YearsWell
                  Equipment
              
              2,060
              
              
              0
              
              5
                  YearsLeaseholds
              
              10,000
              
              
              0
              
              N/ATotal
              
              13,640,921
              
              
              10,865,409Less:
                  Accumulated Depreciation
              
              1,276,562
              
              
              823,321Net
                  Property, Plant and Equipment
              $
              12,364,359
              
              $
              10,042,088





Depreciation
      expense for the years ended December 31, 2006 and December 31, 2005 was $466,241
      and $485,581 respectively.





NOTE
      6 - RESTRICTED
      CASH





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







F-17
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**











NOTE
      7 - LONG-TERM
      DEBT





A
      summary
      of long-term debt at December 31, 2006 and December 31, 2005 is as follows:






**December
                  31,************2006**
              
              **2005**Note
                  Payable, Secured, Interest Bearing at 2% Over Prime Rate,
                  Maturing May 25, 2008
              $
              4,785,003
              
              $
              4,496,468Convertible
                  Debentures, Unsecured, Including Prepaid Interest, Maturing January
                  20,
                  2008
              
              4,374,291
              
              
              09,159,294
              
              
              4,496,468Less:
                  Current Maturities
              
              225,000
              
              
              225,000Total
                  Long-Term Debt
              $
              8,934,294
              
              $
              4,271,468




NOTE
      8 - DEFERRED
      INCOME TAXES





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for Federal income tax purposes. Significant components of
      the
      Company’s deferred taxes as of December 31, 2006, are as follows:






Deferred
                  Tax Assets:Net
                  Operating Loss Carry-Forwards
              
              $
              40,112,572Temporary
                  Differences:Difference
                  between Book and Tax AssetsNon-deductible
                  Accruals Net of Additional Depreciation
              
              
              (3,058,609
              )Net
                  Operating Loss Carry-Forward after Temporary Differences
              
              $
              37,053,963Statutory
                  Tax Rate
              
              
              34
              %Total
                  Deferred Tax Assets
              
              
              12,598,347Less:
                  Valuation Allowance for Deferred Tax Assets
              
              
              12,598,347Net
                  Deferred Tax Asset / (Liability)
              
              $
              0




Management
      believes that the realization of all or a portion of the future tax benefits
      for
      net operating loss carry-forwards is “not likely” as indicated in the above
      table after deducting a 100% valuation allowance. There were no future tax
      benefits for net operating loss carry-forwards realizable prior to
      2006.





At
      December 31, 2006, the Company had available net operating loss carry-forwards
      of approximately $37,053,963 for Federal income tax purposes. Utilization by
      the
      Company is subject to limitations based upon the Company’s future income. The
      loss carry-forwards, if not used, will expire as follows: $256,136 in 2017;
      $122,042 in 2018; $641,595 in 2019; $722,941 in 2020; $2,431,560 in 2021;
      $3,826,221 in 2022; $1,684,474 in 2023; $11,369,605 in 2024; $7,218,073 in
      2025;
      and $8,778,316 in 2026.







F-18
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**




NOTE
      9 - COMMON
      STOCK TRANSACTIONS





On
      January 2, 2006, the Company issued 500,000 shares of its restricted common
      stock valued at $455,000 pursuant to an employment contract with an officer
      of
      the Company for shares accrued at December 31, 2005.





On
      January 3, 2006, the Company issued 500,000 shares of its common stock valued
      at
      $445,000 under the 2004 Stock Grant and Option Plan pursuant to an employment
      contract with an officer of the Company for 2005.





On
      January 16, 2006, the Company issued 250,000 shares of its common stock for
      2006
      legal fees valued at $215,000 under the 2004 Stock Grant and Option
      Plan.





On
      January 30, 2006, the Company issued 60,000 shares of its common stock valued
      at
      $57,000 for legal services.





On
      January 30, 2006, the Company issued 150,000 shares of its restricted common
      stock valued at $142,500 pursuant to an employment contract with an officer
      of
      the Company.





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





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





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





On
      June
      26, 2006, the Company issued 20,000 shares of its restricted common stock valued
      at $16,000 as a bonus to an employee of the Company.





On
      June
      26, 2006, the Company issued 20,000 shares of its restricted common stock valued
      at $16,000 as a bonus to an employee of the Company.





On
      August
      6, 2006, the Company issued 100,000 shares of its common stock valued at $63,500
      as a bonus to an employee of the Company.





On
      September 18, 2006, the Company issued 349,856 shares of its common stock to
      a
      holder of its Convertible Debentures for conversion of $304,375.





On
      September 25, 2006, the Company issued 93,295 shares of its common stock to
      a
      holder of its Convertible Debentures for conversion of $81,167.










F-19
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      9 - COMMON
      STOCK TRANSACTIONS (CONTINUED)





On
      September 25, 2006, the Company issued 150,000 shares of its restricted common
      stock valued at $87,000 to each of three Directors for a total of 450,000 common
      shares valued at $261,000 as Directors Fees.





On
      September 25, 2006, the Company issued 150,000 shares of its common stock valued
      at $87,000 to a fourth Director as a Director Fee.





On
      September 28, 2006, the Company issued 2,828,304 shares of its restricted common
      stock valued at $1,696,982 to five investors in order to cure all existing
      events of default in accordance with the terms of a Waiver and Amendment
      Agreement relating to the Convertible Debentures they previously acquired (See
      NOTE 16 - Debt Financing).





On
      October 10, 2006, the Company issued 93,295 shares of its common stock to a
      holder of its Convertible Debentures for conversion of $81,167.





On
      October 11, 2006, the Company issued 500,000 shares of its common stock valued
      at $237,500 pursuant to an employment contract with an officer of the
      Company.





On
      October 20, 2006, the Company issued 287,357 shares of its common stock to
      a
      holder of its Convertible Debentures for conversion of $250,000.





On
      November 27, 2006, the Company issued 1,000,000 shares of its common stock
      to a
      holder of its Convertible Debentures for conversion of $870,000.





On
      November 27, 2006, the Company issued 40,000 shares of its restricted common
      stock valued at $16,000 pursuant to an employment contract with an officer
      of
      the Company.





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





The
      following table presents the activity for options, warrants and shares reserved
      for issuance upon conversion of outstanding convertible debentures for the
      year
      ending December 31, 2006, 2005 and 2004 (Restated):







**2004**
              
              **StockOptions**
              
              **Stock****Warrants**
              
              **Shares
                  Reservedfor 
                  ConvertibleDebentures**
              
              
              **Weighted
                  AverageExercise
                  Price**Outstanding
                  - December 31, 2003
              
              2,500,000
              
              8,516,807
              
              0
              
              $
              0.31Granted
                  / Issued
              
              250,000
              
              10,562,141
              
              11,111,111
              
              
              0.69Exercised
              
              (2,500,000
              )
              (1,500,000
              )
              0
              
              
              0.14Outstanding
                  - December 31, 2004
              
              250,000
              
              17,578,948
              
              11,111,111
              
              $
              0.50








F-20
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      10 - STOCK
      OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
      (CONTINUED)





**2005**
              
              
              **StockOptions**
              
              
              **Stock****Warrants**
              
              
              **Shares
                  Reservedfor 
                  ConvertibleDebentures**
              
              
              **Weighted
                  AverageExercise
                  Price**Granted
                  / Issued
              
              
              0
              
              
              0
              
              
              0
              
              $
              -Exercised
                  / Converted
              
              
              0
              
              
              (8,500,000
              )
              
              (6,687,456
              )
              
              0.49Expired
              
              
              0
              
              
              0
              
              
              0
              
              
              -Cancelled
              
              
              0
              
              
              (50,000
              )
              
              (4,423,655
              )
              
              0.00Outstanding
                  - December 31, 2005
              
              
              250,000
              
              
              9,028,948
              
              
              0
              
              $
              1.01**2006**Granted
                  / Issued
              
              
              0
              
              
              10,109,103
              
              
              7,551,432
              
              $
              1.05Exercised
                  / Converted
              
              
              0
              
              
              0
              
              
              (1,823,803
              )
              
              0.87Expired
              
              
              0
              
              
              (1,000,000
              )
              
              0
              
              
              0.50Cancelled
              
              
              0
              
              
              0
              
              
              (699,713
              )
              
              0.00Outstanding
                  - December 31, 2006
              
              
              250,000
              
              
              18,138,051
              
              
              5,027,916
              
              $
              $1.07






The
      2004
      Non-Qualified Stock Grant and Option Plan has 3,351,122 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
      6,687,456 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. As of December 31, 2006, no warrants were
      exercised.





On
      January 20, 2006, Tidelands entered into Securities Purchase Agreements with
      the
      following accredited investors: Palisades Master Fund, Crescent International,
      Ltd., Double U Master Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master
      Fund, Ltd. (collectively, “Purchasers”). In exchange for $6,569,750, net of
      $1,173,651 prepaid interest, the Company issued to the investors $6,569,750
      of
      convertible debentures with a maturity date of January 20, 2008, at a conversion
      price of $0.87 per share.







F-21
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      10 - STOCK
      OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
      (CONTINUED)





In
      connection with this financing, the Company issued 2,491,975 common stock
      warrants exercisable at $0.935 with an expiration date of January 20, 2009,
      and
      7,551,432 common stock warrants exercisable at $1.275 with an expiration date
      of
      February 19, 2007. The Company granted the investors registration rights on
      both
      groups of securities; such registration was declared effective on September
      15,
      2006.





Accounting
      for Stock-Based Compensation





The
      Company adopted Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS No. 123R”), as of January 1, 2006. SFAS No. 123R
      requires companies to estimate the fair value of share-based payment option
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is expected to vest is recognized as an expense in
      the
      Company’s consolidated statement of operations over the periods during which the
      employee or director is required to perform service in exchange for the award.
      Prior to the adoption of SFAS No. 123R, the Company accounted for share-based
      awards to employees and directors using the intrinsic value method in accordance
      with APB No. 25.





NOTE
      11 - COMMITMENT
      FOR SUITE LICENSE AGREEMENT





On
      June
      4, 2004, the Company entered into a Suite License Agreement with the San Antonio
      Spurs, LCC 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
      Company’s former President assumed all the Company’s remaining obligations under
      the Suite License Agreement pursuant to the terms of Agreement effective
      December 8, 2006. The Suite License Agreement was assigned to the former
      President although the Company remains liable if the obligations are not met
      in
      whole, or in part.





NOTE
      12 - 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 was credited by airtime charges at standard industry rates offset
      by interest charges computed on the average monthly balance.







F-22
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      12 - RELATED
      PARTY TRANSACTION (CONTINUED)





The
      balance as of December 31, 2006, of $287,435 including interest, was paid in
      full at that time by the former President as part of the aforementioned
      Agreement (See Note 11 above).





NOTE
      13 - LEASES





The
      Company entered into an operating lease on August 1, 2003 for the rental of
      its
      executive offices at a monthly rent of $3,400, which expires December 31,
      2007.





The
      Company’s wholly-owned subsidiary, Sonterra Energy Corporation (“Sonterra”)
      entered into an operating lease agreement for its executive offices in an
      adjacent building at a monthly rental of $3,300 for a term ending December
      31,
      2007.





Sonterra
      entered into a 5-year operating lease on May 17, 2006, at a monthly rent of
      $675
      for its field office.





Sonterra
      also entered into an operating lease for a propane tanks site with a $5,000
      annual rent expiring when propane service terminates. In addition, Sonterra
      has
      entered into 12 tank-site rental agreements with a total annual rent of $93
      as
      long as propane service is provided to each respective subdivision.





Sonterra
      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.





Reef
      Ventures, LP, and its subsidiary, Reef International, LLC, previously had
      entered into a lease agreement for a meter site at an annual rental of $200
      as
      long as their pipeline is operational.





Future
      commitments under the operating leases are as follows:




**Year
                  Ending**
              
              **Total**2007
              
              $
              103,7932008
              
              
              23,3932009
                  - 2011
              
              
              65,117Total
                  Minimum Lease Payments
              
              $
              192,303




Rent
      expense for the years ended December 31, 2006, 2005 and 2004 (Restated) was
      $105,892, $82,300 and $43,300, respectively.





F-23
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      14 - 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
      15 - LITIGATION





**Matter
      No. 1:**


On
      January 6, 2003, we were served as a third party defendant in a lawsuit titled
      Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil & Gas
      Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
      Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
      initiated by Northern Natural Gas (“Northern”) when it sued Betty Lou Sheerin
      (“Sheerin”) for her failure to make payments on a note she executed payable to
      Northern in the original principal amount of $1,950,000. Northern's suit was
      filed on November 13, 2002. Sheerin answered Northern's lawsuit on January
      6,
      2003. Sheerin's answer generally denied Northern's claims and raised the
      affirmative defenses of fraudulent inducement by Northern, estoppel, waiver
      and
      the further claim that the note does not comport with the legal requirements
      of
      a negotiable instrument. Sheerin seeks a judicial ruling that Northern be denied
      any recovery on the note. Sheerin's answer included a counterclaim against
      Northern, ZG Gathering, and Ken Lay generally alleging, among other things,
      that
      Northern, ZG Gathering, Ltd. and Ken Lay, fraudulently induced her execution
      of
      the note. Northern has filed a general denial of Sheerin's counterclaims.
      Sheerin's answer included a third party cross claim against Tidelands Oil and
      Gas Corporation (“Tidelands”). She alleges that Tidelands entered into an
      agreement to purchase the Zavala Gathering System from ZG Gathering Ltd. and
      that, as a part of the agreement, Tidelands agreed to satisfy all of the
      obligations due and owing to Northern, thereby relieving Sheerin of all
      obligations she had to Northern on the $1,950,000 promissory note in question.
      Tidelands and Sheerin agreed to delay the Tidelands' answer date in order to
      allow time for mediation of the case. Tidelands participated in mediation on
      March 11, 2003. The case was not settled at that time. Tidelands answered the
      Sheerin suit on March 26, 2003. Tidelands' answer denies all of Sheerin's
      allegations.











F-24
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      15 - LITIGATION
      (CONTINUED)





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


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





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





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





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







F-25
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      15 - LITIGATION
      (CONTINUED)





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


On
      August
      5, 2005, Northern filed its Fourth Amended Original Petition which, for the
      first time, named Tidelands as a defendant to Northern. Northern seeks to impose
      liability on Tidelands for $1,950.000 promissory note signed by McDay Energy
      Partners, Ltd. (the predecessor to ZG Gathering, Ltd.) and Sheerin and the
      $1,700,000 promissory note signed by McDay only. Northern contends that
      Tidelands is alternatively liable to Northern for payment of both such
      promissory notes totaling $3,709,914 plus interest because Northern is a third
      party beneficiary under a December 3, 2001 purchase and sale agreement between
      ZG Gathering, Ltd., and Tidelands claiming that in such agreement Tidelands
      agreed to assume and satisfy all indebtedness due and owing Northern by Sheerin
      and ZG Gathering, Ltd. Northern also claims that it is entitled to foreclosure
      of a lien on the gas gathering system and pipeline that was the subject of
      the
      promissory notes in question. 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 indebtedness, failing to defend and indemnify it from such debt,
      failing to pay off the $300,000 note, failing to issue the free trading shares
      in Tidelands, and by placing a stop transfer order on the restricted stock
      that
      was issued by Tidelands. ZG seeks specific performance of the agreement,
      recovery of an unspecified amount of damages, and its attorney's fees.





On
      March
      6, 2006, the Court granted Tidelands’ motion for summary judgment against NNG
      and dismissed NNG’s suit against Tidelands. On March 16, 2006, the Court denied
      Tidelands’ motion for summary judgment against Sheerin on Tidelands’ affirmative
      defense of mutual mistake. On July 19, 2006, the Court denied ZG’s motion for
      summary judgment to strike Tidelands’ affirmative defense of mutual
      mistake.





F-26
 Table
          of Contents


**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      15 - LITIGATION
      (CONTINUED)




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


Trial
      is
      scheduled to begin on May 7, 2007, unless the parties reach a settlement before
      that date. The parties are currently in advanced settlement negotiations and
      the
      Company is hopeful that an agreement will be concluded in the near future.
      Based
      on negotiations, the Company has reserved $2,250,000 as an estimated litigation
      settlement and that amount has been included in this report.





**Matter
      No. 2:**


Cause
      No.
      GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
      Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
      Court of Travis County, Texas. This case involves a claim that Defendant Toll
      Brothers Property, LP (“Toll Brothers”) sold Plaintiff Goodson Builder, Ltd.
      (“Plaintiff” or “Goodson”) property without disclosing a propane easement.
      Plaintiff sued Sonterra Energy Corp. (“Sonterra”) for trespassing through the
      use of the easement. Goodson’s primary claim is against the seller for fraud and
      non-disclosure. Toll Brothers has responded with a claim for sanctions because
      the claim is frivolous. Toll Brothers offers a witness who is Plaintiff’s former
      employee and took pictures of the propane tank prior to the Plaintiff’s
      purchase. Goodson seeks damages in the hundreds of thousands of dollars.
      Insurance would not cover these damages.





The
      case
      is pending summary judgment. The Company is contesting the case vigorously;
      however, the Company is willing to settle if the Plaintiff is willing to drop
      the claim.





**Matter
      No. 3:** Cause
      No.
      GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp., Defendant,
      was filed in the 53rd Judicial District of Travis County, Texas and Cause No.
      GN
      501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy Corp.,
      Defendant, was filed in the 98th Judicial District Court of Travis County,
      Texas. The above matters were each filed against Sonterra in May 2005 and
      involve the same claims arising from the same propane service agreement. In
      each
      case, the plaintiff initially brought claims against Sonterra arising from
      Sonterra’s failure, as an assignee of the agreement, to pay easement use fees to
      the plaintiff. Sonterra obtained summary judgment as to the plaintiffs’
respective breach of contract and failure of assignment claims arising from
      the
      failure to pay easement use fees. The cases were not, however, fully dismissed
      because the plaintiffs added new causes of action for failure to pay easement
      use fees, claims for unpaid developer bonus, reformation of the agreements
      to
      require payment of easement use fees and alleged failure of assignment. These
      separate lawsuits have since been consolidated into one suit for purposes of
      pretrial and trial. The May 2007 trial date has been continued and will likely
      be reset in September 2007.





F-27
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      15 - LITIGATION (CONTINUED)





In
        accordance with Statement of Financial Accounting Standards No. 5, “Accounting
        for Contingencies,” management has reached the conclusion that there is a remote
        possibility that the claims enumerated in Matters No. 2 and 3 above would
        be
        upheld at trial and has also determined that the amount of the claims cannot
        be
        reasonably estimated. Accordingly, the Company’s financial statements reflect no
        accrual of a loss contingency with respect to these legal
        matters.





NOTE
      16 - DEBT
      FINANCING





On
      January 20, 2006, the Company completed a private placement of $6,569,750 of
      convertible debt with six institutional investors. The net proceeds realized
      by
      the Company were $4,949,291 after deduction of legal costs, commissions and
      interest discount. The Company issued original issue discount debentures with
      a
      maturity date of January 20, 2008, and a conversion feature which permitted
      the
      holders to convert into common stock of the Company at a price of $0.87 per
      share. The investors also received three year “Series A Common Stock Warrants”
to purchase, in the aggregate, 2,491,975 shares of common stock of the Company
      at a conversion price of $0.935 per share. Additionally, the Company issued
      to
      the investors “Series B Common Stock Warrants” which provided for a thirteen
      month exercise period, at a conversion price of $1.275 per share, and an
      aggregate purchase total of 7,551,432 shares of common stock of the
      Company.





In
      accordance with this private placement, the Company entered into a “Registration
      Rights Agreement” with the investors, whereby, among other terms and conditions,
      the Company must comply with various effective dates and periods or, if in
      default of said dates and/or periods, be subject to liquidated damages as
      outlined in the master agreement. Between June 2006 and September 22, 2006,
      the
      investors billed and were paid $478,155 of liquidated damages including $182,625
      paid to RHP Master Fund, Ltd., as described below for not meeting the required
      effective date.





On
      September 20, 2006, RHP Master Fund, Ltd. (“RHP”) gave the Company its notice of
      default for failure to timely pay liquidated damages associated with the
      Company’s failure to timely register the underlying debenture shares and
      warrants with the Securities and Exchange Commission. RHP accelerated payment
      of
      the RHP Debenture at the Mandatory Default Amount. The Mandatory Default Amount
      was 130% of the aggregate principal amount of the Debenture. On September 22,
      2006, the Company paid RHP the sum of $791,375 including an $182,625 Default
      Amount, thereby discharging the RHP debenture obligation.










F-28
 Table
          of Contents




**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      16 - DEBT
      FINANCING (CONTINUED)





On
      September 26, 2006, Palisades Master Fund, LP (“Palisades”) gave the Company its
      notice of election accelerating payment of the Palisades Debenture at the
      Mandatory Default Amount asserting a cross default event triggered by the RHP
      Notice of Default Event received by the Company on September 20, 2006, as
      disclosed in the Current Report filed on Form 8-K on September 25, 2006.
      Palisades demanded immediate payment of its Debentures at the Mandatory Default
      Amount of $5,597,687.





On
      September 28, 2006, Company entered into a Waiver and Amendment Agreement
      (“Agreement”) with Palisades and all of the remaining Holders, which include
      Crescent International, Ltd., Double U Master Fund, LP, JGB Capital, LP and
      Nite
      Capital, LP.





In
      consideration of that Agreement, all existing events of default known to the
      Holders were waived in consideration of the issuance of 2,828,304 common shares
      valued at $1,696,982. The Company issued the shares as follows: Palisades -
      2,000,000 shares, Crescent International, Ltd. - 304,375 shares, Double U Master
      Fund, LP - 152,179 shares, JGB Capital, LP - 250,000 shares, and Nite Capital,
      LP - 121,750 shares (See NOTE 9 - Common Stock Transactions).





NOTE
      17 - SEGMENT
      REPORTING





The
      following table is a summary of the results of operations and other financial
      information by major segment:




**2006**
              
              
              **Propane
                  Sales and Related Services**
              
              
              **Pipeline
                  Transportation****Fees**
              
              
              **All
                  Other**
                **and
                  Corporate**
              
              
              **Total**
  **Revenue**
              
              **$**
              **1,921,763**
              
              **$**
              **285,098**
              
              **$**
              **15,737**
              
              **$**
              **2,222,598****Depreciation**
              
              **$**
              **126,844**
              
              **$**
              **305,313**
              
              **$**
              **34,084**
              
              **$**
              **466,241****Interest**
              
              **$**
              **1,629**
              
              **$**
              **-**
              
              **$**
              **3,404,149**
              
              **$**
              **3,405,778****Operating
                  (Loss)**
              
              **$**
              **(263,535**
              **)**
              **$**
              **(93,524**
              **)**
              **$**
              **(11,582,775**
              **)**
              **$**
              **(11,939,834**
              **)****Total
                  Assets**
              
              **$**
              **5,284,938**
              
              **$**
              **5,702,978**
              
              **$**
              **4,198,723**
              
              **$**
              **15,186,639**
  
 **2005**
              
              
              **Propane
                  Sales and Related Services**
              
              
              **Pipeline
                  Transportation****Fees**
              
              
              **All
                  Other**
                **and
                  Corporate**
              
              
              **Total**
  **Revenue**
              
              **$**
              **1,630,246**
              
              **$**
              ******231,077**
              
              **$**
              **-**
              
              **$**
              **1,861,323****Depreciation**
              
              **$**
              **116,853**
              
              **$**
              **305,313**
              
              **$**
              **63,315**
              
              **$**
              **485,481****Interest**
              
              **$**
              **2,514**
              
              **$**
              **-**
              
              **$**
              **608,849**
              
              **$**
              **611,363****Operating
                  (Loss)**
              
              **$**
              **(380,900**
              **)**
              **$**
              **(164,523**
              **)**
              **$**
              **(12,765,170**
              **)**
              **$**
              **(13,310,593**
              **)****Total
                  Assets**
              
              **$**
              **2,997,001**
              
              **$**
              **5,621,536**
              
              **$**
              **4,870,312**
              
              **$**
              **13,488,849**
  
 **2004**
              
              
              **Propane
                  Sales and Related Services**
              
              
              **Natural
                  Gas Sales and Pipeline Transportation****Fees**
              
              
              **All
                  Other**
                **and
                  Corporate**
              
              
              **Total**
  **Revenue**
              
              **$**
              **438,611**
              
              **$**
              **1,400,227**
              
              **$**
              **-**
              
              **$**
              **1,838,838****Depreciation**
              
              **$**
              **20,158**
              
              **$**
              **178,099**
              
              **$**
              **46,632**
              
              **$**
              **244,889****Interest**
              
              **$**
              **300**
              
              **$**
              **-**
              
              **$**
              **300,266**
              
              **$**
              **300,566****Operating
                  Income (Loss)**
              
              **$**
              **98,229**
              
              **$**
              **(141,502**
              **)**
              **$**
              **(29,699,024**
              **)**
              **$**
              **(29,742,297**
              **)****Total
                  Assets**
              
              **$**
              **2,775,281**
              
              **$**
              **5,881,774**
              
              **$**
              **13,765,611**
              
              **$**
              **22,422,666**


F-29
 Table
          of Contents





**TIDELANDS
      OIL & GAS CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005 AND 2004 (RESTATED)**





NOTE
      18 - SELECTED
      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)





(Dollars
      in thousands, except per share data)





The
      following tables present our selected consolidated financial information as
      of
      the end of the periods indicated. The information below is from unaudited
      consolidated financial statements.





**Year
                    Ended December 31, 2006**
                
                **March
                    31**
                ****
                **June
                    30**
                
                **September
                    30**
                
                **December
                    31**Revenues
                
                $
                802
                
                $
                407
                
                $
                369
                
                $
                645Cost
                    of Goods Sold
                
                
                377
                
                
                206
                
                
                177
                
                
                414Gross
                    Margin
                
                
                425
                
                
                201
                
                
                192
                
                
                231Operating
                    Expenses
                
                
                2,155
                
                
                2,190
                
                
                4,017
                
                
                4,627Other
                    Income (Expense), Net
                
                
                34
                
                
                28
                
                
                48
                
                
                (7
                )Net
                    earnings (loss)
                
                $
                (1,696
                )
                $
                (1,961
                )
                $
                (3,777
                )
                $
                (4,403
                )Basic
                    (loss) per share
                
                $
                (0.02
                )
                $
                (0.03
                )
                $
                (0.05
                )
                $
                (0.05
                )Diluted (loss)
                    per share
                
                $
                (0.02
                )
                $
                (0.03
                )
                $
                (0.05
                )
                $
                (0.05
                )




**Year
                  Ended December 31, 2005**
              
              **March
                  31**
              ****
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31**


Revenues
              
              $
              628
              
              $
              341
              
              $
              248
              
              $
              644Cost
                  of Goods Sold
              
              
              285
              
              
              130
              
              
              220
              
              
              368Gross
                  Margin
              
              
              343
              
              
              211
              
              
              28
              
              
              276Operating
                  Expenses
              
              
              6,947
              
              
              3,825
              
              
              1,580
              
              
              1,817Other
                  Income (Expense), Net
              
              
              (2,862
              )
              
              8,096
              
              
              324
              
              
              90Net
                  earnings (loss)
              
              $
              (9,466
              )
              $
              4,482
              
              $
              (1,228
              )
              $
              (1,451
              )Basic
                  income (loss) per share
              
              $
              (0.15
              )
              $
              0.08
              
              $
              (0.02
              )
              $
              (0.11
              )Diluted
                  income (loss) per share
              
              $
              (0.15
              )
              $
              0.08
              
              $
              (0.02
              )
              $
              (0.11
              )
   **Year
                    Ended December 31, 2004**
                
                **March
                    31**
                ****
                **June
                    30**
                
                **September
                    30**
                
                **December
                    31**


Revenues
              
              $
              0
              
              $
              508
              
              $
              825
              
              $
              551Cost
                  of Goods Sold
              
              
              0
              
              
              498
              
              
              802
              
              
              209Gross
                  Margin
              
              
              0
              
              
              10
              
              
              23
              
              
              342Operating
                  Expenses
              
              
              1,538
              
              
              4,209
              
              
              3,545
              
              
              20,825Other
                  Income (Expense), Net
              
              
              4
              
              
              15,397
              
              
              6
              
              
              33Net
                  earnings (loss)
              
              $
              (1,534
              )
              $
              11,198
              
              $
              (3,516
              )
              $
              (20,450
              )Basic
                  income (loss) per share
              
              $
              (0.03
              )
              $
              0.18
              
              $
              (0.02
              )
              $
              (0.34
              )Diluted
                  income (loss) per share
              
              $
              (0.03
              )
              $
              0.18
              
              $
              (0.02
              )
              $
              (0.34
              )






NOTE
      19 - SUBSEQUENT
      EVENTS





The
      Company issued 2,298,848 shares of common stock to a holder of its convertible
      debentures for conversion of $2,000,000 at $0.87/share, thereby reducing its
      long-term debt by that amount.













F-30
 Table
          of Contents