As filed with the Securities and Exchange Commission on November 27, 2006
                                            Registration No. 333-138206


                          U.S. SECURITIES AND EXCHANGE
                        COMMISSION Washington, D.C. 20549
                              --------------------

                                   Form S-1/A
                                 Amendment No. 1

             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                              --------------------

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

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

                                      4922
                          (Primary Standard Industrial
                           Classification Code Number)
                              ---------------------


1862 W. Bitters Rd                                         1862 W. Bitters Rd
San Antonio, TX 78248                                      San Antonio, TX 78248
(210) 764-8642                                             (210) 764-8642
(Address and telephone number of                           (Address of principal
 principal executive office)                                place of business)

                             Michael Ward, President
                               1862 W. Bitters Rd.
                              San Antonio, TX 78248

            (Name, address and telephone number of agent for service)
                          ----------------------------
                                   COPIES TO:
                                Counsel to Issuer
                             Gregory M. Wilson, Esq.
                              18610 East 32nd Ave.
                              Greenacres, WA 99016
                               Tel (509) 891-8373
                               Fax (509) 891-8382


                Approximate Date of Proposed Sale to the Public.

Approximate  date of commencement  of proposed sale to the public:  From time to
time after the effective date of this registration statement.

If any of the  securities  being  registered on this form are to be offered on a
delayed or continuous  basis under Rule 415 under the Securities Act of 1933, as
amended, check the following box: [X]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the  Securities  Act of 1933, as amended,  please check the
following box and list the Securities Act  registration  statement number of the
earlier effective registration statement for the same offering. [ ]

If this form is a  post-effective  amendment filed pursuant to Rule 462(c) under
the  Securities  Act,  check  the  following  box and  list the  Securities  Act
registration  statement number of the earlier effective  registration  statement
for the same offering. [ ]

If this form is a  post-effective  amendment filed pursuant to Rule 462(d) under
the  Securities  Act,  check  the  following  box and  list the  Securities  Act
registration  statement number of the earlier effective  registration  statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]





                         CALCULATION OF REGISTRATION FEE
---------------------------------------- --------------- ----------------- ----------------- -------------
Title of Each Class of Securities to be  Number of       Proposed Maximum  Proposed Maximum  Amount of
Registered                               Shares to be    Offering Price    Aggregate         Registration
                                         Registered (1)  Per Share (2)     Offering Price    Fee
---------------------------------------- --------------- ----------------- ----------------- -------------
                                                                                 
Common Stock                               2,828,304          $ 0.42          $ 1,187,887      $ 127.10

---------------------------------------- --------------- ----------------- ----------------- -------------
Total Registration and Fee                 2,828,304          $ 0.42          $ 1,187,887      $ 127.10
---------------------------------------- --------------- ----------------- ----------------- -------------


(1) Represents  shares of our common stock to be sold that are currently  issued
and outstanding.

(2) In accordance  with Rule 457(c) , the aggregate  offering price of shares of
common stock of Tidelands  is estimated  solely for the purposes of  calculating
the registration  fees payable pursuant hereto, as determined in accordance with
Rule 457(c), using the average of the high and low bid price reported by the OTC
Bulletin  Board for the Common  Stock on October 24,  2006,  which was $0.42 per
share.

The registrant hereby amends this  registration  statement on such date or dates
as may be necessary to delay its effective date until the registrant  shall file
a further amendment which specifically  states that this registration  statement
shall  thereafter  become  effective  in  accordance  with  section  8(a) of the
securities act, or until the  registration  statement shall become  effective on
such  date  as the  commission,  acting  pursuant  to  said  section  8(a),  may
determine.

Information   contained  herein  is  subject  to  completion  or  amendment.   A
registration  statement  relating  to these  securities  has been filed with the
Securities  and Exchange  Commission.  These  securities may not be sold nor may
offers to buy be accepted prior to the time the registration  statement  becomes
effective.  This  prospectus  shall  not  constitute  an  offer  to  sell or the
solicitation of an offer to buy nor shall there be any sale of these  securities
in any state in which such offer,  solicitation  or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.


     PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED November 27, 2006.


                                   PROSPECTUS

                                    2,828,304
                                  Common Shares

                         TIDELANDS OIL & GAS CORPORATION
                   1862 W. Bitters Rd., San Antonio, TX 78248

                      The Resale of Shares of Common Stock

The selling price of the shares will be determined by market factors at the time
of their resale.

This  prospectus  relates to the  resale by the  selling  shareholders  of up to
shares of common stock. The selling shareholders may sell the stock from time to
time  in the  over-the-counter  market  at the  prevailing  market  price  or in
negotiated transactions. With regard to the offered shares,

     o    up to 2,828,304  common shares issued and  outstanding for sale by the
          selling security holders.

This offering is not being  underwritten.  The common shares  offered under this
prospectus  may be sold by the selling  shareholders  on the public  market,  in
negotiated  transactions  with a broker-dealer or market maker as a principal or
agent, or in privately negotiated transactions not involving a broker or dealer.

We will  receive  no  proceeds  from  the  sale  of the  shares  by the  selling
shareholders.

Our common stock is quoted on the  over-the-counter  Electronic  Bulletin  Board
under the symbol  TIDE.  On October 24,  2006,  the average of the bid and asked
prices of the common stock on the Bulletin Board was $0.42 per share.

Investing  in the common  stock  involves a high degree of risk.  You should not
invest in the common stock unless you can afford to lose your entire investment.
See "Risk Factors" beginning on page 5 of this prospectus.



Neither  the  Securities  and  Exchange  Commission  nor  any  state  securities
commission  has approved or disapproved  these  securities or determined if this
prospectus  is truthful or  complete.  Any  representation  to the contrary is a
criminal offense.

Please read this  prospectus  carefully.  It describes  our  company,  finances,
products and services.  Federal and state  securities laws require us to include
in this prospectus all the important  information  that you will need to make an
investment decision.

You should rely only on the  information  contained or incorporated by reference
in this  prospectus to make your  investment  decision.  We have not  authorized
anyone to provide you with different  information.  The selling shareholders are
not offering these securities in any state where the offer is not permitted. You
should not assume that the  information in this prospectus is accurate as of any
date other than the date on the front page of this prospectus.

Brokers or dealers  effecting  transactions  in the Shares  should  confirm  the
registration of the Shares under the securities laws of the states in which such
transactions occur or the existence of an exemption from such  registration,  or
should cause such  registration to occur in connection with any offer or sale of
the Shares.

THESE  SECURITIES  HAVE NOT BEEN APPROVED OR  DISAPPROVED  BY THE SECURITIES AND
EXCHANGE  COMMISSION OR ANY STATE  SECURITIES  COMMISSION NOR HAS THE SECURITIES
AND  EXCHANGE  COMMISSION  OR ANY STATE  SECURITIES  COMMISSION  PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                The Date of this Prospectus is November 27, 2006













     The  following  table  of  contents  has  been  designed  to help  you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.

                                TABLE OF CONTENTS

Forward-looking Statements..................................................   2

Prospectus Summary..........................................................   2

         The Company........................................................   2

         The Offering.......................................................   3

         Recent Developments................................................   3

         Summary Financial Information......................................   3

         Risk Factors.......................................................   5

Use of Proceeds.............................................................  13

Market For Common Equity and Related Shareholder Matters....................  13

Dividends and Dividend Policy...............................................  14

Business....................................................................  16

Properties..................................................................  18

Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................  19

Selling Shareholders........................................................  30

Plan of Distribution........................................................  33

Directors and Executive Officers............................................  34

Principal Shareholders......................................................  37

Transactions with Management and Others.....................................  40

Legal Proceedings...........................................................  42

Description of Securities...................................................  44

Legal Matters...............................................................  47

Experts.....................................................................  47

Where You Can Find More Information.........................................  47

Index to Consolidated Financial Statements.................................. F-1


                                      1


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In  this   prospectus   we  make  a  number  of   statements,   referred  to  as
"forward-looking  statements",  which are intended to convey our expectations or
predictions  regarding the occurrence of possible future events or the existence
of trends and factors  that may impact our future plans and  operating  results.
These forward-looking  statements are derived, in part, from various assumptions
and  analyses  we have made in the  context  of our  current  business  plan and
information  currently  available  to us and in  light  of  our  experience  and
perceptions  of  historical  trends,  current  conditions  and  expected  future
developments   and  other   factors  we  believe  to  be   appropriate   in  the
circumstances.  You can generally  identify  forward-looking  statements through
words and phrases such as "seek", "anticipate", "believe", "estimate", "expect",
"intend",  "plan", "budget",  "project",  "may be", "may continue",  "may likely
result", and similar expressions. When reading any forward looking statement you
should  remain  mindful  that  all  forward-looking  statements  are  inherently
uncertain as they are based on current  expectations and assumptions  concerning
future events or future  performance of our company,  and that actual results or
developments  may vary  substantially  from those  expected as  expressed  in or
implied by that  statement for a number of reasons or factors,  including  those
relating to:

o    whether or not markets for our  products  develop  and, if they do develop,
     the pace at which they develop;

o    our ability to attract the  qualified  personnel  to  implement  our growth
     strategies,

o    our ability to develop sales, marketing and distribution capabilities;

o    the accuracy of our estimates and projections;

o    our ability to fund our short-term and long-term financing needs;

o    changes in our business plan and corporate strategies; and

o    other risks and  uncertainties  discussed in greater detail in the sections
     of  this   prospectus,   including   those  captioned  "Risk  Factors"  and
     "Management's Discussion And Analysis Of Financial Condition And Results Of
     Operations".

o    Each forward-looking  statement should be read in context with, and with an
     understanding of, the various other disclosures  concerning our company and
     our  business  made  elsewhere  in this  prospectus  as well as other pubic
     reports filed with the United  States  Securities  and Exchange  Commission
     (the  "SEC").  You should not place undue  reliance on any  forward-looking
     statement as a prediction  of actual  results or  developments.  We are not
     obligated to update or revise any  forward-looking  statement  contained in
     this  prospectus to reflect new events or  circumstances  unless and to the
     extent required by applicable law.


PROSPECTUS SUMMARY

The  following  summary is qualified in its entirety by reference to, and should
be read in  conjunction  with, the more detailed  information  and the Financial
Statements (including the notes thereto) appearing elsewhere in this Prospectus.
Unless otherwise specifically referenced, all references to dollar amounts refer
to United States dollars.

The Company

Tidelands  Oil  &  Gas  Corporation  (the  "Company"),   formerly  known  as  C2
Technologies,  Inc., was  incorporated  under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has eleven  subsidiaries  which it
directly and indirectly owns as follows:  (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates, L.P. , (4) Terranova Energia, S.de R.L. de
C.V., (5) Esperanza Energy LLC and (6) Sonterra Energy Corporation.  We also own
a 97% limited partnership interest in Reef Ventures, L.P.(7) Arrecefe Management
LLC owns a 1% general partner interest in Reef Ventures,  L.P. Rio Bravo Energy,
LLC owns 100% of the member  interest in Sonora Pipeline LLC. (8) Reef Ventures,
L.P.  owns  100% of the  member  interest  in Reef  International  LLC(9),  Reef
Marketing LLC(10) and (11) Tidelands Exploration and Production, Inc.

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

                                       2


Unless otherwise noted, the "Company" as used in this Prospectus,  will refer to
Tidelands Oil & Gas Corporation as described above.

Our principal offices are located at 1862 W. Bitters Rd., San Antonio, TX 78248.
Our telephone number is 210-764-8642.

The Offering

This prospectus relates to the offer and sale by some of our shareholders during
the period in which the  registration  statement  containing  this prospectus is
effective up to 2,828,304 common shares consisting of:

     o    2,000,000 shares owned by Palisades Master Fund, L.P.;
     o    304,375 shares owned by Crescent International Ltd.;
     o    152,179 shares owned by Double U Master Fund, L.P.;
     o    250,000 shares owned by JGB Capital, L.P.; and
     o    121,750 shares owned by Nite Capital, L.P.

The common  shares  offered  under this  prospectus  may be sold by the  selling
shareholders  on  the  public  market,   in  negotiated   transactions   with  a
broker-dealer or market maker as principal or agent, or in privately  negotiated
transactions not involving a broker or dealer. Information regarding the selling
shareholders, the common shares they are offering to sell under this prospectus,
and the times  and  manner in which  they may  offer  and sell  those  shares is
provided in the sections of this prospectus captioned "Selling Shareholders" and
"Plan of  Distribution".  We will not  receive  any of the  proceeds  from those
sales.

     Information on Outstanding Shares
     ---------------------------------

As of September 30, 2006, we have 84,537,270 common shares issued and
outstanding.

Recent Developments

In the first two  fiscal  quarters  of 2006,  several  significant  developments
occurred with respect to our businesses operated by our Company.

Financing Transaction
---------------------

On January 20, 2006, the 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").  We sold  $6,569,732
Dollars,   in  the  aggregate   principal  amount,  of  discounted   convertible
debentures("Debentures")  and Series "A" and Series  "B"  Warrants  to  purchase
common stock ("Warrants") for an aggregate payment of $5,396,098 after deduction
for the interest  discount.  The Company paid an 8%  commission to the placement
agent, HPC Capital  Management,  LLC., a registered  broker-dealer.  The Company
granted  HPC  Capital  Management  Series A Common  Stock  Purchase  Warrants as
additional  transaction  compensation.  The  Company  received  net  proceeds of
$4,949,291 after deduction of legal costs, commissions and interest discount. We
are using the proceeds for working  capital.  This  registration  statement  and
prospectus  covers the re-offer and re-sale of the common shares  underlying the
Debentures and Warrants.

On January 20, 2006, the 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").  We sold  $6,569,732
Dollars,   in  the  aggregate   principal  amount,  of  discounted   convertible
debentures("Debentures")  and Series "A" and Series  "B"  Warrants  to  purchase
common stock ("Warrants") for an aggregate payment of $5,396,098 after deduction
for the interest  discount.  The Company paid an 8%  commission to the placement
agent, HPC Capital  Management,  LLC., a registered  broker-dealer.  The Company
granted  HPC  Capital  Management  Series A Common  Stock  Purchase  Warrants as
additional   transaction   compensation.   The  Company  received  net  proceeds
of$4,949,291 after deduction of legal costs,  commissions and interest discount.
We are using the proceeds for working capital.  This registration  statement and
prospectus  covers the re-offer and re-sale of the common shares  underlying the
Debentures and Warrants.

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.  RHPO 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  thereby  discharging the RHP
debenture  obligation.  Under the Debenture  terms defining  default  events,  a

                                       3


Holder may elect to declare the aggregate principal  Debenture amount,  together
with  other  amounts  owing to the  date of  acceleration,  immediately  due and
payable in cash at the Mandatory  Default  Amount.  In the RHP case, the elected
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
thereby discharging the RHP debenture obligation.

On  September  26, 2006,  Palisades  Master Fund,  L.P.  ("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  Master  Fund,  Ltd.  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 Debenture at the
Mandatory Default Amount of $5,597,687.

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

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.
The Company  will issue the shares as follows:  Palisades:  2,000,000;  Crescent
International,   Ltd.:  304,375;  Double  U  Master  Fund,   L.P.:152,179;   JGB
Capital,L.P.: 250,000; and Nite Capital, L.P.: 121,750.

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,  par value $0.001 per share to Two Hundred  Fifty Million
(250,000,000)  shares, par value $0.001 per share. The amendment was approved by
written consent of 77.5% of our Company shareholders.

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,  par value $0.001 per share to Two Hundred  Fifty Million
(250,000,000)  shares, par value $0.001 per share. The amendment was approved by
written consent of 77.5% of our Company shareholders.

Esperanza Energy LLC
--------------------

Esperanza  Energy LLC  ("Esperanza")  was formed as a wholly owned subsidiary of
the Company in March 2006 to evaluate the feasibility of developing an offshore,
deep-water   liquefied  natural  gas  (LNG)  regas  terminal  near  Long  Beach,
California.  Esperanza  would  utilize TORP  Technology's  HiLoad LNG Regas unit
which attaches to an LNG tanker,  directly  vaporizes the LNG as it is offloaded
and  injects  the  regasified   natural  gas  into  an  undersea   pipeline  for
transportation  of the natural gas to onshore metering stations and transmission
pipelines  to  supply  nearby  gas  markets.  The TORP  HiLoad  LNG  Regas  unit
eliminates  the need for  extensive  above-ground  storage tanks or large marine
structures  required  for  berthing  and  processing  of the LNG.  Esperanza  is
conducting  the  feasibility  study  for this  project  with the  assistance  of
best-in-class LNG, environmental, pipeline and legal advisors.


Sonora Pipeline LLC and Terranova Energia, S. de R.L. de C.V.
-------------------------------------------------------------

The  cross-border gas pipeline and storage  development  activities of the above
entities to establish the Burgos Hub Export/Import project progressed forward in
two principal areas:

     Permitting Activities:
     ----------------------

Sonora Pipeline LLC continued its efforts to finish all activities  necessary to
move from NEPA pre-filing  status to a submission for  Certification for its two
international  pipeline U.S. segments,  the Progreso  International Pipeline and
the  Mission  International  Pipeline.  Sonora  believes it has filed all needed
revisions  to the Draft  Environmental  Report  for the  Progreso  International
Pipeline   with  FERC  for  purposes  of  the  NEPA   Environmental   Assessment
requirements.  This  proposed  pipeline  will  be the  eastern  leg of the  U.S.
pipelines which will interconnect  with the Tennessee Gas Pipeline  transmission
lines at the Alamo Station and will 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  24 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.  The completion of NEPA  pre-filing  activities for the

                                       4


Mission  segment  including  responses to FERC inquiries and scoping of affected
stakeholders  is  anticipated  during the second  quarter of 2006.  The  current
catalog  of  FERC   correspondence   for  Sonora's   activities  is  located  at
www.ferc.gov under Docket No. PF05-15.

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 Export/Import 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 length and will run from the  Brasil  storage
field to Nuevo Progreso, Mexico, with a proposed international pipeline crossing
into South  Texas from  Mexico at the Donna  Station,  which  will  provide  the
opportunity  for  interconnects  into  Texas  with  TETCO,  TGPL and  Texas  Gas
Services.  The  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 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  1.2 BCFD
(billion cubic feet per day).

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.
We believe the CRE will  consider  and issue a decision  on the  storage  permit
application by the first quarter of 2007.

     Commercial Activities:
     ----------------------

The Company continues to present the pipeline and storage segments of the Burgos
Hub  Export/Import  project to commercial  audiences in efforts to solicit their
interest and  participation  in the project at various  levels.  There have been
numerous  introductory  meetings  with  staff  of  the  CFE  and  the  Monterrey
industrial consumers of natural gas with a view toward clarifying their need and
usage of the proposed project facilities. Future efforts will concentrate on the
development and negotiation of precedent  agreements for capacity reservation of
the project  facilities.  Preliminary  evaluation of demand for storage capacity
reservation   based  upon  direct  discussion  with  the  various  customers  is
conservatively  estimated  at 40 Bcf  for  the  market  area  influenced  by the
project. Similarly,  several discussions continue with interested parties in the
U.S. and Mexico regarding the execution of a joint development agreement between
Terranova  and their firms for the  funding,  development  and  ownership of the
Project.

Use of Proceeds

We will not realize any of the proceeds  from the sale of the shares  offered by
the selling stockholders. See "Use of Proceeds".

RISK FACTORS

An  investment  in the  Securities  offered in this  Prospectus  involves a high
degree of risk and  should  only be made by  persons  who can afford the loss of
their entire  investment.  Accordingly,  prospective  investors  should consider
carefully the following factors, in addition to the other information concerning
the Company and its business contained in this Prospectus, before purchasing the
Securities  offered  hereby.  An  investment  in the  common  stock the  selling
shareholders  are  offering  to resell is  risky.  You  should be able to bear a
complete loss of your investment. Before purchasing any of the common stock, you
should carefully consider the following risk factors, among others.

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, 2005, we lost  $7,662,904  and for the

                                       5


year ended  December 31,  2004,  we lost  $14,302,037.  These losses were caused
primarily by:

     o    Financing  costs in connection with  acquisitions  made in prior years
          and the issuance of convertible debentures;
     o    Limited volumes of gas transported through the international  pipeline
          crossing;
     o    Pre-development and operating expenses associated with the development
          of additional pipeline and storage projects in Mexico;
     o    Idle  assets  not  producing  revenue,  such  as  the  gas  plant  and
          associated pipeline.

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.

WE DEPEND HEAVILY ON THE CONTINUED SERVICE OF OUR CHIEF EXECUTIVE OFFICER.

We place  substantial  reliance  upon the efforts and abilities of Michael Ward,
our chief  executive  officer.  The loss of Mr.  Ward's  services  could  have a
serious adverse effect on our business,  operations,  revenues or prospects.  We
maintain key man insurance on his life in the amount of One Million Dollars.

RELIANCE ON MANAGEMENT.

All decisions  with respect to the management of our Company will be made by our
Company's  directors and officers.  Accordingly,  no person should  purchase any
shares  offered by this  Prospectus  unless the subscriber is willing to entrust
all aspects of management to the Directors and Officers of our Company. The loss
of their services could have a material adverse effect on our Company's business
and prospects.

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 the shares that you purchase from the selling
shareholders.

THERE HAS BEEN AN 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 initial  offering  price.  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:

     o    operating  results  that  vary  from the  expectations  of  securities
          analysts and investors;
     o    changes  in  expectations  as to  our  future  financial  performance,
          including financial estimates by securities analysts and investors;
     o    the operations,  regulatory,  market and other risks discussed in this
          section;
     o    announcements  by us or  our  competitors  of  significant  contracts,
          acquisitions,   strategic  partnerships,  joint  ventures  or  capital
          commitments;
     o    announcements  by third parties of  significant  claims or proceedings
          against us; and
     o    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.

                                       6


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 the  purchasers of this Offering to sell their  securities in the
secondary market.

WE MAY NOT HAVE ENOUGH FUNDING TO COMPLETE OUR BUSINESS PLAN.

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. In addition,  our ability to raise additional funds
through  a private  placement  may be  restricted  by SEC  rules  which  limit a
company's ability to sell securities similar to those being sold in a registered
offering  before the time that  offering is completed  or otherwise  terminated.
Lack of funding could force us to curtail substantially or cease our operations.

FUTURE CAPITAL NEEDS COULD RESULT IN DILUTION TO INVESTORS; ADDITIONAL FINANCING
COULD BE UNAVAILABLE OR HAVE UNFAVORABLE TERMS.

Our Company's future capital requirements will depend on many factors, including
cash flow from  operations,  progress in its gas  operations,  competing  market
developments,  and  the  Company's  ability  to  market  its  proposed  products
successfully. Although the Company currently has specific plans and arrangements
for  financing  its  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  or debt  refinancing  could  result in
dilution to our Company's 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,  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.

THERE  CAN BE NO  ASSURANCE  THAT WE  WILL BE  ABILITY  TO  CONTINUE  AS A GOING
CONCERN.

Our substantial historical operating losses, limited revenues,  negative working
capital  and our  capital  needs  raise  substantial  doubt about our ability to
continue as a going  concern.  We can provide no assurances  that cash generated
from  operations  together  with  cash  received  in the  future  from  external
financing  sources  will be  sufficient  to  enable  us to  continue  as a going
concern.  If sufficient  cash cannot be obtained we would have to  substantially
alter  our  operations,  or  we  may  be  forced  to  substantially  curtail  or
discontinue some or all operations.

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:

o    the demand for natural gas;
o    profitability of operations;
o    required principal and interest payments on any debt we may incur;

                                       7


o    the cost of acquisitions;
o    our issuance of equity securities;
o    fluctuations in working capital;
o    capital expenditures;
o    continued development of gas transportation network systems;
o    prevailing economic conditions;
o    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

Our Company  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 the  Company.  There  can be no
assurance  that our  Company  will  successfully  differentiate  itself from its
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.  See
"Competition."

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.

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.

                                       8


There can be no assurance that:

     o    we will identify attractive acquisition candidates in the future;
     o    we will be able to acquire assets on economically acceptable terms;
     o    any  acquisitions  will not be  dilutive  to  earnings  and  operating
          surplus; or
     o    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:

     o    difficulties inherent in the integration of operations and systems;
     o    the diversion of management's  attention from other business concerns;
          and
     o    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.

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:

     o    the impact of weather on the demand for oil and natural gas;
     o    the level of domestic oil and natural gas production;
     o    the availability of imported oil and natural gas;
     o    the  availability of local,  intrastate and interstate  transportation
          systems;
     o    the availability and marketing of competitive fuels;
     o    the impact of energy conservation efforts; and
     o    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

     o    Decreases  in the demand for  propane  because of warmer  weather  may
          adversely affect our financial condition and results of operations.

     o    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.

     o    Sudden and sharp propane price  increases  that cannot be passed on to
          customers may adversely affect our profits, income, and cash flow.

                                       9


     o    Energy efficiency and technology may reduce the demand for propane and
          our revenues.

     o    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.

     o    The   propane   business   is  highly   regulated.   New  or  stricter
          environmental,   health,  or  safety   regulations  may  increase  our
          operating costs and reduce our net income.

     o    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.

     o    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.

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.  We are currently  attempting to permit
two  pipeline  segments  in South  Texas as part of our Burgos  Hub and  storage
project that will be subject to FERC regulation it built and operated.

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

                                       10


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.

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.

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.

                                       11


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 operations are subject to federal and state  environmental  laws under which
owners of natural gas  pipelines  can be liable for clean-up  costs and fines in
connection with any pollution caused by the pipelines. We can also be liable for
clean-up costs resulting from pollution which occurred before our acquisition of
the gathering systems.  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.  While we believe
that the gathering systems comply in all material respects with applicable laws,
we  cannot  assure  you that  future  events  will not occur for which we may be
liable.  Possible future  developments,  including  stricter laws or enforcement
policies,  or  claims  for  personal  or  property  damages  resulting  from our
operations could result in substantial costs and liabilities to us.

SOVEREIGN RISK

The Company is focusing on the development of  infrastructure  projects  through
its 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,
extraofficial 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 the Company's  properties.  In accordance
with customary industry practices, the Company maintains insurance against some,
but not all,  of such risks and  losses.  The  Company  does not carry  business
interruption  insurance.  The  occurrence  of such an event not fully covered by
insurance  could have a material  adverse effect on the financial  condition and
results of operations of the Company.

OUR BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL  RISKS, SOME OF WHICH MAY NOT
BE COVERED BY INSURANCE.

                                       12


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.

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.  The Company  maintains  $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 it to satisfy
any claims for which it might be held liable  resulting  from the conduct of its
business operations.

                                 USE OF PROCEEDS

We will not  receive  any  proceeds  from the sale of the shares by the  selling
shareholders. We will pay all the expenses incident to this registration.


            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 2005 and 2004,  including  the most recent  quarters.  The
quotations set forth below reflect inter-dealer prices,  without retail mark-up,
mark-down or commission and may not represent actual transactions.

Common Stock:

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

Table 1.

Bid Information

Fiscal Quarter Ended
                                    High            Low

September 30, 2006                  0.55            0.54
June 30, 2006                       0.83            0.81
March 31, 2006                      0.87            0.80

December 31, 2005                   1.01            0.76
September 30, 2005                  1.39            0.80
June 30, 2005                       1.77            0.95
March 31, 2005                      2.59            1.74

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



On November 22,  2006,  the closing bid and closing ask prices for shares of our
common  stock in the  over-the-counter  market,  as reported by NASD OTC BB were
0.36 per share, respectively.

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

As of December 31, 2005,  we had an  aggregate of 86  stockholders  of record as
reported by our transfer  agent,  Signature  Stock  Transfer Co.,  Inc.  Certain
shares  are held in the  "street"  names of  securities  broker  dealers  and we

                                       13




estimate the number of stockholders  which may be represented by such securities
broker dealer accounts may exceed 5,000.

Dividends and Dividend Policy

There are no  restrictions  imposed on the  Company  which  limit its ability to
declare  or pay  dividends  on its  common  stock,  except as  limited  by state
corporation  law.  During the year ended  December  31,  2005,  no cash or stock
dividends  were  declared  or  paid  and  none  are  expected  to be paid in the
foreseeable future.

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

Securities Authorized for Issuance under Equity Compensation Plans

The following table  summarizes our equity  compensation  plan information as of
December 31, 2005.  Information  is included for equity  compensation  plans not
approved by our security holders.

Table 1.

Equity Compensation Plan Information

--------------------------- ------------------------ --------------------- ------------------------
Plan Category               Number of Securities to  Weighted-average      Number of Securities
                            be issued upon exercise  Exercise price of     remaining available for
                            of outstanding options,  outstanding options,  future issuance under
                            warrants and rights      warrants, and rights  equity compensation
                                                                           plans (excluding
                                                                           securities reflected in
                                                                           column (a)

                                       (a)                     (b)                     (c)
--------------------------- ------------------------ --------------------- ------------------------
                                                                  
Equity Compensation
Plans approved by security
holders                               None                    None                    None
--------------------------- ------------------------ --------------------- ------------------------
Equity Compensation
Plans not approved by       5,000,000 (1)             $ 0.287                          -0-
security holders            5,000,000 (2)             $ 0.87                        4,350,122
--------------------------- ------------------------ --------------------- ------------------------
Total                       10,000,000                                              4,350,122
--------------------------- ------------------------ --------------------- ------------------------


(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.  We granted 210,122 shares from this plan during 2005, 200,000 for
legal services, 10,000 shares to Robert Dowies under the terms of his Employment
Agreement and 122 shares to James Smith as a part of his 150,000 share  employee
bonus. The balance of this bonus was issued from the Plan outlined in footnote 2
below.

(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.  During 2005, we granted 148,878 shares to James Smith the balance
of his 150,000 share  employee  bonus.  On January 8, 2006,  the Company  issued
James B. Smith 500,000 shares under his employment  agreement  representing  his
2005 annual stock grant.  On January 16, 2006, the Company issued 250,000 shares
to Gregory  Wilson for legal  services.  On August 8, 2006,  the Company  issued
100,000 Shares to Sam Simon for accounting services.  On September 25, 2006, the
Company  issued  James B. Smith  150,000  shares as directors  compensation.  On
October 11, 2006, the Company issued James B. Smith 500,000 under his employment
agreement representing his 2006 annual stock grant.

                   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, 2005,  December 31, 2004,  December 31, 2003, December 31, 2002 and
December 31, 2001, are from our audited consolidated financial statements.

                                       14




     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:                       2005        2004        2003        2002        2001
                                    --------    --------    --------    --------    --------
                                                                     
Revenue                             $  1,861    $  1,884    $    179    $    710    $  1,059
Operating Expenses                    15,172      31,626       3,061       4,454       2,760
Operating Income (Loss)              (13,311)    (29,742)     (2,882)     (3,744)     (1,701)
Other Income (Expense), Net            5,648      15,440       1,534        (316)       (905)
                                    --------    --------    --------    --------    --------
Net Income (Loss)                   $ (7,663)   $(14,302)   $ (1,348)   $ (4,060)   $ (2,606)
                                    ========    ========    ========    ========    ========
Statement of Cash Flows Data:
Cash Provided (Used) by Operating
Activities                          $ (2,784)   $ (3,108)   $    441    $   (423)   $   (934)
Cash Provided (Used) by Investing   $ (1,836)   $ (9,629)   $    366    $   (354)   $    (48)
Activities
Cash Provided (Used) by Financing   $    275    $ 17,302    $   (106)   $    573    $  1,068
Activities

Balance Sheet Data:
Total Assets                        $ 13,489    $ 22,423    $  1,624    $  1,379    $  1,659



Long-Term Debt                      $  4,272    $ 11,732    $   --      $   --      $    199
Total Stockholders' Equity          $  7,767    $  4,949    $    485    $ (2,536)   $ (2,182)


              SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
   The information below is from unaudited consolidated financial statements.

                                         Mar       June      Sept        Dec
Year Ended December 31, 2005             31         30        30         31
-----------------------------------   --------   --------  --------   --------
     Revenues                         $    628   $    341  $    248   $    644
                                      --------   --------  --------   --------
     Cost of Goods Sold                    285        130       220        368
                                      --------   --------  --------   --------
     Gross Margin                          343        211        28        276
     Operating Expenses                  6,947      3,825     1,580      1,817
     Other Income (Expense), Net        (2,862)     8,096       324         90
                                      --------   --------  --------   --------
     Net 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
-----------------------------------
     Revenues                         $      0   $    508  $    825   $    551
     Cost of Goods Sold                      0        498       802        209
                                      --------   --------  --------   --------
     Gross Margin                            0         10        23        342
     Operating Expenses                  1,538      4,209     3,545     20,825
     Other Income (Expense), Net             4     15,397         6         33
                                      --------   --------  --------   --------
     Net earnings (loss)              $ (1,534)  $ 11,198  $ (3,516)  $(20,450)
                                      ========   ========  ========   ========
     Basic (loss) per share           $  (0.03)  $   0.18  $  (0.02)  $  (0.34)
     Diluted (loss) per share         $  (0.03)  $   0.18  $  (0.02)  $  (0.34)

              SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
                                   (CONTINUED)

Interim Periods 2006                    Mar       June      Sept
-----------------------------------
     Revenues                         $   802    $   407    $   369
     Cost of Goods Sold                   377        206        177
                                      -------    -------    -------
     Gross Margin                         425        201        192
     Operating Expenses                 2,154      2,189      4,018

     Other Income (Expense), Net           33         28         49
                                      -------    -------    -------
     Net earnings (loss)              $(1,696)   $(1,960)   $(3,777)
                                      =======    =======    =======
     Basic (loss) per share           $ (0.02)   $ (0.03)   $ (0.05)
     Diluted (loss) per share         $ (0.02)   $ (0.03)   $ (0.05)

                                       15


                                    BUSINESS
Business Overview

Tidelands  Oil  &  Gas  Corporation  (the  "Company"),   formerly  known  as  C2
Technologies,  Inc., was  incorporated  under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has eleven  subsidiaries  which it
directly and indirectly owns as follows:  (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates,  L.P., (4) Terranova Energia, S.de R.L. de
C.V., (5) Esperanza Energy LLC and (6) Sonterra Energy Corporation.  We also own
a 97% limited partnership interest in Reef Ventures, L.P.(7) Arrecefe Management
LLC owns a 1% general partner interest in Reef Ventures,  L.P. Rio Bravo Energy,
LLC owns 100% of the member  interest in Sonora Pipeline LLC. (8) Reef Ventures,
L.P.  owns 100% of the member  interest in Reef  International  LLC (9) and Reef
Marketing LLC (10)and (11) Tidelands Exploration and Production, Inc.

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

Reef Ventures International Pipeline
------------------------------------

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.

Tidelands Oil & Gas Storage Enterprise
--------------------------------------

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

We have completed the initial study of the Burgos facility and expect to receive
permits  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 these two
projects  exceeds  $800  Million  Dollars and is  expected to be funded  through
issuance of  additional  equity of the Company,  the  addition of joint  venture
partners and/or debt  financing.  Marea  Associates,  L.P. was formed to own the
majority  interest in Terranova  Energia,  S. de R.L. de C.V., a Mexican company
which will conduct all business  dealings in Mexico on behalf of Tidelands.  Rio
Bravo Energy LLC, an existing  wholly owned  subsidiary owns the general partner
interest in Marea Associates, L.P. and a minority interest in Terranova Energia,
S. de R.L. de C.V.

Rio Bravo Energy, LLC
---------------------

Rio Bravo  Energy,  LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing  Plant which was  purchased  in 1999 and was  processing  natural gas
primarily from Conoco Oil's Sacatosa Field.  The Sacatosa Field was primarily an
oilfield  which  produced  high BTU  casinghead  gas from  which gas  processing
operations would yield valuable hydrocarbon  components such as propane,  butane
and natural  gasolines.  As the field  depleted  lower volumes of casinghead gas
were being delivered by Conoco,  and other gas producers could not be contracted
with for  processing of additional  replacement  volumes of gas.  Therefore,  in
October 2002, the plant was temporarily shut down due to the declining economics
associated  with low volume  operation  of the plant.  During  2002  through the
fourth  quarter of 2005  management  planned  to reopen the plant when  adequate
volumes of gas from third party producers was obtained to make plant  operations
economically  attractive.  However,  we have been  unsuccessful  in  locating  a

                                       16


locally  available and adequate  supply of high BTU natural gas and have elected
to  dispose  of the gas plant  assets.  Accordingly,  our  financial  statements
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
--------------------

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 financial  statements
with respect to pipeline network in addition to the gas plant. These assets will
also be sold at a later date.

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 pipeline segment will be approximately 8.7 miles long and will comprise
the eastern leg of the proposed U.S.  pipelines which will interconnect with the
Tennessee  Gas  Pipeline  transmission  lines at the Alamo  Station  and deliver
natural gas to the proposed Brasil Storage facility approximately 17 miles south
of the U.S./Mexico border at Progreso,  Texas. The Mission pipeline segment will
be   approximately  24  miles  long  and  will  commence  at  the  existing  HPL
Valero-Gilmore  gas plant in Hidalgo County,  Texas and extend  southward to the
Arguelles crossing of the Rio Grande River into Mexico near the City of Mission,
Hidalgo County, Texas.

Both pipeline segments are expected to be 30 inches in diameter. Sonora Pipeline
LLC continued its efforts to finish all  activities  necessary to move from NEPA
pre-filing  status to a  submission  for  Certification  for these two  proposed
International  Pipeline U.S. segments,  the Progreso  International Pipeline and
the  Mission  International  Pipeline.  Sonora  believes it has filed all needed
revisions  to the Draft  Environmental  Report  for the  Progreso  International
Pipeline   with  FERC  for  purposes  of  the  NEPA   Environmental   Assessment
requirements.  The Mission International Pipeline segment was re-designed in the
first  quarter of 2006 due to a routing  conflict  with a fiber optic line.  The
completion  of NEPA  pre-filing  activities  for the Mission  segment  including
responses to FERC inquiries and scoping of affected  stakeholders is anticipated
in the second quarter of 2006. The current  catalog of FERC  correspondence  for
Sonora's activities is located at www.ferc.gov under Docket No. PF05-15.

Sonterra Energy Corporation Business

The assets of our  Sonterra  Energy  Corporation  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:

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

These subdivisions contain approximately 1,700 lots. At December 31, 2005, 1,067
of these lots are metered for use. There are  approximately 633 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.  An
additional  component  of future  growth  will come  from the  establishment  of
propane  distribution systems in other developments such as the recent agreement
between  Sonterra and Cordillera  Ranch  Development  Corp. in which Sonterra is
currently installing a tank site and gas mains to supply approximately 200 homes

                                       17


in Units  201-204  of that  subdivision.  Future  phases of lot  development  at
Cordillera  Ranch will result in propane service being extended to approximately
300 more  homes.  Sonterra is in active  negotiations  for the  installation  of
propane  distribution  systems with other  developers of residential lots in the
Texas Hill Country area between San Antonio and Austin,  Texas.  Sonterra is the
exclusive  seller of  propane  in these  subdivisions  and is not  considered  a
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.

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:



2005                      Propane Sales         Pipeline               All Other              Total
                          and Related           Transportation         and Corporate
                          Services Fees
                                                                                  
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         Natural Gas Sales      All Other              Total
                          and Related           and Pipeline           and Corporate
                          Services              Transportation Fees

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


Note: Reef Ventures and Sonterra commenced operations in 2004.


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

Reef Ventures, L.P.  Eagle Pass Pipeline Crossing

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

Sonterra Energy Corporation Propane Distribution

Our  propane  distribution  business 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.

Employees

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

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  (thru  Arrecefe  Management  LLC) in this  entity.  We acquired  these
interests from Impact  International,  LLC. Impact financed our purchase of this
system and we owe Impact approximately $4,605,433.

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   consisting  of
approximately  80 miles of  pipeline.  No  significant  encumbrances  exist with

                                       18


respect to the assets of this  company.  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  33 miles of thirty inch diameter
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 a propane  distribution  systems providing
propane  to  15  residential   subdivisions  in  Austin,   Texas.   The  propane
distribution  system is  comprised of  approximately  25 miles of gas main pipe,
75,000 feet of yard lines, 850 meters and storage tanks with a combined capacity
of  156,000  gallons  of LPG.  Sonterra  is  currently  constructing  a  propane
distribution system for approximately 200 residential units in Cordillera Ranch,
a rural subdivision located in Kendall County, Texas.

We lease our San Antonio  executive office. We entered into this office lease on
August 1, 2003. The term expired  November 30, 2005. We held over our tenancy in
the building  under the month to month clause and renewed this lease on February
1, 2006 for a term until December 31, 2007. Our monthly lease payment is $3,400.
Our rent expense for 2005 was $40,800.  Sonterra Energy Corporation entered into
a sublease  agreement  for its  offices in an adjacent  building  for $2,500 per
month  until its  renewal in October  2005 at which time the rent  increased  to
$3,000 per month through March 31, 2006.  However, 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's rent expense
for this office for 2005 was $31,500. 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS

Business Overview
-----------------

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

We derive our revenue  from  transportation  fees for 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.  This company
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.

With respect to our pipeline system owned by Reef Ventures,  L.P., management is
has evaluated an expansion of the pipeline in Coahuila to serve new markets long
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 pipeline in Mexico to reach these new markets.  The required pipeline
will be  constructed  by end users or an  intermediate  purchaser of the natural
gas.  Reef  Ventures,  L.P.  will simply  continue to transport  the  additional
volumes  of  natural  gas  required  for  these  markets  through  its  existing
facilities  which will 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 2007 event. The increased  volume for the Reef Ventures  pipeline from such
an event would  approximate  2-3 times the entire baseload of demand for natural
gas currently taken by the local distribution company,  CONAGAS.The expected end
users would be a brewery and bottling operation. While these entities have begun
feasibility  studies for the construction and operation of their businesses,  no
final decision has been made concerning the building of these facilities.  There
is a risk that the facilities  will never be built because other sites in Mexico
are deemed to be more advantageous for the location of these facilities. In that
event,  the expected  growth in volumes for the Reef Ventures  pipeline will not
materialize.  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  period, the Reef Ventures pipeline was carrying only half the actual
baseload  volume (and none of the swing volume) being  transported to CONAGAS in
Piedras Negras.  We believe that if given adequate  supplies,  the Reef Ventures
pipeline can transport all the current base load and the swing  requirements  of
CONAGAS  which  would  result in a doubling  of  volumes  and  revenues  for the
pipeline.  Negotiations  are currently  underway to achieve that objective.  The
planned  natural gas liquid line between Eagle Pass,  Texas and Piedras  Negras,
Coahuila has been  re-evaluated in light of new supply sources emerging in Texas
and Mexico and the subsidy in effect for LPG and natural gas currently in use in
Mexico.   It  appears   that  the  project  will  need  to  be  developed  as  a

                                       19


transportation  fee business  model instead of a merchant  facility where LPG is
purchased in Texas and re-sold in a direct contract with the propane importation
arm of PEMEX.  This  determination  was made in order to reduce  the risk of any
future cost  incurred on the LPG  project.  Management  will  continue to seek a
transportation  contract which would support  development  and operation of this
project.

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, 2005,  Sonterra had  increased its number of
meter  hookups to 1,067 and is expecting a 15% rate of increase in the number of
new meter hookups in 2006.  Sonterra's  existing and future market area includes
several central Texas locations that do not have access to natural gas as a fuel
for home heating and appliance usage.  Current expansion of over 600 lots within
the  existing  subdivisions  is  possible.  Sonterra has also entered into a new
agreements with the developers of Cordillera Ranch and Northshore at Lake Travis
to expand the  serviced  lots by an  additional  1,500  units over time.  Active
negotiations  with developers in our trade area will likely result in additional
lots becoming available for installation of residential  propane delivery in the
nearby  central Texas  vicinity.  Revenue  growth from propane sold was $250,000
higher than projected primarily due to unit growth as opposed to price increases
applied to product  sold.  The  principal  risk in the growth  picture  for this
business unit comes from a slowing in the absorption rate for developed lots due
to the interest rate cycle. This in turn would slow the rate of meter hookups in
the subdivisions served.

Sonora  Pipeline  LLC  proposes  to own and operate  the U.S.  (Texas)  pipeline
segments  to be  constructed  in  connection  with  the  Mexican  pipeline,  LNG
regasification  terminal and gas storage projects which will interconnect to the
U.S. via two proposed international pipeline crossings in Hidalgo County, Texas.
Management  will be filing with the Federal  Energy  Regulatory  Commission  for
permission  to  construct  and  operate  these  proposed  pipelines  and for the
granting of presidential  permits for the  international  crossings near Mission
and Progreso, Texas for delivery of natural gas into the state of Tamaulipas and
the proposed Mexican pipelines of our Mexican  subsidiary,  Terranova Energia S.
de R.L. de C.V.

The Company is focusing on the development of  infrastructure  projects  through
its Mexican  entity,  Terranova  Energia S.de R.L. de C.V., in the nation of the
United  Mexican  States  (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 ALB Energia,
Rich,  Heather Muller,  Abogados and Miriam  Grunstein,  Abogada.  The Tidelands
advisors include Netherland Sewell & Associates,  CenterPoint Energy, LLC, Mayer
Brown Rowe & Maw, LLP, BNC Engineering, LLC, HSBC Securities, USA, Inc. and R.W.
Beck, Inc.

The  Terranova  Energia  project was  developed to serve the need to 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 project area is called the Burgos Hub and Storage  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,   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 are the Donna
Station and  Arguelles  and VGP  station.  At the Donna  station  our  potential
interconnects  into Texas are with TETCO,  TGPL and Texas Gas  Services.  At the
Arguelles and VGP station our potential  interconnects are with HPL, Calpine and
Kinder Morgan. The Terranova pipeline capacity is estimated at 1.2 BCFD (billion
cubic feet per day).

                                       20


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 a 36 inch diameter  pipeline and from the Brasil field to
Monterey and international crossings are 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 Export/Import Project.
The Permit is for the Occidente and Oriente Sections of the Terranova pipelines.

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.

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  CRE.  As a  result,
management has no reliable estimate concerning when this permit application will
be presented for decision by staff to the CRE Commissioners.

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.  It
utilizes  LNG  vaporizers  of the  shell  and tube  type,  with sea water as the
heating  medium.  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.

There  are  significant  challenges  for the  natural  gas  supply  to the power
generation  industry  in  Northeastern  Mexico.  We believe  the CFE has taken a
proactive  role  in  this  region  with a view to  substantially  improving  the
reliability, flexibility and pricing of the natural gas supply. Presently, there
are three LNG regasification  projects permitted or under construction in Mexico
at  Altamira,  Rosarito  and  Manzanillo.  Additionally,  there  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. 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 critcal 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 has  assisted us in
making  presentations  of the project to the  potential  strategic and financial
equity investors.  We have received positive feedback from several such parties.
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 commercial
structure,  relevant permits and other regulatory  approvals and the fulfillment
of other conditions standard for non-recourse project financing.

We have  undertaken  a risk  analysis  of the project  and have  identified  the
following project specific risks:

     Construction Risks:
              -            Delays in completion within the budget
              -            Failure of the EPC  contractor  to meet the  required
                           contractual performance levels

     Operating Risks:
              -            Project   performing   below   expected   levels   of
                           efficiency
              -            Increased  operating  costs due to  insufficiency  of
                           technology

                                       21


              -            Delays due to inclement weather, breakdown or failure
                           of equipment and third party risks

     Market risks:
              -            Cushion gas price exposure

     Regulatory risks:
              -            Inability  of  Terranova  to  obtain  the   necessary
                           permits and/or rights of w
              -            Changes in the regulatory conditions and requirements
                           may directly affect the profitability of the project

     Environmental risks:
              -            The  construction  and  operation  of the project may
                           result in  adverse  environmental  or social  impact,
                           which could  delay  completion  of the  construction,
                           curtail  operation and result in payments of fines or
                           remediation.

     Inflation risks:
              -            Increased  operating  costs  adversely  affecting the
                           project's earnings

     Financial risks:
              -            Interest rate risk
              -            Foreign exchange risk

     Political risks:
              -            The   risks   of   expropriation,    nationalization,
                           inability to obtain foreign  exchange and transfer it
                           outside of the project country.  (Also see "Sovereign
                           Risk" section in Risk Factors)

While the above risks are typically dealt with through contractual mechanisms in
project  finance and other  documents,  no assurance can be had that these risks
will be successfully mitigated.


RECENT DEVELOPMENTS
-------------------

Financing Transaction

On January 20, 2006, the Company  entered into  Securities  Purchase  Agreements
(the "Agreements) with seven accredited investors (collectively,  "Purchasers or
Holders").  The original  Holders  included  Palisades  Master Fund,  L.P.,  PEF
Advisors, Crescent International, Ltd., Double U Master Fund, L.P., JGB Capital,
L.P. and Nite Capital,  L.P., and RHP Master Fund, Ltd.  Palisades  subsequently
acquired PEF Advisors interests in the Agreements.

We sold $6,569,750  Dollars,  in the aggregate  principal  amount, of discounted
convertible  debentures  ("Debentures")  and Series A and  Series B Warrants  to
purchase common stock  ("Warrants") for an aggregate payment of $5,396,098 after
deduction  for the interest  discount.  The Company paid an 8% commission to the
placement agent, HPC Capital Management,  LLC, a registered  broker-dealer.  The
Company granted HPC Capital  Management  Series A Common Stock Purchase Warrants
as additional  transaction  compensation.  The Company  received net proceeds of
$4,949,291.88 after deduction of legal costs, commissions and interest discount.
We intend to use the proceeds for working capital.

The sale of these  securities  required the Company to increase  its  authorized
common stock capital because it had  insufficient  authorized  capital to comply
with all of the Debenture  conversion and Warrant exercise provisions  contained
in the Transaction  Documents.  We have reserved  9,000,000 common shares of our
unissued authorized common stock capital for the transaction. On April 17, 2006,
an amendment to the  articles of  incorporation  of the Company was approved via
written consent in lieu of a special meeting of the  shareholders of the Company
and on April 19,  2006,  the Company  amended its articles of  incorporation  by
increasing  its  authorized  common  stock  capital  from  One  Hundred  Million
(100,000,000)  shares,  par value $0.001 per share to Two Hundred  Fifty Million
(250,000,000)   shares,   par  value  $0.001  per  share,  thus  satisfying  the
requirements of the financing documents.

We agreed to file a registration statement. We filed a registration statement on
Form SB-2 and later converted to Form S-1 with the U.S.  Securities and Exchange
Commission  ("SEC") to register the common stock  underlying  the Debentures and
Warrants.

The  Debentures  are Original  Issue  Discount  Convertible  Debentures  with an
aggregate face amount of $6,569,750.  The purchasers paid an aggregate principal
sum of  $5,396,098.  The face amount of the  Debentures is due January 20, 2008.
The  difference  between  the  face  amount  and the  aggregate  principal  paid
represents the interest expense. The Debenture Holder may convert all or part of
the Debenture  face amount into shares of Tidelands  common stock at any time at
an initial conversion rate of $0.87 per share.

                                       22


The Purchasers have agreed to restrict their ability to convert their Debentures
or Exercise their Warrants and receive our shares such that the number of shares
of common stock held by each of them  individually  in the aggregate  after such
conversion or exercise does not exceed 4.99% of the then issued and  outstanding
Company common shares. This beneficial ownership limitation may be waived by the
Holder.

Subject to specific terms and  conditions in the Debenture,  the Company has the
option to force conversion of the Debentures into common shares if the Company's
share price as quoted on the Over-the-Counter  Electronic Bulletin Board exceeds
250% of the  then  Conversion  Price  for a  period  of time  based  on a Volume
Weighted  Average  Price (VWAP)  formula.  The VWAP share price must exceed this
250% price for at least 20 consecutive Trading Days.

The conversion price will be subject to adjustment for corporate events, such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

We granted the  Purchasers  Series A Common Stock  Purchase  Warrants  (Series A
Warrants) to purchase  2,491,974 shares of our common stock at $0.935 per share.
We also  granted  HPC  Capital  Management  65,697  Series A Common  Warrants to
purchase our common stock at $0.935 per share.

The  Series A  Warrants  may be  exercised  immediately  by the  Purchasers  and
terminate on January 20, 2009.

Subject to specific  terms and  conditions in the Series A Warrant  including an
effective  registration statement registering underlying shares, the Company has
the call option to force  conversion  of this Warrant into common  shares if the
Company's  share  price as quoted on the  Over-the-Counter  Electronic  Bulletin
Board  exceeds 250% of the then  effective  Exercise  Price for a period of time
based on a Volume Weighted  Average Price (VWAP)  formula.  The VWAP share price
must exceed this 250% threshold price for at least 20 consecutive Trading Days.

If at any time after one year from the date of  issuance  there is no  effective
registration statement  registering,  or no current prospectus available for the
resale of the  underlying  shares,  then this  Warrant may also be  exercised by
means of  "cashless  exercise"  as  determined  by a  formula  described  in the
Warrant.

The exercise price will be subject to adjustment for corporate  events,  such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

We granted the  Purchasers  Series B Common Stock Purchase  Warrants  ("Series B
Warrants") to purchase 7,551,432 shares of our common stock at $1.275 per share.
The  Purchasers  have the right to exercise the Series B Warrants  commencing at
any time on, or after January 20, 2007 and on, or before February 19, 2007.

Subject to specific terms and  conditions in the Series B Warrant,  including an
effective  registration statement registering underlying shares, the Company has
the option to force the  exercise  of this  Warrant  into  common  shares if the
Company's  share  price as quoted on the  Over-the-Counter  Electronic  Bulletin
Board  exceeds 150% of the then  effective  Exercise  Price for a period of time
based on a Volume Weighted  Average Price (VWAP)  formula.  The VWAP share price
must exceed this 150% threshold price for at least 20 consecutive Trading Days.

If at any time after one year from the date of  issuance  there is no  effective
registration statement  registering,  or no current prospectus available for the
resale of the  underlying  shares,  then this  Warrant may also be  exercised by
means of  "cashless  exercise"  as  determined  by a  formula  described  in the
Warrant.

The exercise price will be subject to adjustment for corporate  events,  such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

We have granted the Purchasers and HPC Capital Management registration rights on
the  shares  underlying  the  Debentures  and the  Warrants.  The  Common  Stock
underlying the  Debentures and Warrants will be registered  under the Securities
Act of 1933,  as amended,  for  re-offer and re-sale by the  Purchasers  and HPC
Capital Management.

If the Company failed to timely file a  registration  statement or was unable to
have the registration  statement declared effective by the SEC within the stated
periods of time,  this  would  trigger a default  and be subject to among  other
things,  acceleration of the Debentures, at the Purchasers' options,  additional
default interest payment and monetary liquidated damages. The liquidated damages
will be capped at 20% of the Debentures face amounts.

The registration  provisions of the Agreements  required the Company to have the
registration  statement  declared  effective  by  the  Securities  and  Exchange
Commission  on, or before  June 20,  2006,  ("Effectiveness  Deadline"),  or pay
liquidated damages until the registration  statement was declared effective.  On

                                       23


June 20,  2006,  the  company was  obligated  to pay  liquidated  damages to the
Holders,  however did not pay all of the holders  timely.  Failure to timely pay
these liquidated  damage sums  constituted an event of default.  The Company has
paid all of the  Effectiveness  Deadline  liquidated damage sums to each Holder,
albeit untimely.  However,  prior to these payments,  on September 20, 2006, one
Holder,  RHP Master Fund,  Ltd.  ("RHP") gave the Company its notice of election
accelerating payment of the RHP Debenture at the Mandatory Default Amount. Under
the Debenture terms defining  default events,  a Holder may elect to declare the
aggregate principal  Debenture amount,  together with other amounts owing to the
date of  acceleration,  immediately  due and  payable  in cash at the  Mandatory
Default Amount.  In the RHP case, the elected  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  thereby  discharging  the RHP  debenture
obligation.  On September 26, 2006,  Palisades  Master Fund, L.P.  ("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 Master Fund,  Ltd.  Notice of Default Event received by the
Company on September  20, 2006. On September  27, 2006,  Company  entered into a
Waiver and Amendment Agreement with Palisades and all of the remaining Debenture
Holders,  which included  Crescent  International,  Ltd.,  Double U Master Fund,
L.P., JGB Capital,  L.P. and Nite Capital,  L.P. We issued the Holders 2,828,304
shares in  consideration  for the Waiver and  Amendment  Agreement.  The Company
agreed to register these shares with the Securities and Exchange  Commission and
this registration statement has been prepared and filed for this purpose.

Esperanza Energy LLC

Esperanza  Energy LLC  ("Esperanza")  was formed as a wholly owned subsidiary of
the Company in March 2006 to evaluate the feasibility of developing an offshore,
deep-water  liquefied  natural gas (LNG) regas  terminal in the offshore  waters
near Long Beach,  California.  Esperanza would utilize TORP Technology's  HiLoad
LNG Regas unit which attaches to an LNG tanker, directly vaporizes the LNG as it
is offloaded and injects the  regasified  natural gas into an undersea  pipeline
for  transportation  of  the  natural  gas  to  onshore  metering  stations  and
transmission  pipelines to supply nearby gas markets.  The TORP HiLoad LNG Regas
unit  eliminates  the need for  extensive  above-ground  storage  tanks or large
marine structures required for berthing and processing of the LNG.

Esperanza  is  conducting  the  feasibility  study  for  this  project  with the
assistance of best-in-class LNG, environmental,  pipeline and legal experts that
include:

     o    David Maul, former Manager of the California Energy Commission Natural
          Gas Office,

     o    ENTRIX,   Inc.,  a  professional   environmental   consulting  company
          specializing  in  environmental  permitting  and  compliance for major
          offshore oil and gas projects in California and the United States,

     o    Project   Consulting   Services,   Inc.,  a  leader  in   engineering,
          construction,  management,  and  inspection  of onshore  and  offshore
          pipelines, and

     o    Pillsbury Winthrop Shaw Pittman,  LLP, an  interdisciplinary  law firm
          with  leading  practices in  environmental,  land use and energy legal
          advice and in project development and finance.

     Active  consultations  continue with  California  stakeholders,  commercial
     counterparties, financial investors, and the above mentioned team regarding
     the optimal design and operational  configuration of the project. A primary
     objective  of the  project  feasibility  study is to design the  project to
     exceed California environmental, public health and safety requirements.


Sonora Pipeline LLC and Terranova  Energia,  S. de R.L. de C.V.
The  cross-border gas pipeline and storage  development  activities of the above
entities to establish the Burgos Hub Export/Import project progressed forward in
two principal areas:

Permitting Activities -
Sonora Pipeline, LLC continued its efforts to finish all activities necessary to
move from NEPA pre-filing  status to a submission for  Certification for its two
International  Pipeline U.S. segments,  the Progreso  International Pipeline and
the  Mission  International  Pipeline.  Sonora  believes it has filed all needed
revisions to the Draft Environmental Report for both pipeline segments with FERC
for purposes of the NEPA  Environmental  Assessment  requirements.  The Progreso
International  Pipeline  is the  eastern  leg of the U.S.  pipelines  which will
interconnect  with the  Tennessee Gas Pipeline  transmission  lines at the Alamo
Station and deliver natural gas to the Brasil Storage facility  approximately 17
miles  south  of  the  U.S./Mexico  border  at  Progreso,   Texas.  The  Mission
International  Pipeline segment was re-designed in the first quarter of 2006 due
to a routing conflict with a fiber optic line. It will be approximately 24 miles
long and will commence at the existing HPL  Valero-Gilmore  gas plant in Hidalgo
County,  Texas and extend southward to the Arguelles  crossing of the Rio Grande
River into Mexico near the city of Mission, Texas. We anticipate the issuance of

                                       24


an Environmental Assessment by the staff of FERC in the third quarter of 2006 to
be followed by a complete  application  for a Certificate of Public  Convenience
and Necessity to construct,  own,  operate and maintain the proposed  pipelines.
The current catalog of FERC correspondence for Sonora's activities is located at
www.ferc.gov under Docket No. PF05-15.

On May 23, 2006, Terranova Energia, S. de R.L. de C.V.  ("Terranova"),  a wholly
owned subsidiary of the Company was awarded a permit by the Comision  Reguladora
de Energia de Mexico  ("CRE") to  construct  its 30 inch  diameter  natural  gas
pipeline  segment in Mexico to link to the  Sonora  Pipeline  LLC United  States
pipelines and Terranova's  proposed  underground natural gas storage facility in
the Brasil field (located  approximately 17 miles south of Nuevo Progreso on the
U.S./Mexico  border in  Texas).  Terranova  submitted  the  application  for the
storage  facility  permit to the CRE on August 5, 2005 and it was  accepted  for
full review on October 14, 2005.  Several unique  questions are presented by the
filing of this  permit due to the  proposed  location  and the lack of  previous
storage  permit  applications  having been  considered  by the CRE.  The CRE has
recently  selected GEOSTOCK (an entity owned 50% by Total, 25% by BP, and 25% by
Entrepose  Contracting)  as its  technical  consultant  to  review  the  storage
facility permit application. GEOSTOCK is an international engineering group with
over 40 years experience in the design,  construction and operation of all types
of underground storage facilities for liquid, liquefied or gaseous hydrocarbons.
The technical  review of the permit  application  is expected to be completed by
the end of 2006.  Management  expects the  storage  permit  application  will be
presented for decision by staff to the CRE Commissioners in the first quarter of
2007.

Commercial Activities -
The Company continues to present the pipeline and storage segments of the Burgos
Hub  Export/Import  project to commercial  audiences in efforts to solicit their
interest and  participation  in the project at various  levels.  There have been
numerous  introductory  meetings  with  staff  of  the  CFE  and  the  Monterrey
industrial consumers of natural gas with a view toward clarifying their need and
usage of the proposed project facilities. Future efforts will concentrate on the
development and negotiation of precedent  agreements for capacity reservation of
the project  facilities.  Preliminary  evaluation of demand for storage capacity
reservation   based  upon  direct  discussion  with  the  various  customers  is
conservatively  estimated  at 40 Bcf  for  the  market  area  influenced  by the
project. Similarly,  several discussions continue with interested parties in the
U.S. and Mexico regarding the execution of a joint development agreement between
Terranova  and their firms for the  funding,  development  and  ownership of the
project.

Sonterra Energy Corporation

The residential home markets in Central Texas remain strong and are reflected in
the  continued  growth of new meter hookups in existing  subdivisions  served by
Sonterra  Energy  Corporation.  Sonterra  served  1,115  customers  with propane
service at the end of the third  quarter of 2006 with an additional 40 customers
added in  existing  subdivisions  during the  quarter.  Construction  activities
continue in the existing  subdivisions,  such as Senna Hills, where an expansion
phase of development  will result in the addition of  approximately 50 customers
in the near future.  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  will add 50 more  residential  customers  when  completed  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.


RESULTS OF OPERATIONS
---------------------

NINE MONTHS ENDED  SEPTEMBER 30, 2006 COMPARED WITH NINE MONTHS ENDED  SEPTEMBER
--------------------------------------------------------------------------------
30, 2005
--------


REVENUES:  The Company reported revenues of $1,578,244 for the nine months ended
September  30, 2006 as compared  with  revenues  from  continuing  operations of
$1,216,626 for the nine months ended  September 30, 2005.  The revenue  increase
resulted  primarily from increasing  revenues of Sonterra Energy Corporation due
to an increase in total  customers  served and product  prices in the first nine
months of 2006 versus the first nine months of 2005.

TOTAL COSTS AND EXPENSES:  Total costs and expenses from  continuing  operations
decreased  from  $12,987,237  for the nine months  ended  September  30, 2005 to

                                       25


$9,121,500 for the nine months ended  September 30, 2006.  The principal  reason
for this amount of decrease was the lack of expense for  Impairment  Loss in the
nine months ended September 30, 2006 versus the nine months ended September 30,

2005.

COST OF SALES:  Total Cost of Sales  increased from $635,113 for the nine months
ended  September  30, 2005 to $759,954 for the nine months ended  September  30,
2006. This increase  resulted from the increased cost and volume of propane sold
by Sonterra  Energy  Corporation  in the nine months  ended  September  30, 2006
versus September 30, 2005.

OPERATING EXPENSES: Operating expenses from continuing operations increased from
$210,545 for the nine months ended  September  30, 2005 to $286,128 for the nine
months ended  September 30, 2006.  This increase was primarily due to additional
operating expenses incurred by Sonterra Energy Corporation in its operations for
the period which were not present in the comparative nine months for 2005.

Depreciation  expense declined in the first nine months of 2006 versus the first
nine  months  of  2005,  decreasing  from  $360,817  for the nine  months  ended
September  30, 2005 to $345,887  for the nine months  ended  September  30, 2006
reflecting a minor decrease in depreciable assets for the respective periods due
to impairment charges.

INTEREST  EXPENSE:  Interest expense increased from $503,950 for the nine months
ended  September 30, 2005 to $3,057,258 for the nine months ended  September 30,
2006  primarily  as a result of three  factors:  (a)  interest  penalties in the
amount of  $1,696,182  in  connection  with the  payment of stock to the various
investors  upon  the  defaults  described  in  Notes  3 and 5 of  the  Financial
Statements,  (b)  liquidated  damage  payments in the amount of $478,155 paid in
cash to the  various  investors  upon as  described  in Note 5 of the  Financial
Statements,  and  (c)  interest  paid  in  connection  with  the  conversion  of
debentures  to common  stock in the amount of $277,282  during the period  ended
September  30,  2006.  No income or expense for  Beneficial  Conversion  Feature
Interest was recorded for the nine months ended  September  30, 2006 as compared
to ($501,659) for the nine months ended September 30, 2005. The market price for
the  Company's  common stock at the relevant  measurement  dates during the nine
months  ended  September  30,  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 & Administrative  Expenses
decreased by  $1,906,198  during the nine months ended  September  30, 2006 to a
total  amount of  $4,672,273  as compared  $6,578,471  for the nine months ended
September 30, 2005.  This decrease was due primarily to the absence of financing
costs paid to Impact  International  LLC during the period ended  September  30,
2006 as compared to financing costs of $1,272,500  paid to Impact  International
LLC during the period ended September 30, 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 nine months ended September 30,
2006 versus the nine months ended September 30, 2005.

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

DERIVATIVE   GAIN:  Gain  from  embedded   derivative   instrument   liabilities
decreasedfrom  ($5,168,000) for the nine months ended September 30, 2005 to zero
for the nine months ended  September 30, 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 nine
months ended September 30, 2006.

NET LOSS: Net loss of ($6,211,713)  for the nine months ended September 30, 2005
increased to  ($7,433,260)  for the nine months  ended  September  30, 2006,  an
increase  in the  amount of loss of  1,221,547.  The  principal  reason for this
amount of increase in net loss was the lack of  Derivative  Gains to offset Loss
from Operations for the nine months ended September 30, 2006 versus the nine

months ended September 30, 2005.  Included in the net loss of  ($7,433,260)  for
the  nine  months  ended  September  30,  2006 is  $1,562,800  of  expenses  for
employment contract costs and legal fees paid by issuance of common stock.

LIQUIDITY  AND CAPITAL  RESOURCES:  With  regard to  liquidity  and  adequacy of
capital  resources,   management  believes  that  adequate  liquidity  and  cash
resources exist to sustain current corporate activities for the remainder of the
fiscal year.  However, in the event that a decision to proceed with the offshore
LNG regas  terminal  project in Southern  California is made during the upcoming
months,  additional  funding for the permit  process will be needed.  Management
will evaluate the required budget and funding alternatives for such an effort as
an integral part of the project  feasibility  study underway.  Furthermore,  the
Company  will  need to raise  additional  capital  to fund  ongoing  development

                                       26


activities  for its  Mexican  subsidiary,  Terranova  Energia  and  also to fund
operating  overhead at the parent  company  level.  New issuance of common stock
sufficient  to retire  the  outstanding  debentures  and to  provide  additional
required capital is under active negotiation. In addition, management is seeking
commitments  to fund the  development  activities of the Mexican and  California
projects by private equity  sources.  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 is taking  immediate  action to reduce  overhead  costs and otherwise
obtain cash resources for the Company.  Actions  underway  include  reduction of
staff,  termination of leases for the resulting unused office space,  subletting
of the Suite License Agreement with the San Antonio Spurs, LLC, conveyance of an
interest  in Reef  Ventures,  LP for  cash,  collection  of stock  subscriptions
receivable from current and past officers,  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.  Furthermore,  management  expects
that in the fourth  quarter of 2006, the Company will begin  receiving  proceeds
from the sale and  transportation  of natural gas by its  subsidiary,  Tidelands
Exploration  &  Production,  as a result  of its  participation  in the  working
interests in the gas wells and the gathering pipeline located in Bexar,  Medina,
and Atascosa counties.

Direct  capital  expenditures  during the nine months ended  September  30, 2006
totaled  $2,525,218.   The  capital  expenditures  were  composed  of  increased
pre-construction costs regarding potential  international pipeline crossings and
storage facilities in Mexico,  pre-construction  costs regarding an offshore LNG
terminal in Southern California,  and additional machinery,  equipment,  trucks,
autos and trailers for the operation of the Sonterra Energy Corporation  propane
systems.  Total  debt  increased  from  $5,722,322  at  December  31,  2005 to $
11,239,928 at September 30, 2006. The increase in total debt is due primarily to
the  issuance  of  $6,569,750  of   convertible   debentures  in  the  financing
transaction  of January 20, 2006.  Net loss for the nine months ended  September
30,  2006 was  ($7,433,260)  an increase in net loss of 19% from the net loss of
($6,211,713) for the nine months ended September 30, 2005. Basic and diluted net
loss per common share  remained the same in the nine months ended  September 30,
2006 at ($0.05).  The net loss per share  calculation  for the nine months ended
September  30,  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.

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

                                       27


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 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.

                                       28


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

TOTAL COSTS AND EXPENSES:  Total costs and expenses from  continuing  operations
increased  from  $3,061,068  for the twelve  months  ended  December 31, 2003 to
$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  Corporartion  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.

                                       29


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.

FORWARD-LOOKING STATEMENTS:

We have included  forward-looking  statements in this report.  For this purpose,
any  statements  contained in this report that are not  statements of historical
fact may be  deemed to be  forward  looking  statements.  Without  limiting  the
foregoing,  words  such as "may",  "will",  "expect",  "believe",  "anticipate",
"estimate",  "plan" or "continue" or the negative or other variations thereof or
comparable  terminology  are  intended to identify  forward-looking  statements.
These statements by their nature involve  substantial  risks and  uncertainties,
and actual  results  may differ  materially  depending  on a variety of factors.
Factors that might cause  forward-looking  statements to differ  materially from
actual  results  include,  among other  things,  overall  economic  and business
conditions,  demand  for the  Company's  products,  competitive  factors  in the
industries  in which we compete or intend to compete,  natural gas  availability
and cost and timing,  impact and other  uncertainties of our future  acquisition
plans.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

Cash and Cash Equivalents

     We have historically  invested our cash and cash equivalents in short-term,
fixed rate, highly rated and highly liquid instruments which are reinvested when
they mature  throughout  the year.  Although  our existing  investments  are not
considered  at risk with  respect to changes in  interest  rates or markets  for
these  instruments,  our  rate of  return  on  short-term  investments  could be
affected at the time of  reinvestment as a result of intervening  events.  As of
September 30, 2006, we had cash and cash equivalents aggregated $887,194.

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

Debt

     The interest rate on our Impact  International debt obligation is generally
determined  based on the prime interest rate plus two percent and may be subject
to market fluctuation as the prime rate changes.


                              SELLING SHAREHOLDERS

The following table provides certain information about the selling shareholder's
beneficial  ownership  of our  common  stock  as of  September  30,  2006 and as
adjusted to give effect to the sale of all of the shares  being  offered by this
prospectus.

The number of shares that Palisades Master Fund, Crescent  International,  Ltd.,
Double U Master Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master Fund,
Ltd  ("Purchasers"),  will own at any  time are  subject  to  limitation  in the
governing agreements for the Debentures and Warrants,  respectively, so that the
aggregate number of shares of common stock of which such selling stockholder and

                                       30


all persons  affiliated with such selling  stockholder  (calculated  pursuant to
Rule 13d-3 of the  Securities  Exchange Act of 1934, as amended) does not at any
time exceed 4.99% of our then outstanding common stock.

The following table  identifies the selling  stockholders  and indicates (i) the
nature of any position,  office or other material relationship that each selling
stockholder  has  had  with  us  during  the  past  three  years  (or any of our
predecessors  or affiliates) and (ii) the number of shares and percentage of our
outstanding shares of common stock owned by the selling stockholder prior to the
offering,  the  number of shares to be  offered  for the  selling  stockholder's
account  and the number of shares and  percentage  of  outstanding  shares to be
owned by the selling stockholder after completion of the offering.



Table 1.
-------------------- ------------- ------------- -------------- -------------- --------------
Name of Selling      Shares         Percent of    Maximum        Shares         Percent of
Shareholder          Beneficially   Class of      Number of      Beneficially   Class of
                     Owned Before   Shares        Shares to be   Owned After    Shares Owned
                     Offering (A)   Owned         Sold in this   the Offering   After this
                                    Before the    Offering       (B)            Offering (C)
                                    Offering
-------------------- ------------- -------------- ------------- -------------- --------------
                                                                
Palisades Master      13,198,308     4.99%           2,000,000       -0-            -0-
Fund (1)
-------------------- -------------  ------------- ------------- -------------- --------------
Crescent              1,934,706      2.28%             304,375       -0-            -0-
International,
Ltd.(2)
-------------------- ------------- ------------ --------------- -------------- --------------
Double U Master
Fund, LP(3)           967,295        1.14%             152,179       -0-            -0-
-------------------- ------------- ------------- -------------- -------------- --------------
JGB Capital, LP(4)    1,589,081      1.87%             250,000       -0-            -0-
-------------------- ------------- ------------- -------------- -------------- --------------
Nite Capital, LP(5)   773,882        0.92%             121,750       -0-            -0-
-------------------- ------------- ------------- -------------- -------------- --------------
Total                 18,463,272    21.84%           2,828,304
-------------------- ------------- ------------- -------------- -------------- --------------


(A) The number and  percentage  of shares  beneficially  owned is  determined in
accordance  with Rule  13d-3 of the  Securities  Exchange  Act of 1934,  and the
information is not necessarily  indicative of beneficial ownership for any other
purpose.  Under such rule,  beneficial ownership includes any shares as to which
the individual has sole or shared voting power or investment  power and also any
shares that the  individual  has the right to acquire within 60 days of the date
of this  prospectus  through the  exercise of any stock  option or other  right.
Unless  otherwise  indicated in the  footnotes,  each person has sole voting and
investment  power (or shares such powers with his or her spouse) with respect to
the shares shown as beneficially  owned.  Percentage of beneficial  ownership is
based on 84,537,270 shares of common stock outstanding as of September 30, 2006.

(B)  Assumes  that the  selling  shareholder  will sell all of the shares of the
common stock offered by this  prospectus.  We cannot assure you that the selling
shareholders will sell all or any of these shares.

(C) Assumes  that the  selling  shareholder  will  convert  all  debentures  and
exercise  all  warrant  and  sell  all of the  shares  of the  common  stock  as
previously registered on Registration statement Form S-1/A, File No. 333-135636,
filed with the  Securities  and  Exchange  Commission  (the "SEC") and  declared
effective  on  September  15 ,  2006 We  cannot  assure  you  that  the  selling
shareholders will sell all or any of these shares.

     (1) Represents 2,000,000 shares issued and outstanding and up to 11,527,808
shares of common stock  previously  registered on  Registration  statement  Form
S-1/A, File No.  333-135636,  filed with the Securities and Exchange  Commission
(the  "SEC") and  declared  effective  on  September  15,  2006 and  issuable as
follows:
     (a) 4,947,557 shares upon conversion of the Debentures,
     (b) 1,632,694  shares of common stock  issuable upon exercise of the Series
     "A" Warrants at $0.935 per share; and
     (c) 4,947,557  shares of common stock  issuable upon exercise of the Series
     "B" Warrants at $1.275 per share. PEF Advisors,  LLC, ("PEF") serves as the
     investment  manager  Palisades Master Fund, LP ("the Fund"). As a result of
     its role as  investment  manager  to the Fund,  PEF may be deemed to be the
     beneficial  owner,  as defined in Rule 13d-3 under the Securities  Exchange
     Act of 1934, of such  securities  held by the Fund.  However,  PEF does not
     have the right to receive dividends from, or the proceeds from the sale of,
     such securities held by the Fund and disclaims any beneficial  ownership of
     such shares of common  stock.  As of April 20, 2005,  Mr. David Batista was
     delegated authority from PEF regarding the portfolio  management  decisions
     of PEF Advisors with respect to the securities owned by the Fund. By reason

                                       31


     of such delegated authority,  Mr. Batista may be deemed to have dispositive
     and  voting  power  over the  securities  owned by the Fund.  However,  Mr.
     Batista does not have the right to receive  dividends from, or the proceeds
     from the sale  of,  such  securities  held by the  Fund and  disclaims  any
     beneficial  ownership of such  securities.  Palisades  Master Fund,  LP has
     certified  that it  acquired  the  securities  in the  ordinary  course  of
     business and at the time it acquired the  securities,  it had no agreements
     or  understandings,  directly or indirectly,  with any person to distribute
     the  securities.  The  selling  stockholder  has agreed not to convert  the
     Debentures  or to  exercise  warrants  to  the  extent  such  stockholder's
     beneficial  ownership  of our common stock would exceed 4.99% of our common
     stock then outstanding.

     (2) Represents  304,375 shares issued and  outstanding  and up to 1,630,331
shares of common stock  previously  registered on  Registration  statement  Form
S-1/A, File No.  333-135636,  filed with the Securities and Exchange  Commission
(the  "SEC") and  declared  effective  on  September  15,  2006 and  issuable as
follows:
     (a) 699,713 shares upon conversion of the Debentures,
     (b) 230,905 shares of common stock issuable upon exercise of the Series "A"
     Warrants at $0.935 per share; and
     (c) 699,713 shares of common stock issuable upon exercise of the Series "B"
     Warrants at $1.275 per share. Crescent International, Ltd. is a corporation
     organized under the laws of Bermuda. Maxi Brezzi and Bachir Taleb-Ibrahimi,
     in  their  capacities  as  managers  of  Cantara  (Switzerland)  S.A.,  the
     investment advisor to Crescent International, Ltd., have voting control and
     investment authority over the securities owned by Crescent. Messres. Brezzi
     and Taleb-Ibrahimi  disclaim  beneficial  ownership of the securities.  The
     selling stockholder has agreed not to convert the Debentures or to exercise
     warrants  to the extent  such  stockholder's  beneficial  ownership  of our
     common stock would exceed 4.99% of our common stock then  outstanding.  The
     selling stockholder is not a registered broker-dealer and is not affiliated
     with  any  registered  broker-dealer.  The  securities  to be  acquired  on
     conversion  or  exercise of  outstanding  securities  will be acquired  for
     investment.  The  selling  stockholder  does  not  have  any  agreement  or
     understanding,  direct  or  indirect,  with  any  party to  distribute  the
     securities.

     (3)  Represents  152,179  shares issued and  outstanding  and up to 815,116
shares of common stock  previously  registered on  Registration  statement  Form
S-1/A, File No.  333-135636,  filed with the Securities and Exchange  Commission
(the  "SEC") and  declared  effective  on  September  15,  2006 and  issuable as
follows:
     (a) 349,835 shares upon conversion of the Debentures,
     (b) 115,446 shares of common stock issuable upon exercise of the Series "A"
     Warrants at $0.935 per share; and
     (c) 349,835 shares of common stock issuable upon exercise of the Series "B"
     Warrants at $1.275 per share.  Double U Master Fund,  LP is a master feeder
     structure organized in the British Virgin Islands with B&W Equities, LLC as
     its General Partner.  Isaac Winehouse is the manager of B&W Equities,  LLC.
     Mr. Weinhouse has voting and investment control over the shares held by the
     Double U Master Fund,  LP by virtue of his manager role with B&W  Equities,
     LLC. Mr. Weinhouse disclaims  beneficial  ownership of the securities.  The
     selling stockholder has agreed not to convert the Debentures or to exercise
     warrants  to the extent  such  stockholder's  beneficial  ownership  of our
     common stock would exceed 4.99% of our common stock then  outstanding.  The
     selling stockholder is not a registered broker-dealer and is not affiliated
     with  any  registered  broker-dealer.  The  securities  to be  acquired  on
     conversion  or  exercise of  outstanding  securities  will be acquired  for
     investment.  The  selling  stockholder  does  not  have  any  agreement  or
     understanding,  direct  or  indirect,  with  any  party to  distribute  the
     securities.

     (4) Represents  250,000 shares issued and  outstanding  and up to 1,339,081
shares of common stock  previously  registered on  Registration  statement  Form
S-1/A, File No.  333-135636,  filed with the Securities and Exchange  Commission
(the  "SEC") and  declared  effective  on  September  15,  2006 and  issuable as
follows:
     (a) 574,713 shares upon conversion of the Debentures,
     (b) 189,655 shares of common stock issuable upon exercise of the Series "A"
     Warrants at $0.935 per share; and
     (c) 574,713 shares of common stock issuable upon exercise of the Series "B"
     Warrants  at $1.275  per  share.  JBG  Capital,  LP is a  Delaware  limited
     partnership.  Mr.  Brett Cohen has voting and  investment  control over the
     shares  held  by the  JGB  Capital,  LP.  Mr.  Cohen  disclaims  beneficial
     ownership  of the  securities.  The selling  stockholder  has agreed not to
     convert  the  Debentures  or  to  exercise  warrants  to  the  extent  such
     stockholder's  beneficial  ownership of our common stock would exceed 4.99%
     of our common  stock then  outstanding.  The selling  stockholder  is not a
     registered   broker-dealer  and  is  not  affiliated  with  any  registered
     broker-dealer.  The  securities to be acquired on conversion or exercise of
     outstanding  securities  will  be  acquired  for  investment.  The  selling
     stockholder  does  not have  any  agreement  or  understanding,  direct  or
     indirect, with any party to distribute the securities.

                                       32


     (5)  Represents  121,750  shares issued and  outstanding  and up to 652,132
shares of common stock  previously  registered on  Registration  statement  Form
S-1/A, File No.  333-135636,  filed with the Securities and Exchange  Commission
(the  "SEC") and  declared  effective  on  September  15,  2006 and  issuable as
follows:
     (a) 279,885 shares upon conversion of the Debentures,
     (b) 92,362 shares of common stock  issuable upon exercise of the Series "A"
     Warrants at $0.935 per share; and
     (c) 279,885 shares of common stock issuable upon exercise of the Series "B"
     Warrants  at $1.275  per share.  Nite  Capital,  LP is a  Delaware  limited
     partnership.  Keith  Goodman is the manager of the General  Partner of Nite
     Capital,  LP. Mr. Goodman has voting and investment control over the shares
     held by the Nite Capital, LP. Mr. Goodman disclaims beneficial ownership of
     the  securities.  The  selling  stockholder  has agreed not to convert  the
     Debentures  or to  exercise  warrants  to  the  extent  such  stockholder's
     beneficial  ownership  of our common stock would exceed 4.99% of our common
     stock  then  outstanding.  The  selling  stockholder  is  not a  registered
     broker-dealer and is not affiliated with any registered broker-dealer.  The
     securities  to  be  acquired  on  conversion  or  exercise  of  outstanding
     securities will be acquired for investment.  The selling  stockholder  does
     not have any agreement or understanding, direct or indirect, with any party
     to distribute the  securities.  The selling  stockholder  has agreed not to
     convert  the  Debentures  or  to  exercise  warrants  to  the  extent  such
     stockholder's  beneficial  ownership of our common stock would exceed 4.99%
     of our common  stock then  outstanding.  The selling  stockholder  is not a
     registered   broker-dealer  and  is  not  affiliated  with  any  registered
     broker-dealer.  The  securities to be acquired on conversion or exercise of
     outstanding  securities  will  be  acquired  for  investment.  The  selling
     stockholder  does  not have  any  agreement  or  understanding,  direct  or
     indirect, with any party to distribute the securities.


                              PLAN OF DISTRIBUTION

Each Selling Stockholder of the common stock of Tidelands Oil & Gas Corporation,
a Nevada  corporation  (the "Company") and any of their pledgees,  assignees and
successors-in-interest  may, from time to time,  sell any or all of their shares
of Common  Stock on the Trading  Market or any other stock  exchange,  market or
trading  facility  on which the shares  are  traded or in private  transactions.
These sales may be at fixed or negotiated prices. A Selling  Stockholder may use
any one or more of the following methods when selling shares:

     o    ordinary   brokerage   transactions  and  transactions  in  which  the
          broker-dealer solicits purchasers;
     o    block  trades  in which the  broker-dealer  will  attempt  to sell the
          shares as agent but may  position and resell a portion of the block as
          principal to facilitate the transaction;
     o    purchases  by  a   broker-dealer   as  principal  and  resale  by  the
          broker-dealer for its account;
     o    an  exchange   distribution  in  accordance  with  the  rules  of  the
          applicable exchange;
     o    privately negotiated transactions;
     o    settlement of short sales entered into after the effective date of the
          registration statement of which this prospectus is a part;
     o    broker-dealers  may  agree  with the  Selling  Stockholders  to sell a
          specified number of such shares at a stipulated price per share;
     o    a combination of any such methods of sale;
     o    through  the  writing  or  settlement  of  options  or  other  hedging
          transactions, whether through an options exchange or otherwise; or
     o    any other method permitted pursuant to applicable law.

The  Selling  Stockholders  may  also  sell  shares  under  Rule 144  under  the
Securities Act of 1933, as amended (the "Securities Act"), if available,  rather
than under this prospectus.

Broker-dealers  engaged  by the  Selling  Stockholders  may  arrange  for  other
brokers-dealers to participate in sales.  Broker-dealers may receive commissions
or discounts from the Selling  Stockholders  (or, if any  broker-dealer  acts as
agent  for the  purchaser  of  shares,  from the  purchaser)  in  amounts  to be
negotiated,  but, except as set forth in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage  commission
in compliance with NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.

In  connection  with the sale of the  Common  Stock or  interests  therein,  the
Selling  Stockholders may enter into hedging transactions with broker-dealers or
other  financial  institutions,  which may in turn  engage in short sales of the
Common Stock in the course of hedging the  positions  they  assume.  The Selling
Stockholders  may also sell shares of the Common  Stock short and deliver  these
securities  to close out their  short  positions,  or loan or pledge  the Common
Stock to  broker-dealers  that in turn may sell these  securities.  The  Selling
Stockholders   may  also  enter   into   option  or  other   transactions   with
broker-dealers  or other  financial  institutions or the creation of one or more
derivative  securities which require the delivery to such broker-dealer or other
financial  institution of shares offered by this  prospectus,  which shares such

                                       33


broker-dealer  or  other  financial  institution  may  resell  pursuant  to this
prospectus (as supplemented or amended to reflect such transaction).

The Selling  Stockholders and any  broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters"  within the meaning of the
Securities Act in connection  with such sales.  In such event,  any  commissions
received  by such  broker-dealers  or agents and any profit on the resale of the
shares  purchased  by them  may be  deemed  to be  underwriting  commissions  or
discounts  under the Securities  Act. Each Selling  Stockholder has informed the
Company that it does not have any written or oral  agreement  or  understanding,
directly or indirectly,  with any person to distribute  the Common Stock.  In no
event shall any  broker-dealer  receive fees,  commissions and markups which, in
the aggregate, would exceed eight percent (8%).

The Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares.  The Company has agreed to indemnify
the  Selling   Stockholders   against  certain  losses,   claims,   damages  and
liabilities, including liabilities under the Securities Act.

Because  Selling  Stockholders  may be deemed to be  "underwriters"  within  the
meaning of the Securities  Act, they will be subject to the prospectus  delivery
requirements of the Securities Act. In addition,  any securities covered by this
prospectus  which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather  than  under  this  prospectus.  Each  Selling
Stockholder  has advised us that they have not entered  into any written or oral
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in  connection  with the proposed sale of the resale shares by the
Selling Stockholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling  Stockholders without registration
and without regard to any volume  limitations by reason of Rule 144(e) under the
Securities  Act or any other  rule of  similar  effect or (ii) all of the shares
have been sold pursuant to the  prospectus or Rule 144 under the  Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed  brokers or dealers if required  under  applicable  state
securities  laws. In addition,  in certain states,  the resale shares may not be
sold unless they have been  registered or qualified  for sale in the  applicable
state or an exemption  from the  registration  or  qualification  requirement is
available and is complied with.

Under  applicable  rules and  regulations  under the  Exchange  Act,  any person
engaged in the distribution of the resale shares may not  simultaneously  engage
in market making  activities with respect to the Common Stock for the applicable
restricted  period, as defined in Regulation M, prior to the commencement of the
distribution.   In  addition,  the  Selling  Stockholders  will  be  subject  to
applicable  provisions  of the  Exchange  Act  and  the  rules  and  regulations
thereunder,  including Regulation M, which may limit the timing of purchases and
sales of shares of the Common  Stock by the  Selling  Stockholders  or any other
person.  We  will  make  copies  of this  prospectus  available  to the  Selling
Stockholders  and  have  informed  them of the  need to  deliver  a copy of this
prospectus to each purchaser at or prior to the time of the sale.


                        DIRECTORS AND EXECUTIVE OFFICERS

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

Michael Ward               50    Director, President, CEO   October 21, 1998
James B. Smith, C.P.A.     52    Director, CFO, V.P.        August 16, 2003
Ahmed Karim                34    Director, V.P.             October 21, 1998
Carl Hessel                41    Director                   January 28, 2004
Robert Dowies              56    V.P.                       October 18, 2004


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

                                       34


Texas counties. The company was sold. With Tidelands Oil Corporation, his duties
included supervising and performing remedial well work,  work-overs and economic
evaluation  of the  corporate  properties.  The primary  area of interest was in
Maverick  County,  Texas.  He  has  performed  project  financing  analysis  and
consulting of refinery acquisitions for the Yemen government.  Currently,  he is
negotiating new gas purchase and sale contracts,  supervising and  administering
the sale of gas line connections and hookups.

JAMES B. SMITH:  On August 16,  2003,  we  employed  James B. Smith to act as an
Senior Vice President and Chief Financial  Officer.  On June 27, 2005, Mr. Smith
joined the board of  directors.  Mr.  Smith  received a Bachelor of Science from
Texas AM  University  and a Master of  Professional  accounting  degree from the
McCombs School of Business at the University of Texas, Austin. He is licensed as
a Certified Public Accountant in Texas and Colorado.  From 1996 through 2001, he
directed  the  financial  affairs  and tax  planning  for several  closely  held
corporations engaged in land development in Colorado. From 2000 through 2003, he
served as Chief  Financial  Officer for Starr Produce  Company,  a major produce
company  with   significant   subsidiaries   in  real  estate   development  and
agr-business.

AHMED KARIM:  Mr. Karim was a director and Vice  President of the Company  since
October 21, 1998. He resigned his Vice  President  position on June 27, 2005. 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.

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,  Switzterland  in 2001.  Prior to 2001,  he served as Vice  President of
Merrill  Lynch  were he was  responsible  for  creating  global  high net  worth
management  platform.  He began his career at  Goldman  Sachs and help build the
Scandinavian  ultra-high net worth market.  Mr. Hessel received his M.B.A.  from
Wharton  Business  School  and a  degree  in  Finance  and  Management  from the
University of Pennsylvania.  He was awarded the Marcus  Wallenberg  Foundation's
Scholarship.

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

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, 2005 all Section  16(a) filing  requirements
applicable to its executive  officers,  directors and beneficial  owners of more
than 10%of its Common Stock were complied with, except as follows:

1. Michael Ward, Ahmed Karim, Carl Hessel and Robert Dowies did not file Forms 5
during 2005.
2. James  Smith  filed on late Form 4 on  November  11, 2005 for a June 27, 2005
transaction.

Executive Officer Compensation

The following table contains  compensation data for our named executive officers
for the fiscal years ended December 31, 2005, 2004 and 2003.


                                       35




Table 1.


                                                      SUMMARY COMPENSATION TABLE

                                              Annual Compensation               Long-Term Compensation
                                                                               Restricted    Securities
                                                               Other Annual      Stock       Underlying       All Other
        Name and                Fiscal  Salary       Bonus     Compensation      Awards      Options (#)    Compensation
 Principal Position (1)         Year      ($)          ($)        ($)(2)         ($)(3)          (4)           ($)(5)
                                                                                       
Michael Ward                    2005    252,000      10,500         --          1,230,000         --           199,500
President & CEO                 2004    252,500      28,500         --           845,000          --              --
                                2003    120,000        --           --              --         500,000            --
James B. Smith                  2005    168,000      19,500                         --            --           199,500
Chief Financial Officer         2004    130,200      11,996         --              --            --             --
                                2003     31,333  (6)   --        525,816            --         500,000           --
Robert Dowies  Vice             2005    100,000       4,167       8,350                           --
President, Marketing            2004     19,444       4,167         --                            --
                                2003       --    (7)   --           --             94,900         --
Ahmed Karim, V.P. (8)           2005       --          --           --                            --           199,500
                                2004       --          --           --                            --           36,000
                                2003       --          --           --                         500,000         48,000
Royis Ward, Sec/Treas (9)       2005       --          --           --                            --
                                2004       --          --           --                            --
                                2003     90,000  (9) 25,000         --                         500,000


(1) During the periods  reflected,  certain of the officers  named in this table
received perquisites and other personal benefits not reflected in the amounts of
their respective annual salaries or bonuses. The dollar amount of these benefits
did not, for any individual in any year,  exceed the lesser of $50,000 or 10% of
the total  annual  salary and bonus  reported for that  individual  in any year,
unless otherwise noted.
(2) This column shows the market value of "Other Annual Compensation" awarded to
officers in that fiscal year as follows:  On January 8, 2004, the Company issued
Mr. Smith 52,800 shares of its common stock valued at $90,816 and on November 1,
2004,  issued  500,000  common  shares valued at $435,000.  Mr. Dowies  received
$10,000  shares valued at $8,350.  The shares were issued from the company Stock
Grant and Option Plan.
(3) This column shows the market value of  restricted  stock awards  granted for
performance  in that fiscal  year as follows:  Year 2005:  Mr.  Ward,  1,000,000
shares and Mr. Dowies,100,000 shares; 2004: Mr. Ward 1,000,000.
(4) This  column  shows  common  stock  options  granted on  February 5, 2003 to
Michael  Ward,  Royis Ward and Ahmed  Karim  common  stock  options to  purchase
500,000 shares each at $0.22 per share. On August 16, 2003, we granted Mr. Smith
common stock options to purchase 500,000 shares at $0.22 per share.  These stock
options were exercised on September 14, 2004.
(5) This column  shows the market value of "All Other  Compensation"  awarded to
officers in that fiscal year as follows:  During 2005, each director  received a
common stock grant of 150,000  shares.  During 2004 and 2003, Mr. Karim received
$36,000 and $48,000 respectively, as director compensation.
(6) Mr.  Smith's  annual  salary was $80,000  commencing  August 16,  2003,  his
initial  employment date. This figure represents  salary for approximately  four
months employment.
(7) Mr.  Dowies  annual  salary was $100,000  commencing  October 18, 2004,  his
initial  employment  date.  This figure  represents  approximately  three months
employment.
(8) Mr.  Karim  resigned his  position as Vice  President  on June 27, 2005.  He
remains a member of the board of  directors.  (9) Mr.  Royis Ward  resigned  his
officer  and  director  positions  on October 1, 2003 and  received  and $25,000
severance payment.


Executive Officer Compensation
------------------------------

During 2005, the Company had four  executive  officers,  Michael Ward,  James B.
Smith,  Ahmed Karim and Robert Dowies.  Michael Ward's was paid $252,000  salary
and a bonus of $10,500. James B. Smith was paid $168,000,  plus a $19,500 bonus.
Messrs.  Ward and Smith have new and different  employment  agreements  for 2004
discussed below in the Employment  Agreement  paragraphs.  During 2005,  Michael
Ward received  1,000,000  shares of common stock as his annual stock grant under
the terms of his  employment  agreement  and 150,000  common shares as directors
fees. Mr. Smith  received  500,000 common shares as his annual stock grant under
the terms of his employment agreement and 150,000 shares as a stock grant bonus.

During 2005, we paid Mr. Dowies $104,167 which consisted of his annual salary of
$100,000,  a $4,167  dollar bonus and his annual stock grant of 100,000  shares.
Mr. Dowies employment agreement stock grant vested on April 18, 2005.

Mr. Karim did not receive any officer  salary during 2005. Mr. Karim resigned as
a Vice President on June 27, 2005. We paid Mr. Karim $36,000 and granted 150,000
common shares as director compensation for 2005.

                                       36


Director Compensation
---------------------

On April 11, 2001, the Company agreed to compensate Ahmed Karim, a director, for
services provided at the rate of $5,000 per month until June 30, 2003 and $3,000
per month thereafter.  For the year ended December 31, 2005, we incurred $36,000
for cash director  compensation  and issued a total of 450,000  common shares to
three  directors,  Michael  Ward,  Ahmed  Karim  and  Carl  Hessel.  We  plan to
compensate directors with an annual stock grant of 150,000 shares each.

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.

Employment Agreements with Management
-------------------------------------

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

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

JAMES B. SMITH: Under the terms of Mr. Smith's employment agreement,  commencing
October 1, 2004,  he was employed as the  Company's  Senior Vice  President  and
Chief Financial  Officer for a term of four (4) years. His base annual salary is
$168,000. The annual salary may be increased from year to year, as determined by
our board of directors  acting as the  Compensation  Committee,  by at least the
Consumer Price Index. As additional compensation,  Mr. Smith will be entitled to
an annual stock grant of Five Hundred  (500,000)  shares.  Stock grant dates are
October 1 during the four year term. The first year stock grant was paid October
1, 2004.  As incentive  compensation,  Mr. Smith will be entitled to  additional
compensation  equal to two  percent of our net  profits  and one  percent of the
increase in sales over a previous year's sales,  effective  October 1, 2004. Mr.
Smith is entitled to all  employee  benefits as provided by the  Company.  He is
entitled  to four weeks paid  vacation  and an annual  automobile  allowance  of
$12,000. Mr. Smith joined our board of directors on June 27, 2005.

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.

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.

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 it 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.


                             PRINCIPAL SHAREHOLDERS

The  following  table sets forth the Common Stock  ownership  information  as of
September  30, 2006,  with respect to (i) each person known to the Company to be
the beneficial  owner of more than 5% of the Company's  Common Stock;  (ii) each
director  of the  Company;  and  (iii) all  directors,  executive  officers  and

                                       37


designated  stockholders  of the  Company  as a group.  This  information  as to
beneficial ownership was furnished to the Company by or on behalf of the persons
named.  Unless  otherwise  indicated,  we believe  that each has sole voting and
investment power with respect to the shares beneficially owned.

The percentage interest of each principal shareholder is based on the beneficial
ownership  of such  shareholder  divided by the sum of the  current  outstanding
shares of common stock plus the additional shares, if any, which would be issued
to such shareholder (but not any other shareholder) when exercising  warrants or
other  rights in the future.  Applicable  percentage  of  ownership  is based on
84,537,270  shares of common stock outstanding as of September 30, 2006 together
with securities exercisable or convertible into shares of common stock within 60
days of  September  30,  2006,  for each  shareholder.  Beneficial  ownership is
determined  in  accordance  with  the  rules  of  the  Securities  and  Exchange
Commission  and generally  includes  voting or investment  power with respect to
securities.  Shares  of  common  stock  subject  to  securities  exercisable  or
convertible  into  shares of common  stock  that are  currently  exercisable  or
exercisable  within 60 days of September 30, 2006 are deemed to be  beneficially
owned by the person  holding such  securities  for the purpose of computing  the
percentage of ownership of such person,  but are not treated as outstanding  for
the purpose of computing the percentage ownership of any other person. Note that
affiliates  are  subject  to  Rule  144  and  Insider  trading  regulations  and
percentage computation is for form purposes only.

(a) Beneficial Ownership of more than 5% based on 84,537,270 common shares.

Beneficial Ownership of 5%.


Table 1.



(1)              (2)                            (3)                 (4)
Title of Class   Name and Address               Amount and Nature   Percent of Class
Common Stock
                                                           

Common           Mercator Momentum              751,974                  0.89%
                 Fund, LP (1)                   Common Stock
                 555 S. Flower St.              Warrants (3)
                 Suite 4500
                 Los Angeles, CA 90071

Common           Mercator Momentum              521,928                  0.61%
                 Fund III, LP(1)                Common Stock/
                 555 S. Flower St.              Warrants (4)
                 Suite 4500
                  Los Angeles, CA 90071

Common           Monarch Pointe                 1,690,460(5)             1.99%
                 Fund, Ltd. (1)                 Common Stock
                 c/o Bank of Ireland Warrants
                 Securities Services Ltd.
                 New Century House
                 International Fin. Ser.Ctr.
                 Mayor Street Lower
                 Dublin 1
                 Republic of Ireland

Common           M.A.G. Capital, LLC(1)         6,536,072(1)(6)          7.7%
                 555 S. Flower St.              Common Stock
                 Suite 4500 Warrants
                 Los Angeles, CA 90071

Common           Robinson Reed (1)              200,000 (7)              0.23%
                 AV.DU Leman 8B                 Common Stock
                 CH-1003-Lausanne Warrants
                 Switzerland

Common           David F. Firestone (1)         6,536,072(1)             7.7%
                 555 S. Flower St               Common Stock
                 Suite 4500 Warrants
                 Los Angeles, CA 90071

Common           Impact International, LLC(2)   8,842,980               10.46%
                 111 W. 5th St. Ste.720
                 Tulsa, OK 74103

Common           Michael Ward (8)               8,467,038                9.83%
                 1862 W. Bitters Rd.
                 San Antonio, TX78248


                                       38


Notes:

(1) Mercator  Momentum Fund, LP, Mercator  Momentum Fund III, LP, Monarch Pointe
Fund, Ltd., MAG Capital,  LLC,  formerly  Mercator Advisory Group, LLC, Robinson
Reed and David F.  Firestone  are  referred  to  "Reporting  Persons".  Mercator
Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe Fund, Ltd. and
MAG Capital,  LLC,  formerly Mercator Advisory Group, LLC, each hold warrants to
purchase shares of our common stock.  The right to vote and the right to dispose
of the  shares  beneficially  owned by  Mercator  Momentum  Fund,  LP,  Mercator
Momentum Fund III, LP, Monarch Pointe Fund,  Ltd. and Robinson Reed are, in each
case,  shared among either of the three funds,  as  applicable,  and both M.A.G.
Capital,  LLC and David F. Firestone.  The documentation  governing the terms of
the warrants  contain  provisions  prohibiting any exercise of the warrants that
would result in the Reporting Persons owning beneficially more than 9.99% of the
outstanding  common stock as determined  under  Section 13(d) of the  Securities
Exchange Act of 1934. The Reporting Persons have never had beneficial  ownership
of more than 9.99% of our outstanding  common stock.  Beneficial share ownership
as reported on Schedule 13G.

(2) Represents  issued and outstanding  common stock.  Robert May has voting and
dispositive authority over Impact International,LLC. Share ownership as reported
on Form 4 September 29, 2006.

(3) Mercator  Momentum  Fund,  LP is a private  investment  limited  partnership
organized under California law. MAG Capital, LLC, a California limited liability
company, formerly Mercator Advisory Group, LLC, is its general partner. David F.
Firestone is the  Managing  Member of the MAG Capital,  LLC.  Mercator  Momentum
Fund,  LP holds  common stock  warrants to purchase up to 751,974  shares of our
common  stock.  Half the  warrants are  exercisable  at $0.80 per share and half
exercisable at $0.87 per share.

(4) Mercator Momentum Fund III, LP is a private investment  limited  partnership
organized under California law. MAG Capital, LLC, a California limited liability
company,  is its general  partner.  David F. Firestone is the Managing Member of
the MAG Capital,  LLC. Mercator Momentum Fund III, LP holds warrants to purchase
up to 518,092 shares of our common stock and 3,836 shares of common stock.  Half
the warrants are  exercisable  at $0.80 per share and half  exercisable at $0.87
per share.

(5) Monarch Pointe Fund,  Ltd. is a corporation  organized  under of the British
Virgin  Islands.  Mercator  Advisory Group  controls the  investments of Monarch
Pointe  Fund.  Monarch  Pointe Fund holds  warrants to purchase up to  1,690,460
shares of our common stock. Half the warrants are exercisable at $0.80 per share
and half exercisable at $0.87 per share.

(6) MAG Capital,  LLC,  formerly Mercator Advisory Group, LLC, holds warrants to
purchase up to  3,371,710  shares of our common  stock.  Half the  warrants  are
exercisable at $0.80 per share and half exercisable at $0.87 per share.

(7) Robinson Reed holds 200,000 common stock  warrants,  100,000  exercisable at
$0.80 per share and 100,000 exercisable at $0.87 per share.

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


(b) Security Ownership of Management. Based on 84,537,270 shares as set forth in
(a) above as of September 30, 2006.

Table 2.



Title of Class   Name and Address               Amount and Nature   Percent of Class
                                                           

Common           Michael Ward                   8,467,038                9.83%
                 1862 W. Bitters Rd.
                 San Antonio, TX 78248

Common           James B. Smith                 1,549,000(1)             1.83%
                 1862 W. Bitters Rd.
                 San Antonio, TX 78248

Common           Ahmed Karim                      652,500                0.77%
                 1532 Woods Dr.
                 N. Vancouver, B.C.
                 Canada V7R 1A9

Common           Robert W. Dowies                 200,000                0.23%
                 1862 W. Bitters Rd.
                 San Antonio, TX 78248

                                       39



Common           Carl Hessel (2)                2,592,221                3.06%
                 c/o Margaux Investment
                 Management Group, S.A.
                 9 Rue de Commerce
                 CH 1211 Geneva 11
                 Switzerland

Total                                           13,460,759              15.92%



Notes:

(1) Includes 650,000 shares in the name of James B. Smith,  39,000 held in Smith
IRA account,  500,000  shares in the name of Aigle  Partners,  Ltd. in which Mr.
Smith  has a  partnership  interest  and  360,000  shares in the name of du Midi
Trust, in which Mr. Smith has a beneficial interest.

(2) Mr. Hessel is a partner in Margaux  Investment  Management  Group,  S.A. Mr.
Hessel also exercises voting and dispositive control over the Margaux securities
and as such beneficial  ownership reflects 1,988,889 shares owned by Margaux and
600,332 shares owned personally by Mr. Hessel.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On October 11, 2006,  James B. Smith received  500,000 shares under the terms of
his employment  agreement  representing  his annual stock grant. The shares were
issued from the Company's 2004 Non-Qualified Stock Grant and Option Plan.

On September 25, 2006,  the Company issued each member of its board of directors
150,000 common shares as annual  directors'  compensation.  Michael Ward,  Ahmed
Karim and Carl Hessel received restricted common shares. James B. Smith received
shares from the 2004 Non-Qualified Stock Grant and Option Plan.

On July 9, 2006,  Tidelands  Exploration and Production,  Inc., a corporation in
organization  by Tidelands Oil & Gas  Corporation,  entered into a Participation
Agreement  and a Joint  Operating  Contract with Regency  Energy,  Inc., a Texas
corporation,  concerning Tidelands'  acquisition of a fifty-percent  interest in
(a) a 24-mile  natural  gas  pipeline  located  in  Medina,  Atascosa  and Bexar
Counties,  Texas and (b) two  leases  with five  recompleted  natural  gas wells
located on approximately  1,000 acres.  The interest  consideration is $500,000.
Royis Ward is the principal  shareholder of Regency  Energy,  Inc. Royis Ward is
the father of Michael Ward, the Tidelands Oil & Gas Corporation  President,  CEO
and Director.

On June 7, 2006, we issued Michael Ward, the Company's President, CEO and member
of the board of directors,  500,000  common shares  representing a partial stock
grant under his employment contract.

On May 22, 2006,  we issued  Robert  Dowies,  a Company Vice  President,  60,000
common shares under the terms of his employment contract.

On January 2, 2006, we issued  Michael Ward,  the Company's  President,  CEO and
member of the board of directors,  500,000 common shares  representing a partial
stock grant under his employment contract. The shares were valued at $455,000 or
$0.91 per share.

On January 3, 2006, we issued James B. Smith,  the Company's Sr. Vice President,
CFO and member of the board of directors, 500,000 common shares representing the
annual  stock grant  under his  employment  contract.  The shares were valued at
$445,000 or $0.89 per share.

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

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

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

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

                                       40


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

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

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

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

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

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

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

On September 14, 2004, we issued  500,000 shares of common stock to Michael Ward
under the terms of his employment agreement. The shares were valued at $427,500.

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

On September  14, 2004,  Michael  Ward,  the  Company's  President and Director,
exercised his common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing  interest at the rate of 5% payable in full
on, or  before  September  14,  2005.  The  shares  are  subject  to a  security
agreement.

On September 14, 2004 Ahmed Karim,  the Company's  Vice  President and Director,
exercised his common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing  interest at the rate of 5% payable in full
on, or  before  September  14,  2005.  The  shares  are  subject  to a  security
agreement.

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

On April 15, 2004,  we issued  3,322  common  shares to Carl Hessel for $ 4,983.
Carl Hessel was a member of our board of directors at the time of issuance.

The Company  executed an agreement  in January 2004 with Royis Ward,  to provide
charter air transportation in his Beechcraft King Air, for Tidelands  employees,
customers and contractors to job sites and other business related  destinations.
A $300,000 5% interest  bearing loan due in January 2007 was made by the Company
to Mr. Ward regarding the transaction.  The loan balance was credited by airtime
charges at standard  industry rates offset by interest  charges  computed on the
average  monthly  balance.  On April  14,  2006,  Michael  Ward,  through  Scoot
Aviation,  LLC, acquired the Royis Ward aircraft and the loan obligation.  As of
June 30, 2006, the outstanding loan balance was $285,240.

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

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

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

On February 5, 2003, we granted Michael Ward,  Royis Ward and Ahmed Karim common
stock options to purchase  500,000 shares each at $0.22 per share. On August 16,

                                       41


2003, we granted James B. Smith common stock options to purchase  500,000 shares
at $0.22 per share. The options were exercised on September 14, 2004 and payment
was made by  promissory  note.  Each  grantee  delivered a  promissory  note for
$110,000 bearing interest at the annual rate of Five percent. Presently, Michael
Ward,  our  President and  director,  James B. Smith,  our Sr. V.P and CFO,Ahmed
Karim,  a member  of our board of  directors,  and Royis  Ward,  former  company
officer  and father of Michael  Ward,  are  indebted  to the company as outlined
above.

                                LEGAL PROCEEDINGS

Matter No. 1:

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

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

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

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

Tidelands won a partial summary  judgment  against Sheerin as to all of her tort
claims pled against Tidelands,  save and except only her claim for conversion of
500,000  shares of  Tidelands  stock.  Tidelands  has filed a Motion for Partial
Summary  Judgment  seeking the court's ruling that Sheerin was not a third party
beneficiary  to the alleged  purchase and sale  agreement.  On June 1, 2006, the
court,  pursuant to a Letter  Ruling,  found that  Sheerin was not a third party
beneficiary to the alleged purchase and sale agreement executed by Tidelands and
ZG Gathering,  Ltd. and expressed an intent to deny Sheerin's motion for summary
judgment seeking to establish herself as a third party beneficiary.  Sheerin has

                                       42


filed a motion for  reconsideration  on this Letter  Ruling.  These  rulings are
interlocutory and potentially subject to change.

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

On August 5,  2005,  Northern  Natural  Gas  Company  filed its  Fourth  Amended
Original  Petition which,  for the first time, named Tidelands as a defendant to
Northern.  Northern  seeks to  impose  liability  on  Tidelands  for  $1,950.000
promissory  note signed by McDay Energy  Partners,  Ltd. (the  predecessor to ZG
Gathering,  Ltd.) and Sheerin and the $1,700,000 promissory note signed by McDay
only.  Northern contends that Tidelands is alternatively  liable to Northern for
payment of both such promissory notes totaling  $3,709,914 plus interest because
Northern is a third party beneficiary under a December 3, 2001 purchase and sale
agreement  between ZG and Tidelands  claiming that in such  agreement  Tidelands
agreed to assume and satisfy all  indebtedness due and owing Northern by Sheerin
and ZG. Northern also claims that it is entitled to foreclosure of a lien on the
gas gathering  system and pipeline that was the subject of the promissory  notes
in question.

Tidelands won a summary  judgment motion it filed against Northern and the court
dismissed Northern's claims against Tidelands.  Pursuant to the Letter Ruling on
June 1, 2006,  the judge  reaffirmed  her decision that Northern was not a third
party  beneficiary under the alleged  Tidelands/ZG  purchase and sale agreement.
This is an interlocutory judgment potentially subject to change.

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.

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

Matter No. 2:

On May 4, 2005,  HBH  Development  Company,  LLC initiated  legal action against
Sonterra Energy Corporation in the District Court of Travis County,  Texas, 98th
Judicial  District,  Cause No. GN 501626 HBH  Development  Co., LLC vs. Sonterra
Energy  Corp.  This  action  involves  the  developer  of  the  Austin's  Colony
Subdivision  in  Travis  County,  Texas  and  the  propane  distribution  system
originally constructed by Southern Union Company.  Southern Union entered into a
letter agreement with HBH concerning the construction and operation of a propane
distribution  system in the  subdivision  to be owned and  operated  by Southern
Union.  Southern  Union  assigned the letter  agreement and its interests in the
propane  system to Oneok,  Inc.,  the parent  company of Oneok Propane  Company.
Sonterra  acquired  its  interest  in the  propane  system  from  Oneok  Propane
Distribution Company. HBH is claiming that Sonterra has failed or refused to pay
HBH rent and  easement  use fees  under the terms of the letter  agreement.  HBH
alleges that  Sonterra's  actions cause a failure of the  assignment  whereby it
acquired  rights in the propane  system or  alternatively,  if the assignment is
effective,  for  breach  of  contract.  HBH  seeks to have the  court  terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages,  cancellation  of the contract and rights  associated  with the propane
distribution system, issue to HBH a writ of possession for the property, and for
attorneys  fees. HBH has amended its complaint  adding claims for mutual mistake
and reformation as to the letter  agreement and a developer's  bonus under terms
of the letter  agreement.  Sonterra is defending the legal  action.  It believes
that under the terms of the letter agreement between HBH Development Company and
Southern  Union  Company,  that the easement use fees  terminated  when Southern
Union conveyed its interest in the propane  distribution system to Oneok Propane
Company.


                                       43


Matter No. 3:

On May 4, 2005, Senna Hills, Ltd. initiated legal action against Sonterra Energy
Corporation  in the  District  Court of  Travis  County,  Texas,  53rd  Judicial
District  Cause No. GN 501625 Senna Hills,  Ltd. vs Sonterra  Energy Corp.  This
action  involves the developer of the Senna Hills  Subdivision in Travis County,
Texas and the propane  distribution  system  originally  constructed by Southern
Union Company.  Southern Union entered into a letter  agreement with Senna Hills
concerning the  construction and operation of a propane  distribution  system in
the  subdivision  to be owned and  operated by Southern  Union.  Southern  Union
assigned the letter  agreement and its interests in the propane system to Oneok,
Inc.,  the parent  company  of Oneok  Propane  Company.  Sonterra  acquired  its
interest in the propane system from Oneok Propane  Distribution  Company.  Senna
Hills is claiming  that  Sonterra  has failed or refused to pay Senna Hills rent
and  easement  use fees under the terms of the  letter  agreement.  Senna  Hills
alleges that  Sonterra's  actions cause a failure of the  assignment  whereby it
acquired  rights in the propane  system or  alternatively,  if the assignment is
effective, for breach of contract. Senna Hills seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, and cancellation of the contract and rights associated with the propane
distribution system, issue to Senna Hills a writ of possession for the property,
and attorneys fees.

Senna Hills sold certain  undeveloped  sections of Senna Hills  Subdivision to a
new owner.  Sonterra  believes that it has the right to expand its  distribution
system into such  undeveloped  sections of the  subdivision.  Sonterra  plans to
expand the  distribution  system into these sections under an agreement with the
new owner. Senna Hills has stated that although it is not presently objecting to
Sonterra's  expansion of the system at this time, it is reserving its claim that
Sonterra  does not have the right to do so and that it  intends to ask the court
to cancel  Sonterra's  right to use and  possession of the propane  distribution
system, including the system in the new sections of the subdivision. Senna Hills
has amended its complaint adding claims for mutual mistake and reformation as to
the  letter  agreement  and a  developer's  bonus  under  terms  of  the  letter
agreement.

Sonterra is defending the legal action.  It believes that under the terms of the
letter  agreement  between  Senna Hills and  Southern  Union  Company,  that the
easement use fees  terminated  when Southern  Union conveyed its interest in the
propane distribution system to Oneok Propane Company.

Matter No. 4:

On April 7, 2005, Goodson Builders,  Ltd. named Sonterra Energy Corporation in a
legal action titled, Goodson Builders,  Ltd, Plaintiff vs. Jim Blackwell and BNC
Engineering,  LLC,  Defendants.  The legal  action is in the  District  Court of
Travis County,  Texas 345th Judicial  District.  This legal action arises from a
claim that an  underground  propane  storage tank and  underground  distribution
lines is situated on the  Plaintiff's  lot in the Hills of Lakeway  subdivision,
Travis  County,  Texas.  Plaintiff  alleges  that there is no recorded  easement
setting forth the rights and  obligations  of the parties for use of the propane
tank and lines. However,  there is reference to a "suburban propane easement" on
the plat  document.  Plaintiff  alleges  that the property is being used without
permission  and the use  constitutes  an on-going  trespass.  Plaintiff asks the
court to determine that his lot is not subject to a "suburban propane easement",
declare the propane  equipment the property of plaintiff,  enjoin  Sonterra from
use of  Plaintiff's  land,  and award  damages.  The Plaintiff  seeks damages of
$165,000 based on a market rental rate he claims to be $5,000 per month, $50,000
damages  for  depreciation  of the value of the lot,  an  unspecified  amount of
exemplary damages, and attorneys' fees. Sonterra is defending the claims.


                            DESCRIPTION OF SECURITIES
Common Stock

The Company is  authorized  to issue Two  Hundred  Fifty  Million  (250,000,000)
shares of common  stock,  par value $0.001 per share.  As of September 30, 2006,
there were 84,537,270 shares of common stock issued and outstanding. The holders
of the common stock are not entitled to  pre-emptive or  preferential  rights to
subscribe to any unissued stock or other  securities.  The  shareholders are not
entitled to cumulative voting rights. The common stock is not assessable and not
subject to the payment of any corporate  debts.  The holders of our common stock
are  entitled  to one vote  for  each  share  on all  matters  submitted  to the
shareholders  for vote.  Holders are entitled to share  ratably in any dividends
which may be  declared,  from time to time,  by the  board of  directors  in its
discretion,  from legally available funds. If we are liquidated,  dissolved,  or
wound up, the holders of common shares are entitled to share pro rata all assets
remaining after full payment of all liabilities.  There are no conversion rights
or redemption or sinking fund provisions for the common stock.

Common Stock Held by Selling Shareholders

On  September  26, 2006,  Palisades  Master Fund,  L.P.  ("Palisades")  gave the
Company its notice of election  accelerating  payment of the Palisades Debenture

                                       44


at the Mandatory Default Amount asserting a cross default event triggered by the
RHP  Master  Fund,  Ltd.  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 Debenture at the
Mandatory Default Amount of $5,597,687.

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

In consideration of that Agreement,  all existing events of default known to the
Holders were in consideration  of the issuance of 2,828,304  common shares.  The
Company  will  issue  the  shares as  follows:  Palisades:  2,000,000;  Crescent
International,   Ltd.:  304,375;  Double  U  Master  Fund,   L.P.:152,179;   JGB
Capital,L.P.:  250,000;  and Nite Capital,  L.P.: 121,750.  These shares are the
Subject of this Prospectus.

Common Stock Warrants Held by Selling Shareholders

Warrants
--------

As part of our January 20, 2006 financing with Palisades  Master Fund,  Crescent
International, Ltd., Double U Master Fund, LP, JGB Capital, LP, Nite Capital, LP
and RHP Master  Fund,  Ltd  ("Purchasers"),  we issued  Series "A" common  stock
purchase  warrants  to purchase up to  2,557,663  shares of our common  stock at
$0.935 per share and Series "B" common stock purchase warrants to purchase up to
7,551,415  shares of our common  stock at $1.275 per share.  We also  issued HPC
Capital Management Corp., the financing broker, 65,696 Series "A" warrants.  The
shares  issuable  upon exercise of these  warrants have been  registered on Form
S-1, SEC File No. 333-135636 declared effective September 15, 2006.

o    Palisades Master Fund, LP holds 1,632,694  Series "A" warrants  exercisable
     at $0.935 per share and 4,947,557 Series "B" warrants exercisable at $1.275
     per share;
o    Crescent International,  Ltd. holds 230,905 Series "A" warrants exercisable
     at $0.935 per share and 699,713  Series "B" warrants  exercisable at $1.275
     per share;
o    Double U Master Fund, LP. holds 115,446 Series "A" warrants  exercisable at
     $0.935 per share and 349,835 Series "B" warrants  exercisable at $1.275 per
     share;
o    JGB Capital,  LP. holds 189,655  Series "A" warrants  exercisable at $0.935
     per share and 574,713 Series "B" warrants exercisable at $1.275 per share;
o    Nite Capital,  LP. holds 92,362 Series "A" warrants  exercisable  at $0.935
     per share and 279,885 Series "B" warrants exercisable at $1.275 per share;
o    RHP Master Fund,  LP. holds  230,905  Series "A"  warrants  exercisable  at
     $0.935 per share and 699,713 Series "B" warrants  exercisable at $1.275 per
     share;
o    HPC Capital  Management Corp. holds 65,696 Series "A" warrants  exercisable
     at $0.935 per share.

Series "A" Common Stock Purchase Warrants:
------------------------------------------

The Series "A" Warrants  may be  exercised  immediately  by the  Purchasers  and
terminate on January 20, 2009.

Subject to specific terms and conditions in the Series "A" Warrant  including an
effective  registration statement registering underlying shares, the Company has
the call option to force  conversion  of the Warrants  into common shares if the
Company's  share  price as quoted on the  Over-the-Counter  Electronic  Bulletin
Board  exceeds 250% of the then  effective  Exercise  Price for a period of time
based on a Volume Weighted  Average Price (VWAP)  formula.  The VWAP share price
must exceed this 250% threshold price for at least 20 consecutive Trading Days.

If at any time after one year from the date of  issuance  there is no  effective
registration statement  registering,  or no current prospectus available for the
resale of the  underlying  shares,  then this  Warrant may also be  exercised by
means of  "cashless  exercise"  as  determined  by a  formula  described  in the
Warrant.  If the Company  fails to deliver the  certificates  on conversion in a
timely manner, we will pay liquidated  damages and be liable for buy-ins imposed
on the holder.

The exercise price will be subject to adjustment for corporate  events,  such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

Series "B" Common Stock Purchase Warrants:
------------------------------------------

The  Purchasers  have the right to exercise the Series B Warrants  commencing at
any time on, or after January 20, 2007 and on, or before February 19, 2007.

                                       45


Subject to specific terms and  conditions in the Series B Warrant,  including an
effective  registration statement registering underlying shares, the Company has
the option to force the  exercise  of this  Warrant  into  common  shares if the
Company's  share  price as quoted on the  Over-the-Counter  Electronic  Bulletin
Board  exceeds 150% of the then  effective  Exercise  Price for a period of time
based on a Volume Weighted  Average Price (VWAP)  formula.  The VWAP share price
must exceed this 150% threshold price for at least 20 consecutive Trading Days.

If at any time after one year from the date of  issuance  there is no  effective
registration statement  registering,  or no current prospectus available for the
resale of the  underlying  shares,  then this  Warrant may also be  exercised by
means of  "cashless  exercise"  as  determined  by a  formula  described  in the
Warrant.  If the Company  fails to deliver the  certificates  on conversion in a
timely manner, we will pay liquidated  damages and be liable for buy-ins imposed
on the holder.

The exercise price will be subject to adjustment for corporate  events,  such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

Convertible Debentures

As a part of our January 20, 2006  financing with the above named  entities,  we
issued  Original Issue Discount  Convertible  Debentures  with an aggregate face
amount  of  $6,569,750.  The  purchasers  paid  an  aggregate  principal  sum of
$5,396,098.  The face amount of the  Debentures  is due January  20,  2008.  The
difference  between the face amount and the aggregate  principal paid represents
the  interest  expense.  The  Debenture  Holder may  convert  all or part of the
Debenture  face amount into shares of  Tidelands  common stock at any time at an
initial  conversion rate of $0.87 per share. The shares issuable upon conversion
of the  debentures  have been  registered  on Form S-1, SEC File No.  333-135636
declared effective September 15, 2006.


The Purchasers have agreed to restrict their ability to convert their Debentures
or exercise their Warrants and receive our shares such that the number of shares
of common stock held by each of them  individually  in the aggregate  after such
conversion or exercise does not exceed 4.99% of the then issued and  outstanding
Company common shares. This beneficial ownership limitation may be waived by the
Holder.

Subject to specific terms and  conditions in the Debenture,  the Company has the
option to force conversion of the Debentures into common shares if the Company's
share price as quoted on the Over-the-Counter  Electronic Bulletin Board exceeds
250% of the  then  Conversion  Price  for a  period  of time  based  on a Volume
Weighted  Average  Price (VWAP)  formula.  The VWAP share price must exceed this
250% price for at least 20 consecutive Trading Days.

The conversion price will be subject to adjustment for corporate events, such as
stock splits,  stock dividends,  and stock  combinations,  as more  specifically
outlined in the transaction documents.

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.  RHPO 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  thereby  discharging the RHP
debenture obligation.

Under the Debenture terms defining default events, a Holder may elect to declare
the aggregate principal  Debenture amount,  together with other amounts owing to
the date of  acceleration,  immediately due and payable in cash at the Mandatory
Default Amount.  In the RHP case, the elected  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  thereby  discharging  the RHP  debenture
obligation.

Registration Rights
-------------------

We granted the Purchasers and HPC Capital Management  registration rights on the
shares  underlying the Debentures and the Warrants.  The common stock underlying
the Debentures and Warrants must be registered under the Securities Act of 1933,
as  amended,  for  re-offer  and  re-sale  by the  Purchasers  and  HPC  Capital
Management.  If the Company fails to timely file a registration  statement or is
unable to have the registration  statement  declared effective by the SEC within
the stated  periods of time,  we will  trigger a default and be subject to among
other  things,  acceleration  of the  Debentures,  at the  Purchasers'  options,
additional  default  interest  payment  and  monetary  liquidated  damages.  The
liquidated damages will be capped at 20% of the Debentures face amounts.

                                       46


The  registration  agreement  we  made  with  the  purchase  agreement  used  in
connection  with  the  placement  of the  convertible  debentures  and  warrants
described  above  provides that no later than 150 days  following the closing we
will file a  registration  statement  under the Securities Act of 1933 to enable
the resale of the shares issuable upon conversion of the convertible  debentures
and exercise of the warrants,  and that we will use all commercially  reasonable
efforts to cause the registration statement to be declared effective as promptly
as  possible  after  filing.  In the event  the  registration  statement  is not
declared  effective  within  150  days  following  the  closing  of the  private
placements,  then we may be required to pay  partial  liquidated  damages to the
selling  security  holders  equal 1.5% of the  aggregate  purchase  price of the
securities  pursuant to the Purchase Agreement for the registerable  securities.
The amount  payable by the  Company  will  increase  to 2% on the first  monthly
anniversary of the event and to 2.5% on the second monthly  anniversary and each
succeeding monthly  anniversary,  provided however,  that the partial liquidated
damages will not exceed in the aggregate  for each Holder,  20% of the principal
amount of the  Debentures.  If the Company  fails to pay the partial  liquidated
damages  within 7 calendar days after the payable date, the Company is obligated
to pay  18%  interest  on  the  partial  liquidated  damages  (See  Management's
Discussion and Analysis and Results of Operations-Recent Developments).

Penny Stock Rules

Our common stock is covered by the  Securities and Exchange  Commission's  penny
stock rules.  These rules include a rule that imposes  additional sales practice
requirements  on  broker-dealers  who sell our  securities to persons other than
established  customers  and  accredited  investors.   Accredited  investors  are
generally  institutions  with assets in excess of $5,000,000 or individuals with
net  worth in excess  of  $1,000,000  or annual  income  exceeding  $200,000  or
$300,000 jointly with their spouses.  For transactions  covered by the rule, the
broker-dealer  must make a special  suitability  determination for the purchaser
and  transaction  prior  to the  sale.  The  rule  may  affect  the  ability  of
broker-dealers  to sell our  securities  and may also  affect  the  availability
ability of purchasers of our stock to sell their shares in the secondary market.
It may also  cause  fewer  brokers  to be willing to make a market in our common
stock and it may affect the level of news coverage we receive.

Stock Transfer Agent

Our stock  transfer agent is Signature  Stock Transfer Co., Inc.  located at One
Preston  Park,  2301 Ohio Dr.,  Suite  100,  Plano,  Texas  75093.  The  agent's
telephone number is (972) 612-4120.

                                  LEGAL MATTERS

The legality of the securities offered hereby has been passed upon by Gregory M.
Wilson, Attorney at Law. Mr. Wilson is a shareholder of our Company.

                                     EXPERTS

Our balance sheet as of December 31, 2005,  2004, 2003 and the statements of our
operations,  shareholders'  equity and cash flows for the years then ended, have
been  included in this  prospectus  in reliance on the report of Baum & Company,
P.A.,  certified  public  accountants,  given on the  authority  of that firm as
experts in accounting and auditing.

                       WHERE YOU CAN FIND MORE INFORMATION

We file  annual,  quarterly  and special  reports,  proxy  statements  and other
information  with the  Securities and Exchange  Commission.  Our SEC filings are
available   to  the  public  over  the   Internet  at  the  SEC's  web  site  at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington,  D.C. 20549. Please
call  the  SEC at  1-800-SEC-0330  for  further  information  about  the  public
reference  room.  Additionally,  we will provide you with copies of any of these
reports we file,  free of charge,  as soon as  practical  after we file with the
SEC.

We have  filed  with the SEC a  registration  statement  on Form S-1  under  the
Securities Act with respect to the securities  offered by this prospectus.  This
prospectus does not contain all the  information  set forth in the  registration
statement  and  the  accompanying  exhibits,  as  permitted  by  the  rules  and
regulations  of the SEC. For further  information,  please see the  registration
statement and  accompanying  exhibits.  Statements  contained in this prospectus
regarding any contract or other  document  which has been filed as an exhibit to
the registration statement are qualified in their entirety by reference to these
exhibits  for  a  complete   statement  of  their  terms  and  conditions.   The
registration  statement and the accompanying  exhibits may be inspected  without
charge at the  offices  of the SEC and  copies  may be  obtained  from the SEC's
principal office at 100 F. Street, N.E., Washington, D.C. 20549, upon payment of
the fees prescribed by the SEC.  Electronic  reports and other information filed
through the Electronic Data Gathering,  Analysis, and Retrieval System, known as
EDGAR, are publicly available on the SEC's website, http://www.sec.gov.

                                       47


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Auditors...............................................F-2

Consolidated Balance Sheets at December 31, 2005 and
December 31, 2004............................................................F-3

Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 2005, 2004 and 2003.........................F-4

Consolidated Statement of Operations for the Years Ended
December 31, 2005, 2004 and 2003.............................................F-6

Consolidated Statement of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003.............................................F-7

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

Unaudited Consolidated Balance Sheet as of September 30, 2006 and
December 31, 2005...........................................................F-32

Unaudited Consolidated Statement of Operations for the Three Months
Ended September 30, 2006 and 2005...........................................F-33

Unaudited Consolidated Statement of Operations for the Nine Months
Ended September 30, 2006 and 2005...........................................F-34

Unaudited Consolidated Statements of Cash Flow for the Nine Months
Ended September 30, 2006 and 2005...........................................F-35

Notes to Unaudited Financial Statements.....................................F-37







                                      F-1


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



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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

We have audited the accompanying  consolidated balance sheets of Tidelands Oil &
Gas Corporation as of December 31, 2005, and 2004, and the related statements of
consolidated  stockholders'  equity,  operations,  and cash  flows for the years
ended December 31, 2005, 2004 and 2003. These consolidated  financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Tidelands  Oil & Gas  Corporation  as of  December  31,  2005 and 2004,  and the
results of their  consolidated  operations and their consolidated cash flows for
the years ended December 31, 2005,  2004 and 2003 in conformity  with accounting
principles generally accepted in the United States of America.

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

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




                                       F-2




                         TIDELANDS OIL & GAS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   YEARS ENDED

                                     ASSETS
                                     ------

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

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

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

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

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

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

      Total Current Liabilities                          1,450,554         574,224

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

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

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

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

      Total Liabilities and Stockholders' Equity      $ 13,488,849    $ 22,422,666
                                                      ============    ============




        See Accompanying Notes to Consolidated Financial Statements


                                      F-3




                        TIDELANDS OIL AND GAS CORPORATION
                 STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
             YEARS ENDED DECEMBER 31, 2005, 2004 (RESTATED) AND 2003

                                                  Stock
                                               Additional                                       Total
                                  Common          Stock        Paid-In       Subscription    Accumulated     Stockholders'
                                  Shares         Amount        Capital        Receivable      (Deficit)         Equity
                               ------------   ------------   ------------    ------------    ------------    ------------
                                                                                           
Balance
  January 1, 2003                33,683,329   $     33,684   $  6,715,108    $    (18,000)   $ (9,266,722)   $ (2,535,930)

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

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

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

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

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

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

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

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

Net Loss                               --             --             --              --        (1,348,481)     (1,348,481)
                               ------------   ------------   ------------    ------------    ------------    ------------


Balance
  December 31, 2003              44,825,302   $     44,826   $ 11,072,987    $    (18,000)   $(10,615,203)   $    484,610

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

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

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

Issuance of Common
  Stock for Services              6,602,800          6,603      9,321,213            --              --         9,327,816

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

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

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

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




           See Accompanying Notes to Consolidated Financial Statements

                                      F-4


                        TIDELANDS OIL AND GAS CORPORATION
                 STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
             YEARS ENDED DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
                                   (CONTINUED)

                                                   Stock
                                                Additional                                        Total
                                  Common           Stock         Paid-In       Subscription    Accumulated     Stockholders'
                                  Shares          Amount         Capital        Receivable      (Deficit)         Equity
                               ------------    ------------    ------------    ------------    ------------    ------------

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

Net Loss                               --              --              --              --       (14,302,037)    (14,302,037)
                               ------------    ------------    ------------    ------------    ------------    ------------

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

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

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

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

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

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

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

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





















           See Accompanying Notes to Consolidated Financial Statements

                                      F-5




                         TIDELANDS OIL & GAS CORPORATION
                      STATEMENTS OF CONSOLIDATED OPERATIONS
                                   YEARS ENDED




                                            December 31,    December 31,    December 31,
                                                2005            2004            2003
                                            ------------    ------------    ------------
                                             (Restated)      (Restated)
                                                                   
Revenues:
   Gas Sales and Pipeline Fees              $  1,725,756    $  1,800,863    $          0
   Construction Service                          135,567          82,975               0
   Other                                               0               0         178,856
                                            ------------    ------------    ------------
        Total Revenues                         1,861,323       1,883,838         178,856
                                            ------------    ------------    ------------

Expenses:
   Cost of Sales                               1,003,386       1,508,891               0
   Operating Expenses                            202,766          99,665          27,767
   Depreciation                                  485,481         244,889          43,006
   Interest                                      611,363         300,566          53,163
   Beneficial Conversion Feature Interest       (756,329)      3,092,105               0
   Sales, General and Administrative           8,033,249      11,022,019       2,937,132
   Impairment Losses - Long-Lived Assets         392,000               0               0
   Impairment Losses - Goodwill                5,200,000      15,358,000               0
                                            ------------    ------------    ------------

      Total Expenses                          15,171,916      31,626,135       3,061,068
                                            ------------    ------------    ------------


(Loss) from Operations                       (13,310,593)    (29,742,297)     (2,882,212)
Gain on Sale of Subsidiary                             0               0       1,533,731
Gain on Reduction of Derivative Liability      5,168,000      15,390,000               0
Loss on Equipment Sale                            (3,167)              0               0
Other Income                                      61,956               0               0
Interest and Dividend Income                     123,075          50,260               0
Minority Interest                                   --              --              --
Litigation Settlement                            297,825               0               0
                                            ------------    ------------    ------------
  Net (Loss)                                $ (7,662,904)   $(14,302,037)   $ (1,348,481)
                                            ============    ============    ============

Net (Loss) Per Common Share:
   Basic and Diluted                        $      (0.11)   $      (0.27)   $      (0.03)
   -----------------                        ============    ============    ============

Weighted Average Number of Common
   Shares Outstanding -
   Basic and Diluted                          70,049,587      53,214,230      39,254,316
   -----------------                        ============    ============    ============












             Accompanying Notes to Consolidated Financial Statements

                                      F-6




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




                                                    December 31,    December 31,    December 31,
                                                        2005            2004            2003
                                                    ------------    ------------    ------------
                                                                     (Restated)
                                                                           

Cash Flows Provided (Required) By
  Operating Activities:
    Net (Loss)                                      $ (7,662,904)   $(14,302,037)   $ (1,348,481)
   Adjustments to Reconcile Net (Loss)
      To Net Cash Provided (Required) By
      Operating Activities:

    Depreciation                                         485,481         244,889          43,006
    Goodwill                                                   0      (5,200,000)              0
    Impairment Losses                                  5,592,000      15,358,000               0
    Change in Derivative Instrument                   (5,168,000)    (10,222,000)              0
    Loss on Disposal of Equipment                          3,167               0               0
    Issuance of Common Stock:
     For Services Provided                             4,022,525       9,327,816       2,191,597
     Beneficial Conversion Feature - Interest           (756,329)      3,092,105               0
       Return of Issued Stock
         Litigation Settlement                          (297,825)              0               0
       Changes In:
         Accounts Receivable                              47,929        (516,159)         16,078
         Inventory                                       (59,681)        (82,523)         12,155
         Prepaid Expenses                                303,550        (465,279)         21,392
         Other Assets                                          0               0          (1,805)
         Deferred Charges                                116,250        (116,250)              0
         Deposits                                        (61,699)        (25,308)              0
         Accounts Payable and Accrued Expenses
                                                         651,330        (201,370)       (492,815)
                                                    ------------    ------------    ------------


Net Cash (Required)
   By Operating Activities                            (2,784,206)     (3,108,116)        441,127
                                                    ------------    ------------    ------------

Cash Flows Provided (Required)
  By Investing Activities:
      (Increase) In Investments                                0        (901,871)        (98,629)
      Acquisitions of Property, Plant & Equipment     (1,837,222)     (8,727,010)       (134,505)
      Disposals of Oil and Gas Properties                      0               0         598,924
      Disposals of Equipment                                 800               0               0
                                                    ------------    ------------    ------------


   Net Cash (Required)
        By Investing Activities                       (1,836,422)     (9,628,881)        365,790
                                                    ------------    ------------    ------------












             Accompanying Notes to Consolidated Financial Statements

                                      F-7




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



                                                     December 31,    December 31,    December 31,
                                                         2005            2004            2003
                                                     ------------    ------------    ------------
                                                                      (Restated)
                                                                            

Cash Flows Provided (Required)
   By Financing Activities:
      Proceeds from Issuance of Common Stock                    0       6,088,317       1,050,000
      Proceeds from Long-Term Loans                       277,385       6,731,883               0
      Proceeds from Issuance Of
        Convertible Debentures                                  0       5,000,000               0
      Repayment of Short-Term Loans                             0        (250,000)              0
      Reduction of Stock Subscription Receivable                0          18,000               0
      Repayment of Loan Due to Related Parties                  0               0        (933,554)
      Proceeds of Loans From Related Parties                    0               0          80,349
      Loan to Related Party                                (1,900)       (286,606)              0
      Repayment of current Maturities of Long-Term
        Debt                                                    0               0        (302,924)
                                                     ------------    ------------    ------------

Net Cash Provided By
  Financing Activities                                    275,485      17,301,594        (106,129)
                                                     ------------    ------------    ------------

Net Increase (Decrease) in Cash                        (4,345,143)      4,564,597         700,788
Cash at Beginning of Period                             5,459,054         894,457         193,669
                                                     ------------    ------------    ------------

Cash at End of Period                                $  1,113,911    $  5,459,054    $    894,457
                                                     ============    ============    ============

Supplemental Disclosures of
   Cash Flow Information:
      Cash Payments for Interest                     $    356,504    $     38,320    $     38,773
                                                     ============    ============    ============


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

Non-Cash Financing Activities:
Return of Issued Stock For
  Beneficial Conversion Feature - Interest           $   (756,329)   $  3,092,105    $          0
Litigation Settlements                                   (297,825)              0               0
Increase of Stock Subscription Receivable                       0         550,000               0
Issuance of Common Stock:
    Repayment of Notes                                  2,512,500          75,000         198,767
    Conversion of Debentures                            5,000,000               0               0
    Payment of Accounts Payable                                 0          38,311          62,500
    Repayment of Loans From Related Parties                     0               0         866,157
    Acquisition Cost                                            0         126,437               0
                                                     ------------    ------------    ------------


      Total Non-Cash Financing Activities            $  6,458,346    $  3,881,853    $  1,127,424
                                                     ============    ============    ============











           See Accompanying Notes to Consolidated Financial Statements

                                      F-8


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

         Tidelands  Oil  and  Gas  Corporation  (the  Company  and  formerly  C2
         Technologies,  Inc.),  was  incorporated  in the  state  of  Nevada  on
         February  25,  1997.  On December 1, 2000,  the Company  completed  its
         acquisition  of Rio  Bravo  Energy,  LLC,  and their  related  entities
         thereby making Rio Bravo Energy, LLC, a wholly-owned  subsidiary of the
         Company. During 2004, the Company acquired all of the stock of Sonterra
         Energy Corporation (Sonterra) and through this wholly-owned subsidiary,
         the  Company  purchased  all  of  the  assets  of  a  gas  distribution
         organization (see Note 15-Acquisitions). The Company also, during 2004,
         increased its ownership interest from 25% to 98% in Reef Ventures,  LP,
         and their wholly-owned  subsidiaries (Reef International,  LLC and Reef
         Marketing, LLC) (see Note 15-Acquisitions).

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

         The Company  currently  operates a natural gas pipeline  between  Eagle
         Pass,  Texas and  Piedras  Negras,  Mexico  and a propane  distribution
         system  serving  residential  customers in the Austin,  Texas area.  In
         addition,  the  Company is engaged in the  development  of natural  gas
         storage  facilities in Mexico and other  natural gas pipelines  between
         the United States and Mexico.

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

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

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

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



                                      F-9


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

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

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

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

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

         The requirements of SFAS 144 and the evaluation by the Company resulted
         in impairment  losses of $392,000,  all of which is attributable to the
         Rio Bravo Energy, LLC, Consolidated Group.

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

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



                                      F-10


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

         Goodwill
         --------

         Goodwill represents the excess of purchase price and related costs over
         the value  assigned  to the net  tangible  and  identifiable  assets of
         businesses  acquired.  Statement of Financial  Accounting Standards No.
         142  (SFAS  142),  "Goodwill  and  Other  Intangible  Assets"  requires
         goodwill  to be tested for  impairment  on an annual  basis and between
         annual tests in certain circumstances,  and written down when impaired,
         rather than being amortized as previous accounting  standards required.
         Furthermore,  SFAS 142 requires purchased  intangible assets other than
         goodwill to be amortized over their useful lives unless these lives are
         determined to be indefinite. As the result of an acquisition during the
         second quarter of 2004, the Company recorded  goodwill in the amount of
         $20,561,800.  The Company evaluates the carrying value of goodwill on a
         quarterly  basis. As part of the evaluation,  the company  compares the
         carrying value of the intangible asset with its fair value to determine
         whether  there  has  been  impairment.  As  a  result  of  management's
         impairment  review  of  goodwill  during  2004 and  2005,  the  Company
         recognized  impairment losses of $15,358,000 and $5,200,000 in 2004 and
         2005 respectively.

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

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

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



                                      F-11


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

         In  June  2001,   Statement  of  Financial  Accounting  Standards  143,
         "Accounting for Asset  Retirement  Obligations",  (SFAS 143) was issued
         and is effective for fiscal years  beginning  after June 15, 2002. SFAS
         143  addresses  financial  accounting  and  reporting  for  obligations
         associated  with the retirement of tangible  long-lived  assets and the
         associated  asset  retirement  costs. The adoption of SFAS 143 does not
         have a material effect on our consolidated financial statements.

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

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








                                      F-12


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

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

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

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



                                      F-13




                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

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


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

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

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

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

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

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

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





                                      F-14




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

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

                   SUMMARY OF RESTATED INTERIM REPORTS - 2005

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


                                      F-15


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

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

                   SUMMARY OF RESTATED INTERIM REPORTS - 2005


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


                                      F-16




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

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

             SUMMARY OF RESTATED INTERIM REPORTS - 2005 (CONTINUED)



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

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




                                      F-17


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

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

             SUMMARY OF RESTATED INTERIM REPORTS - 2005 (CONTINUED)



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

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


(1)      Adjust goodwill to period ending balances.

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

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

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

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


                                      F-18




                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003

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

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

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

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

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

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


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

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

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


         Depreciation  expense for the years ended  December 31, 2005,  December
         31, 2004 and  December  31,  2003 was  $485,581,  $244,889  and $43,006
         respectively.

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

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



                                      F-19


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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




                                      F-20


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

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

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

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

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

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

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

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




                                      F-21


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

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

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

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

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

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

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

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



                                      F-22




                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

                                                              Shares Reserved    Weighted
                                     Stock          Stock     for Convertible     Average
                                    Options        Warrants     Debentures     Exercise Price
                                  -----------    -----------    -----------    --------------
                                                                   
Outstanding - December 31, 2003     2,500,000      8,516,807              0         $0.31
Granted / Issued                      250,000     10,562,141     11,111,111          0.69
Exercised                          (2,500,000)    (1,500,000)             0          0.14
                                  -----------    -----------    -----------         -----

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


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

On November 18, 2004, the Company entered into a Securities  Purchase  Agreement
with Mercator  Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe
Fund,  LP,  (collectively,  "the  Funds")  and M.A.G.  Capital,  LLC  ("M.A.G.")
(formerly  Mercator Advisory Group, LLC). In exchange for $5,000,000 the Company
issued to the Funds,  7% convertible  debentures with a maturity date of May 18,
2006. As of November 2, 2005,  the  $5,000,000  of  convertible  debentures  was
converted for 6,587,456 shares of the Company's common stock.

In connection  with this  financing the Company  issued  6,578,948  common stock
warrants which expire  November 18, 2007. The warrants are exercisable at prices
ranging  from  $0.80  to  $0.87.  The  Company  granted  the  Funds  and  M.A.G.
registration rights on both groups of securities; such registration was declared
effective May 27, 2005.

                     Accounting for Stock-Based Compensation

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




                                      F-23


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


NOTE 10 - COMMITMENT FOR SUITE LICENSE AGREEMENT
-------   --------------------------------------

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

         The future annual license fee commitments are as follows:

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

NOTE 11 - RELATED PARTY TRANSACTION
-------   -------------------------

         The Company  executed an agreement in January 2004 with a related party
         to provide charter air transportation for its employees,  customers and
         contractors to job sites and other  business  related  destinations.  A
         $300,000 5% interest  bearing  loan due in January 2007 was made by the
         Company  regarding  the  transaction.  The loan  balance is credited by
         airtime charges at standard  industry rates offset by interest  charges
         computed on the average monthly balance. At December 31, 2005, the loan
         balance was $288,506.

NOTE 12 - LEASES
-------   ------

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

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

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





                                      F-24


                         TIDELANDS OIL & GAS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

         Future commitments under the operating leases are as follows:

                                 Year Ending                Total
                                -----------              ---------
                                  2006                   $  83,400
                                  2007                      90,400
                                  2008 - 2019              107,500
                                                         ---------
                          Total Minimum Lease Payments   $ 281,300
                                                         =========

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

NOTE 13 - COMMITMENTS AND CONTINGENCIES
-------   -----------------------------

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

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

         On January 6, 2003,  we were  served as a third  party  defendant  in a
         lawsuit titled  Northern  Natural Gas Company vs. Betty Lou Sheerin vs.
         Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the
         150th  Judicial  District  Court,  Bexar  County,  Texas,  Cause Number
         2002-C1-16421.  The lawsuit was initiated by Northern  Natural Gas when
         it sued Betty Lou Sheerin  for her  failure to make  payments on a note
         she executed  payable to Northern in the original  principal  amount of
         $1,950,000.  Northern's  suit was filed on November 13,  2002.  Sheerin
         answered  Northern's  lawsuit  on January  6,  2003.  Sheerin's  answer
         generally denied Northern's claims and raised the affirmative  defenses
         of fraudulent inducement by Northern,  estoppel, waiver and the further
         claim that the note does not comport with the legal requirements of a







                                      F-25


                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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





                                      F-26


                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

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

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

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

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

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

         On November 28, 2005,  ZG  Gathering,  Ltd. and ZG Pipeline  Management
         ("ZG")  filed its answer to  Northern's  Fifth  Amended  Petition,  its
         counter-claim against Northern,  and its answer and cross claim against
         Tidelands.  ZG  contends  that  the  promissory  notes  given by ZG and
         Sheerin  to   Northern   were   procured   by   Northern's   fraudulent
         misrepresentations and it claims unspecified amounts of damages against
         Northern.  ZG's cross action against Tidelands claims Tidelands entered
         into an agreement to purchase the Zavala  Gathering  System from ZG and
         that,  as part of that  agreement,  Tidelands  agreed  to  satisfy  the
         $3,700,914  Northern indebtedness of ZG, and  to defend, indemnify, and




                                      F-27


                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003

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

         hold  ZG and  Sheerin  harmless  from  such  indebtedness  to pay off a
         Sheerin  loan of $300,000,  and to issue 1 million  shares of Tidelands
         stock, of which 500,000 was to be free-trading  shares.  ZG claims that
         Tidelands  breached  this  agreement by failing to satisfy the Northern
         indebtedness,  failing  to defend  and  indemnify  it from  such  debt,
         failing to pay off the $300,000 note, failing to issue the free-trading
         shares  in  Tidelands,  and by  placing  a stop  transfer  order on the
         restricted  stock  that was  issued  by  Tidelands.  ZG seeks  specific
         performance  of the  agreement,  recovery of an  unspecified  amount of
         damages, and its attorney's fees.

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

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

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

NOTE 15 - ACQUISITIONS
-------   -------------

         REEF VENTURES, L.P. TRANSACTION
         -------------------------------

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




                                      F-28


                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


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

         Purchase and Sale Agreement - Background

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

         Summary of Purchase and Sale Agreement

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

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

         (b) The Tidelands' note is secured by (i) a deed of trust (the "Deed of
         Trust")  from the  Partnership  to Impact,  covering  the  pipeline and
         related  facilities,  easements,  rights-of-way  and the Gas  Contracts
         which  comprise the project,  being that 12-inch  pipeline  Project for
         transporting  natural  gas from Eagle  Pass  Texas to  Piedras  Negras,
         Mexico, defined in the Partnership  Agreement.  The Deed of Trust would
         include a present assignment of Reef's rights to receive cash flow from
         the Gas Project which would be  exercisable by Impact only upon default
         under the Tidelands' Note, Reef guarantee,  or Reef Deed of Trust. (ii)
         a  guaranty  of  payment  and  performance  from the  Partnership  (the
         "Partnership  Guaranty"),  and  (iii) a pledge  agreement  whereby  the
         Partnership pledges to Impact its 98% membership interest in Reef.

         Minority Interest

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





                                      F-29




                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003

NOTE 16 - SEGMENT REPORTING
-------   -----------------

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

2005               Propane Sales      Pipeline
                    and Related    Transportation    All Other
                     Services           Fees       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                                      Natural Gas
                                           Sales and
                          Propane Sales     Pipeline
                           and Related   Transportation    All Other
                            Services         Fees        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


2003

There was no segment reporting in 2003.


NOTE 17 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-------   ----------------------------------------------------

             (Dollars in thousands, except share and 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, 2005          Mar         June       Sept        Dec
----------------------------           31          30         30          31
                                    --------    --------   --------    --------
  Revenues                          $    628    $    341   $    248    $    644
  Cost of Goods Sold                     285         130        220         368
                                    --------    --------   --------    --------
  Gross Margin                           343         211         28         276
  Operating Expenses                   6,947       3,825      1,580       1,817
  Other Income (Expense), Net         (2,862)      8,096        324          90
                                    --------    --------   --------    --------
  Net 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
----------------------------
  Revenues                          $      0    $    508   $    825    $    551
  Cost of Goods Sold                       0         498        802         209
                                    --------    --------   --------    --------
  Gross Margin                             0          10         23         342
  Operating Expenses                   1,538       4,209      3,545      20,825
  Other Income (Expense), Net              4      15,397          6          33
                                    --------    --------   --------    --------
  Net earnings (loss)               $ (1,534)   $ 11,198   $ (3,516)   $(20,450)
                                    ========    ========   ========    ========
  Basic (loss) per share            $  (0.03)   $   0.18   $  (0.02)   $  (0.34)
  Diluted (loss) per share          $  (0.03)   $   0.18   $  (0.02)   $  (0.34)





                                      F-30


                         TIDELANDS OIL & GAS CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   DECEMBER 31, 2005, 2004 (RESTATED) AND 2003


NOTE 18 - SUBSEQUENT EVENTS
-------   -----------------

         During  January,  2006,  the Company  completed a private  placement of
         $6,569,750 of securities  with several  institutional  investors led by
         Palisades Master Fund, L.P. The private placement  consists of Original
         Issue Discount Convertible Debentures, convertible into common stock of
         the Company at a  conversion  price of $0.87 per share.  The  investors
         will also receive  three-year  warrants to purchase,  in the aggregate,
         2,491,975  shares of common stock of the Company at a conversion  price
         of $0.935 per share. Additional 13 month callable warrants to purchase,
         in the aggregate, 7,551,432 shares were issued to the investors with an
         exercise  price of $1.275  which  warrants  include  a forced  exercise
         provision  by the Company if certain  price and equity  conditions  are
         met.  The Company  will  receive net  proceeds of  $4,964,410  from the
         transactions.

































                                      F-31




                         TIDELANDS OIL & GAS CORPORATION
                      UNAUDITED CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                      September 30,     December 31,
                                                           2006             2005
                                                      -------------    -------------
                                                       (Unaudited)
                                                                 
Current Assets:
   Cash and Cash Equivalents                          $     887,194    $   1,113,911
   Accounts and Loans Receivable                            290,968          468,458
   Inventory                                                 74,589          142,204
   Prepaid Expenses                                         312,918          183,938
                                                      -------------    -------------
      Total Current Assets                                1,565,669        1,908,511
                                                      -------------    -------------

Property Plant and Equipment, Net                        12,226,640       10,042,088
                                                      -------------    -------------

Due from Related Party                                      283,854          288,506
                                                      -------------    -------------

Other Assets:
   Deposits                                                  64,004           14,004
   Restricted Cash                                           52,159           76,803
   Deferred Charges                                         880,256                0
   Goodwill                                               1,158,937        1,158,937
                                                      -------------    -------------
      Total Other Assets                                  2,155,356        1,249,744
                                                      -------------    -------------

      Total Assets                                    $  16,231,519    $  13,488,849
                                                      =============    =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Current Maturities - Notes Payable                 $     225,000    $     225,000
   Accounts Payable and Accrued Expenses                  1,000,176        1,225,554
                                                      -------------    -------------
      Total Current Liabilities                           1,225,176        1,450,554

Long-Term Debt                                           10,014,752        4,271,768
                                                      -------------    -------------

      Total Liabilities                                  11,239,928        5,722,322
                                                      -------------    -------------

Commitments and Contingencies                                  --               --

Stockholders' Equity:
   Common Stock, $.001 Par Value per Share,
     250,000,000 Shares Authorized, 84,537,270
     and 78,495,815 Shares Issued and
     Outstanding at September 30, 2006
     and December 31, 2005 Respectively                      84,538           78,497
   Paid-in Capital in Excess of Par Value                45,250,456       40,818,174
   Subscriptions Receivable                                (330,000)        (550,000)
   Minority Interest                                           --               --
   Accumulated (Deficit)                                (40,013,403)     (32,580,144)
                                                      -------------    -------------
      Total Stockholders' Equity                          4,991,591        7,766,527
                                                      -------------    -------------

      Total Liabilities and Stockholders' Equity      $  16,231,519    $  13,488,849
                                                      =============    =============





      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      F-32




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



                                            Three Months Ended    Three Months Ended
                                            September 30, 2006    September 30, 2005
                                            ------------------    -----------------
                                                                      (Restated)
                                                            
Revenues:
   Gas Sales and Pipeline Fees              $          355,937    $         248,015
   Construction Services                                13,289                    0
                                            ------------------    -----------------
      Total Revenues                                   369,226              248,015
                                            ------------------    -----------------

Expenses:
   Cost of Sales                                       176,675              219,865
   Operating Expenses                                  102,010               81,408
   Depreciation                                        114,085              124,422
   Interest                                          2,572,249              110,090
   Beneficial Conversion Feature Interest                    0             (637,448)
   Sales, General and Administrative                 1,229,528            1,901,401
                                            ------------------    -----------------

      Total Expenses                                 4,194,547            1,799,738
                                            ------------------    -----------------

(Loss) From Operations                              (3,825,321)          (1,551,723)

Derivative Gain (Loss)                                       0                    0
(Loss) on Sale of Investments                             (743)                   0
(Loss) on Sale of Equipment                             (4,500)                   0
Interest and Dividend Income                            53,500               26,589
Litigation Settlement                                        0              297,825
                                            ------------------    -----------------

Net Income (Loss)                           $       (3,777,064)   $      (1,227,309)
                                            ==================    =================

Net Income (Loss) Per Common Share:
   Basic and Diluted                        $            (0.05)   $           (0.02)
                                            ==================    =================

Weighted Average Number of Common
   Shares Outstanding                               82,551,543           75,712,742
                                            ==================    =================










      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      F-33




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




                                             Nine Months Ended     Nine Months Ended
                                            September 30, 2006    September 30, 2005
                                            ------------------    ------------------
                                                                      (Restated)
                                                            
Revenues:
   Gas Sales and Pipeline Fees              $        1,420,551    $        1,097,505
   Construction Services                               157,693               119,121
                                            ------------------    ------------------
   Total Revenues                                    1,578,244             1,216,626
                                            ------------------    ------------------



Expenses:
   Cost of Sales                                       759,954               635,113
   Operating Expenses                                  286,128               210,545
   Depreciation                                        345,887               360,817
   Interest                                          3,057,258               503,950
   Beneficial Conversion Feature Interest                    0              (501,659)
   Sales, General and Administrative                 4,672,273             6,578,471
   Impairment Losses                                         0             5,200,000
                                            ------------------    ------------------
      Total Expenses                                 9,121,500            12,987,237
                                            ------------------    ------------------

(Loss) From Operations                              (7,543,256)          (11,770,611)

Derivative Gain (Loss)                                       0             5,168,000
(Loss) on Sale of Investments                             (743)                    0
(Loss) on Sale of Equipment                             (4,500)               (3,167)
Interest and Dividend Income                           115,239                96,240
Litigation Settlement                                        0               297,825
                                            ------------------    ------------------

Net (Loss)                                  $       (7,433,260)   $       (6,211,713)
                                            ==================    ==================

Net (Loss) Per Common Share:
   Basic and Diluted                        $            (0.09)   $            (0.09)
                                            ==================    ==================

Weighted Average Number of Common
   Shares Outstanding                               81,516,543            69,378,850
                                            ==================    ==================





      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      F-34




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




                                                   Nine Months Ended     Nine Months Ended
                                                  September 30, 2006    September 30, 2005
                                                  ------------------    ------------------
                                                                             (Restated)
                                                                  
Cash Flows Provided (Required) By
  Operating Activities:
     Net (Loss)                                   $       (7,433,260)   $       (6,211,713)
     Adjustments to Reconcile Net (Loss)
      to Net Cash Provided (Required) By
      Operating Activities:
         Depreciation                                        314,666               360,817
         Loss on Disposal of Equipment                         4,500                 3,167
         Change in Derivative Liability                            0            (5,168,000)
         Issuance of Common Stock:
           For Services Provided                           1,910,800             3,682,950
           For Payment of Interest                         1,696,982                     0
         Beneficial Conversion Feature Interest                    0              (501,659)
         Changes in:
           Accounts Receivable                               177,490               307,719
           Inventory                                          67,615                (7,809)
           Prepaid Expenses                                 (128,980)              278,609
           Deferred Charges                                 (880,256)              116,250
           Deposits                                          (50,000)               (2,600)
           Restricted Cash                                    24,644              (101,471)
           Accounts Payable and
             Accrued Expenses                                219,622                68,233
           Impairment Losses                                       0             5,200,000
                                                  ------------------    ------------------

Net Cash (Required) By Operating Activities               (4,076,177)           (1,975,507)
                                                  ------------------    ------------------

Cash Flows Provided (Required)
  By Investing Activities:
    Acquisitions of Property, Plant
         and Equipment                                    (2,525,218)           (1,376,250)
    Disposals of Equipment                                    21,500                   800
                                                  ------------------    ------------------

Net Cash (Required) By Investing Activities               (2,503,718)           (1,375,450)
                                                  ------------------    ------------------










      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      F-35




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

                                   (UNAUDITED)



                                                Nine Months Ended     Nine Months Ended
                                               September 30, 2006    September 30, 2005
                                               ------------------    ------------------
                                                                        (Restated)
                                                               
Cash Flows Provided (Required)
   by Financing Activities:
      Proceeds from Stock Subscriptions
        Receivable                                        220,000                     0
      Proceeds from Long-Term Loans                     6,737,276               201,671
      Repayment of Long-Term Loans                       (608,750)                    0
      Repayment of Loan by Related Party                    4,652                 1,662
                                               ------------------    ------------------

Net Cash Provided by Financing Activities               6,353,178               203,333
                                               ------------------    ------------------

Net (Decrease) in Cash                                   (226,717)           (3,147,624)

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

Cash at End of Period                          $          887,194    $        2,336,430
                                               ==================    ==================

Supplemental Disclosures of
   Cash Flow Information:
       Cash Payments for Interest              $        1,153,116    $          266,938
                                               ==================    ==================

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

Non-Cash Investing and Financing Activities:
   Issuance of Common Stock:
      Repayment of Note                        $                0    $        2,512,500
      Repayment of Convertible Debentures                 385,542             4,020,000
      Payment of Accrued Expense                          445,000                     0
                                               ------------------    ------------------

      Total Non-Cash Investing and
         Financing Activities                  $          830,542    $        6,532,500
                                               ==================    ==================











      See Accompanying Notes to Condensed Consolidated Financial Statements

                                      F-36


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


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

         The accompanying  unaudited condensed consolidated financial statements
         for the nine month periods ended  September  30, 2006,  and 2005,  have
         been  prepared  in  conformity  with  accounting  principles  generally
         accepted  in  the  United  States  of  America  for  interim  financial
         information and with the  instructions to Form 10-Q and Regulation S-X.
         The financial  information as of December 31, 2005, is derived from the
         registrant's  Form 10-K for the year ended  December 31, 2005.  Certain
         information  or footnote  disclosures  normally  included in  financial
         statements prepared in accordance with accounting  principles generally
         accepted in the United States of America have been condensed or omitted
         pursuant to the rules and  regulations  of the  Securities and Exchange
         Commission.

         The  preparation  of condensed  consolidated  financial  statements  in
         conformity with accounting  principles generally accepted in the United
         States of America requires management to make estimates and assumptions
         that affect the reported  amounts of assets and liabilities at the date
         of the financial  statements  and the reported  amounts of revenues and
         expenses during the reporting period.  Actual results could differ from
         those  estimates.  In  the  opinion  of  management,  the  accompanying
         financial statements include all adjustments  necessary (which are of a
         normal and recurring  nature) for the fair  presentation of the results
         of the interim periods  presented.  While the registrant  believes that
         the  disclosures  presented are adequate to keep the  information  from
         being  misleading,  it is suggested that these  accompanying  financial
         statements  be  read  in  conjunction  with  the  registrant's  audited
         consolidated financial statements and notes for the year ended December
         31,  2005,  included in the  registrant's  Form 10-K for the year ended
         December 31, 2005.

         Operating  results for the nine-month  period ended September 30, 2006,
         are not necessarily  indicative of the results that may be expected for
         the  remainder  of the  fiscal  year  ending  December  31,  2006.  The
         accompanying  unaudited  condensed  consolidated  financial  statements
         include the accounts of the registrant,  its wholly-owned subsidiaries,
         Rio Bravo Energy, LLC, Sonora Pipeline, LLC, Arrecefe Management,  LLC,
         Marea Associates, LP, Reef Ventures, LP, Reef International,  LLC, Reef
         Marketing,  LLC,  Terranova  Energia  S. de R. L. de C.  V.,  Esperanza
         Energy, LLC, and Tidelands  Exploration & Production  Corporation.  All
         significant   inter-company   accounts  and   transactions   have  been
         eliminated in consolidation.










                                      F-37


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




NOTE 2 - GOING CONCERN
------   -------------

         The Company has sustained recurring losses and negative cash flows from
         operations.  Over the past year,  the Company's  growth has been funded
         through issuance of convertible  debentures.  As of September 30, 2006,
         the Company had approximately  $900,000 of unrestricted cash.  However,
         the  Company has  experienced  and  continues  to  experience  negative
         operating  margins and negative cash flows from operations,  as well as
         an ongoing  requirement for substantial  additional capital investment.
         The Company expects that it will need to raise  substantial  additional
         capital to accomplish  its business  plan over the next several  years.
         The  Company is  seeking  to obtain  such  additional  funding  through
         private equity sources, possible sale of certain operating assets along
         with reduction of operating  expenses.  There can be no assurance as to
         the  availability  or terms upon which such financing and capital might
         be available or that asset sales will be possible at suitable pricing.

NOTE 3 - LITIGATION
------   ----------

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

         Betty Lou Sheerin filed amended pleadings, wherein she sued current and
         former  Tidelands'  Board members,  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, 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 Bexar County, Texas on this note seeking a
         judgment  against  Tidelands for the principle amount of the note, plus
         interest.  Tidelands  answered  this lawsuit  denying  liability on the
         note.  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.




                                      F-38


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


NOTE 3 - LITIGATION (CONTINUED)
------   ----------------------

         In September,  and again in October 2004, Sheerin amended her pleadings
         regarding the third party cross action against Tidelands adding a claim
         for the  $300,000  promissory  note.  Sheerin  also  deleted her claims
         against Carl Hessel and Ahmed Karim (Company Directors).

         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.

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

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

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




                                      F-39


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


NOTE 3 - LITIGATION (CONTINUED)
------   ----------------------

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

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

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

NOTE 4 - COMMON STOCK TRANSACTIONS
------   -------------------------

         On August 6, 2006,  the  Company  issued  100,000  shares of its common
         stock valued at $63,500 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.

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






                                      F-40


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


NOTE 4 - COMMON STOCK TRANSACTIONS (CONTINUED)
------   -------------------------------------

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

         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 5 - Debt Financing).


NOTE 5 - RELATED PARTY TRANSACTION
------   -------------------------

         The Company  executed an agreement in January 2004 with a related party
         to provide charter air transportation for its employees,  customers and
         contractors to job sites and other  business  related  destinations.  A
         $300,000 5% interest  bearing  loan due in January 2007 was made by the
         Company  regarding  the  transaction.  The loan  balance is credited by
         airtime charges at standard  industry rates offset by interest  charges
         computed on the average  monthly  balance.  At September 30, 2006,  the
         loan balance was $283,854.

         During 2006,  the  President  acquired the airplane  being  utilized to
         provide charter air  transportation for the Company which is being held
         by his wholly-owned corporation. The transaction includes assumption of
         the  $300,000  5%  interest  bearing  loan due in  January  2007 to the
         Company.

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













                                      F-41


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


NOTE 6 - DEBT FINANCING
------   --------------

         On January 20,  2006,  the Company  completed  a private  placement  of
         $6,569,750 of convertible debt with seven institutional  investors. The
         net proceeds realized by the Company were $4,949,291 after deduction of
         legal costs,  commission  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.

         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.




                                      F-42


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


NOTE 6 - DEBT FINANCING (CONTINUED)
------   --------------------------

         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.  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,  JGC Capital,  LP -
         250,000  shares,  and Nite Capital,  LP - 121,750  shares (See NOTE 3 -
         Common Stock Transactions).
























                                      F-43


TABLE OF CONTENTS

                                                 2,828,304 Share of Common Stock

FORWARD LOOKING STATEMENTS
PROSPECTUS SUMMARY
RISK FACTORS
USE OF PROCEEDS                                         _________________
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS                                                     PROSPECTUS
DIVIDENDS AND DIVIDEND POLICY                           _________________
MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
BUSINESS
PROPERTIES
MANAGEMENT'S DISCUSSION AND
ANALYSIS
PLAN OF DISTRIBUTION                                 Dated November 27, 2006
DIRECTORS AND EXECUTIVE OFFICERS
PRINCIPAL SHAREHOLDERS
TRANSACTIONS WITH MANAGEMENT
AND OTHERS
LEGAL PROCEEDINGS
DESCRIPTION OF SECURITIES
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO FINANCIAL STATEMENTS
EXHIBITS
















                         Tidelands Oil & Gas Corporation

                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

The Nevada  Corporation Law and the Company's  Certificate of Incorporation  and
Bylaws authorize  indemnification of a director,  officer,  employee or agent of
the  Company  against  expenses  incurred by him or her in  connection  with any
action,  suit,  or proceeding to which such person is named a party by reason of
having acted or served in such  capacity,  except for  liabilities  arising from
such person's own  misconduct or negligence in performance of duty. In addition,
even a director,  officer, employee or agent of the Company who was found liable
for  misconduct  or  negligence  in the  performance  of duty  may  obtain  such
indemnification  if, in view of all the  circumstances  in the case,  a court of
competent jurisdiction  determines such person is fairly and reasonably entitled
to indemnification. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,  officers,  or
persons  controlling  the Company  pursuant  to the  foregoing  provisions,  the
Company has been  informed  that in the opinion of the  Securities  and Exchange
Commission,  such  indemnification  is against public policy as expressed in the
Act and is therefore unenforceable.

Item 25. Other Expenses of Issuance and Distribution

The  following  table sets forth  estimated  expenses  to be  incurred  by us in
connection with the issuance and  distribution  of all shares being  registered.
All such expenses are estimated except for the SEC registration fee.

Description of Expense                                   Amount ($)
----------------------                                   ----------
SEC Registration Fee                                          $
Accounting Fees and Expenses                                  $
Legal Fees and Expenses                                       $
Miscellaneous                                                 $

         Total                                                $

Item 26. Recent Sales of Unregistered Securities

During the period the preceding  three years we issued the following  securities
in exempt transactions not requiring registration:

On June 30,  2003,  we issued  1,300,000  common  shares as full  payment for an
outstanding  promissory  note obligation to Guernsey  Partners.  The transaction
value was $198,767,  representing unpaid principal.  Unpaid interest was waived.
The shares were issued to nine individuals.

On September 10, 2003, we issued 600,000 common shares to 34479 Yukon, Inc., for
consulting services valued at $62,400.

On  September  12,  2003,  we issued  500,000  common  shares to C.  Siddons for
consulting services valued at $52,000.

On September 22, 2003, we issued  300,000  common shares to Marcello  Kochen for
consulting  services  valued at 31,200.  On October  1, 2003,  we issued  60,000
common shares to Barry Gross for investor  public  relations  services valued at
$38,700.

On  October  29,  2003,  we issued  150,000  common  shares to Carl  Hessel  for
investment banking services valued at $148,500.

On  October  29,  2003,  we  issued  200,000  common  shares to C.  Siddons  for
consulting services valued at $198,000.

On November 1, 2003, we issued  500,000 common shares to David  Zirilnikoff  for
consulting services valued at $625,000.

On November 1, 2003,  we issued  200,000  common  shares to Marcello  Kochen for
consulting services valued at $250,000.

On  November  4,  2003,  we  issued  300,000  common  shares to C.  Siddons  for
consulting services valued at $375,000.

On  November  14,  2003,  we issued  150,000  common  shares to Carl  Hessel for
investment banking services valued at $187,500.

On November 14, 2003,  we issued  300,000  common  shares to Milo  Resources for
consulting services valued at $375,000.

On November  24,  2003,  we sold Carl  Allers  Etablissement,  a private  Danish
company, 581,395 common shares for $1,000,000.

On January 8, 2004, we authorized  the issuance of 300,000 common shares to Carl
Hessel for services valued at $450,000.

                                      II-1


On January 8, 2004,  we  authorized  the  issuance of 300,000  common  shares to
Stanley Merdinger for services valued at $450,000.

On January 8, 2004, we authorized  the issuance of 400,000 common shares to Milo
Resources for consulting services valued at $600,000.

On January 8, 2004, we authorized the issuance of 75,000 common shares to Jerome
Tannenbaum  and Elizabeth  Tannenbaum in payment of a $75,000  promissory  note,
including $38,311 of accrued interest.

On January 23, 2004, we sold Carl Allers  Etablissement  1,333,334 shares of our
common stock for $2,000,000 Dollars.

On January 28, 2004, we sold the Margaux Group shares  1,388,889 for  $2,083,335
Dollars.

On April  12,  2004,  we  issued  500,000  shares  of  common  stock  to  Impact
International,  Inc. valued at $1,220,000 in a cashless exercise of their common
stock warrants.

On April 15, 2004, we issued  700,000 common shares to Majestic  Holdings,  LLC.
for consulting services valued at $1,205,000.

On April 15, 2004, we issued  450,000  common  shares to New Age Group,  LLC for
consulting services valued at $1,210,000.

On April 15, 2004,  we issued  3,322  common  shares to Carl Hessel for $ 4,983.
Carl Hessel is a member of our board of directors.

On  July  2,  2004,  we  issued   500,000  shares  of  common  stock  to  Impact
International,  LLC. valued at $1,002,500 in a cashless exercise of their common
stock warrants.

On August 1, 2004, we issued  1,000,000  shares of common stock to L.L.  Capital
Group,  LLC pursuant to a  Consulting  Services  Agreement.  We also issued L.L.

Capital Group 500,000 common stock warrants  exercisable at $1.45 per share. The
warrants expire August 9, 2006. The transaction was valued at $1,520,000.

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

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

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

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

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

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

On September 14, 2004, we issued  500,000 shares of common stock to Michael Ward
as a stock  grant  under his  employment  agreement.  The shares  were valued at
$427,500.

On  September  14, 2004 we sold Four  Million  (4,000,000)  Tidelands  Oil & Gas
common  shares  to  ACH  Securities,   S.A.,  a  company  domiciled  in  Geneva,
Switzerland,  for Two Million  ($2,000,000)  Dollars.  On October 14,  2004,  in
connection  with the ACH Securities  transaction,  we issued Margaux  Investment
Group, S.A. common stock warrants to purchase One Million (1,000,000)  Tidelands
Oil & Gas common shares for Fifty ($0.50) Cents per share.

On October 14, 2004,  we  authorized  the  issuance of 500,000  shares of common
stock to Gregory M. Wilson for legal services valued at $160,000.

On October 26, 2004, we issued ACH  Securities,  S.A.  common stock  warrants to
purchase  One  Million  (1,000,000)  Tidelands  Oil & Gas common  shares for Two
Dollars Fifty ($2.50) Cents per share.

                                      II-2


On November 1, 2004, we issued James Blackwell, P.E. 574,712 Tidelands Oil & Gas
common shares in a stock  purchase  transaction  where we acquired 500 shares of
Sonterra Energy Corporation. The transaction was valued at $126,437.

On November 1, 2004, we authorized the issuance to Impact International,  LLC of
500,000  shares of common  stock  valued at $417,500  in a cashless  exercise of
their common stock warrants.

On November  18,  2004,  we entered  into  Securities  Purchase  Agreement  with
Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe Fund,
LP, (collectively,  "the Funds") and Mercator Advisory Group, LLC. ("Mercator").
We issued the Funds 7% Convertible  Debentures in the aggregate principal amount
of  $5,000,000.  The  Debentures  mature May 18,  2006.  We are  required to pay
interest  monthly.  The aggregate  monthly interest  payment is $29,166.67.  The
allocation  of the  debentures  is as follows:  (a) Mercator  Momentum  Fund, LP
acquired $1,270,000 7% Convertible  Debentures;  (b) Mercator Momentum Fund III,
LP acquired $875,000 7% Convertible Debentures; and (C)) Monarch Pointe Fund, LP
acquired $2,855,000 7% Convertible Debentures.

In connection  with this  financing we issued  6,578,948  common stock  warrants
which expire November 18, 2007. We issued the warrants as follows:

o    Mercator  Momentum  Fund,  LP  417,763  warrants  exercisable  at $0.87 and
     417,763 warrants exercisable at $0.80;

o    Mercator  Momentum Fund III, LP 287,829  warrants  exercisable at $0.87 and
     287,829 warrants exercisable at $0.80;

o    Monarch Pointe Fund, LP 939,145  warrants  exercisable at $0.87 and 939,145
     warrants exercisable at $0.80.

o    Mercator  Advisory Group, LLC 1,644,737  warrants  exercisable at $0.87 and
     1,644,737 warrants exercisable at $0.80.

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

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

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

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

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

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

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

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

On January 2, 2006, we issued  Michael Ward,  the Company's  President,  CEO and
member of the board of directors,  500,000 common shares  representing a partial
stock grant under his employment contract. The shares were valued at $445,000 or
$0.89 per share.

On January 20, 2006, the Company  entered into  Securities  Purchase  Agreements
with seven accredited investors  (collectively  "Purchases or Holders"). We sold
$6,569,750  in  the  aggregate  principal  amount,  of  discounted   convertible
debentures  ("Debentures") and Series A and Series B Warrants to purchase common
stock  ("Warrants")  for an aggregate  payment of $5,396,098 after deduction for
the  interest  discount.  The  Debenture  Holders may convert all or part of the
Debenture  face amount into shares of  Tidelands  common stock at any time at an
initial  conversion  rate of $0.87 per share.  The Series  "A"  Warrants  may be
exercised  immediately  by the  Purchasers for $0.935 per share and terminate on
January 20, 2009.  The Series "B" Warrants are  exercisable  at $1.275 per share
commencing at any time on, or after January 20, 2007 and on, or before  February
19, 2007.


                                      II-3


On January 30, 2006,  we issued Gene Kaslow 60,000  shares as  compensation  for
legal services valued at $57,000 or $0.95 per share.

On January 30, 2006, we issued Julio  Bastarrachea  150,000 shares as additional
employee compensation valued at $142,500 or $0.95 per share.

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

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

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

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

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

On September 25, 2006,  the Company  issued  Michael Ward,  Ahmed Karim and Carl
Hessel 150,000 common shares each as annual board of director compensation.

September 28, 2006, the Company issued  2,828,304 common shares as consideration
for a Waiver  and  Amendment  Agreement  pertaining  to all  existing  events of
default  known to the Holders  associated  with our  January 20, 2006  Debenture
finaning.  We  issued  shares  as  follows:   Palisades:   2,000,000;   Crescent
International,   Ltd.:  304,375;  Double  U  Master  Fund,   L.P.:152,179;   JGB
Capital,L.P.: 250,000; and Nite Capital, L.P.: 121,750.

We believe the  securities  issued  above were  issued in a private  transaction
pursuant  to  Section  4(2) of the  Securities  Act of 1933,  as  amended,  (the
"Securities Act"). These shares are considered restricted securities and may not
be publicly resold unless  registered for resale with  appropriate  governmental
agencies or unless exempt from any applicable registration requirements.











                                      II-4




Item 27. Exhibits

Exhibit          Description                                                     Location of Exhibit
                                                                           

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

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


2.3         Asset Purchase and Sale Agreement by and between Sonterra Energy     Incorporated by reference to
            Corporation and Oneok Propane Distribution Company.                  Exhibit 10.3
                                                                                 8-K filed November 15, 2004

2.4         Purchase and Sale Agreement for Reef Ventures, L.P. by and           Incorporated by reference
            between Impact International, LLC ("Impact") and Coahuila            Exhibit 10 to 8-K filed
            Pipeline, LLC, ("Coahuila"), (jointly "Seller") and Tidelands        June 25, 2004
            Oil &Gas Corporation ("Tidelands") and Arrecefe
            Management, LLC ("Arrecefe"), (jointly "Buyer") dated
            May 25, 2004 with Exhibits.

2.5         Purchase and Sale Agreement for Reef Marketing, L.L.C.               Incorporated by reference
            and  Reef International, L.L.C. by and between Tidelands             Exhibit 10.1 to 8-K filed
            Oil &Gas Corporation and Impact International, L.L.C.                May 8, 2003
            and Coahuila Pipeline, L.L.C. dated April 16, 2003.

2.6         Agreement of Limited Partnership of Reef Ventures, L.P.              Incorporated by reference
                                                                                 to Exhibit 10.2 to 8-K filed
                                                                                 on May 8, 2003

3.0         Certificate of Amendment to Articles of Incorporation                Incorporated by reference to
                                                                                 Exhibit 3.0 to 8-K filed on
                                                                                 April 24, 2006


3.1         Restated Articles of Incorporation of Tidelands Oil                  Incorporated by reference to
            & Gas Corporation., a Nevada corporation.                            Exhibit 3.0 to SB-2 filed
                                                                                 on December 17, 2004

3.2         Restated Bylaws of Tidelands Oil &Gas Corporation.                   Incorporated by reference to
                                                                                 Exhibit 3.1 to SB-2 filed
                                                                                 on December 17, 2004

4.0         Form of Original Issue Discount Convertible Debentures               Incorporated by reference to
            with Palisades Master Fund, Crescent International, Ltd.,            Exhibit 10.2 to 8-K filed on
            Double U Master Fund, LP, JGB Capital, LP, Nite                      January 25, 2006
            Capital, LP and RHP Master Fund, Ltd

4.1         7% Convertible Debenture Mercator Momentum Fund, LP                  Incorporated by reference to
                                                                                 Exhibit 10.2 to 8-K filed on
                                                                                 December 3, 2004

4.2         7% Convertible Debenture Mercator Momentum Fund III, LP              Incorporated by reference to
                                                                                 Exhibit 10.3 to 8-K filed on
                                                                                 December 3, 2004

4.3         7% Convertible Debenture Monarch Pointe Fund, LP                     Incorporated by reference to
                                                                                 Exhibit 10.4 to 8-K filed on
                                                                                 December 3, 2004

5.0         Opinion of Wilson Law Offices dated August 18, 2006                  Incorporated by reference to
                                                                                 Exhibit 5.1 of S-1 filed on
                                                                                 October 25, 2006

10.0        Form of Securities Purchase Agreement with                           Incorporated by reference to
            Palisades Master Fund, Crescent International, Ltd.,                 Exhibit 10.2 to 8-K filed on
            Double U Master Fund, LP, JGB Capital, LP, Nite                      January 25, 2006
            Capital, LP and RHP Master Fund, Ltd.

10.1        Form of Series "A" Common Stock Purchase Warrant                     Incorporated by reference to
            Palisades Master Fund, Crescent International, Ltd.,                 Exhibit 10.4 to 8-K filed on
            Double U Master Fund, LP, JGB Capital, LP, Nite                      January 25, 2006
            Capital, LP and RHP Master Fund, Ltd.

10.2        Form of Series "B" Common Stock Purchase Warrant                     Incorporated by reference to
            Palisades Master Fund, Crescent International, Ltd.,                 Exhibit 10.5 to 8-K filed on
            Double U Master Fund, LP, JGB Capital, LP, Nite                      January 25, 2006
            Capital, LP and RHP Master Fund, Ltd.

                                      II-5


10.3        Form of Registration Rights Agreement with                           Incorporated by reference to
            Palisades Master Fund, Crescent International, Ltd.,                 Exhibit 10.2 to 8-K filed on
            Double U Master Fund, LP, JGB Capital, LP, Nite                      January 25, 2006
            Capital, LP and RHP Master Fund, Ltd.

10.1        Employment Agreement with Michael Ward                               Incorporated by reference to
                                                                                 Exhibit 10.0 of SB-2 filed
                                                                                 December 17, 2004

10.2        Employment Agreement with James B. Smith                             Incorporated by reference to
                                                                                 Exhibit 10.1 of SB-2 filed
                                                                                 December 17, 2004

10.3        Employment Agreement with Robert Dowies                              Incorporated by reference to
                                                                                 Exhibit 10.2 of SB-2 filed
                                                                                 December 17, 2004

10.4        2003 Non-Qualified Stock Grant and Option Plan                       Incorporated by reference to
                                                                                 Form S-8 filed on June 11, 2003

10.5        Securities Purchase Agreement                                        Incorporated by reference to
10.6        Warrant Margaux                                                      Incorporated by reference to
                                                                                 Exhibit 10.5 of SB-2 filed
                                                                                 December 17, 2004

10.7        Warrant Margaux                                                      Incorporated by reference to
                                                                                 Exhibit 10.6 of SB-2 filed
                                                                                 December 17, 2004

10.         Stock Purchase Warrant Impact                                        Incorporated by reference to
                                                                                 Exhibit 10.3 to 8-K filed on
                                                                                 May 8, 2003.

10.         Registration Rights Agreement Impact                                 Incorporated by reference to
                                                                                 Exhibit 10.4 to 8-K filed on
                                                                                 May 8, 2003.

10.8        Amended Stock Purchase Warrant Impact International                  Incorporated by reference
                                                                                 Exhibit 10 to 8-K filed
                                                                                 June 25, 2004

10.9        Registration Rights Agreement with Mercator Group                    Incorporated by reference to
                                                                                 Exhibit 10.5 to 8-K filed on
                                                                                 December 3, 2004

10.10       Warrant to Purchase Common Stock Mercator Momentum                   Incorporated by reference to
            Fund, LP. $0.87                                                      Exhibit 10.6 to 8-K filed on
                                                                                 December 3, 2004

10.11       Warrant to Purchase Common Stock Mercator Momentum                   Incorporated by reference to
            Fund, LP $0.80                                                       Exhibit 10.7 to 8-K filed on
                                                                                 December 3, 2004

10.12       Warrant to Purchase Common Stock Mercator Momentum                   Incorporated by reference to
            Fund, III, LP $0.87                                                  Exhibit 10.8 to 8-K filed on
                                                                                 December 3, 2004

10.13       Warrant to Purchase Common Stock Mercator Momentum                   Incorporated by reference to
            Fund III, LP $0.80                                                   Exhibit 10.9 to 8-K filed on
                                                                                 December 3, 2004

10.14       Warrant to Purchase Common Stock Monarch Pointe                      Incorporated by reference to
            Fund, LP $0.87                                                       Exhibit 10.10 to 8-K filed on
                                                                                 December 3, 2004

10.15       Warrant to Purchase Common Stock Monarch Pointe                      Incorporated by reference to
            Fund, LP $0.80                                                       Exhibit 10.11 to 8-K filed on
                                                                                 December 3, 2004

10.16       Warrant to Purchase Common Stock Mercator Advisory                   Incorporated by reference to
            Group, LLC. $0.87                                                    Exhibit 10.12 to 8-K filed on
                                                                                 December 3, 2004

10.17       Warrant to Purchase Common Stock Mercator Advisory                   Incorporated by reference to
            Group, LLC $0.80                                                     Exhibit 10.13 to 8-K filed on
                                                                                 December 3, 2004

                                      II-6


10.18       Regency Participation Agreement                                      Incorporated by reference to
                                                                                 Exhibit 10.1 to 10-Q filed on
                                                                                 August 21, 2006

10.19       Regency Joint Operating Agreement                                    Incorporated by reference to
                                                                                 Exhibit 10.1 to 10-Q filed on
                                                                                 August 21, 2006

10.20       Aircraft Prepaid Lease/Use Agreement                                 Incorporated by reference to
                                                                                 Exhibit 10.3 to 10-Q filed on
                                                                                 August 21, 2006

10.21       Promissory Note relating to Aircraft Prepaid Lease                   Incorporated by reference to
                                                                                 Exhibit 10.4 to 10-Q filed on
                                                                                 August 21, 2006

10.22       Waiver and Amendment Agreement                                       Incorporated by reference to
                                                                                 Exhibit 10 to Form 8-K filed
                                                                                 September 29, 2006

21          List of Subsidiaries                                                 Incorporated by reference to
                                                                                 Exhibit 21 of S-1 filed on
                                                                                 October 25, 2006

23.1        Consent of Wilson Law Offices                                        Incorporated by reference to
                                                                                 Exhibit 5.1 of S-1 filed on
                                                                                 October 25, 2006

23.2        Consent of Independent Auditor                                       Incorporated by reference to
                                                                                 Exhibit 23 of S-1 filed on
                                                                                 October 25, 2006





















                                      II-7


Item 28. Undertakings

         The undersigned registrant hereby undertakes to:

         (1) Insofar as  indemnification  for liabilities  arising under the Act
may be permitted to directors,  officers and controlling  persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that  in  the  opinion  of  the   Securities   and  Exchange   Commission   such
indemnification  is  against  public  policy  as  expressed  in the  Act and is,
therefore,  unenforceable. In the event that a claim for indemnification against
such liabilities  (other than the payment by the registrant of expenses incurred
or paid by a director,  officer or  controlling  person of the registrant in the
successful  defense of any  action,  suit or  proceeding)  is  asserted  by such
director,  officer or controlling person in connection with the securities being
registered,  the Company  will,  unless in the opinion of its counsel the matter
has been  settled  by  controlling  precedent  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

         (2) File, during any period in which it offers or sells  securities,  a
post effective amendment to this registration statement to:

         (i)      Include any  prospectus  required  by section  10(a)(3) of the
                  Act;
         (ii)     Reflect  in  the   prospectus   any  facts  or  events  which,
                  individually  or together,  represent a fundamental  change in
                  the information in the registration statement; and
         (iii)    Include any additional or changed material  information on the
                  plan of distribution.

         For   determining   liability   under  the   Securities,   treat   each
post-effective  amendment  as a new  registration  statement  of the  securities
offered,  and the offering of the securities at that time to be the initial bona
fide offering.

         File a post-effective  amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

         (b)  Insofar  as  indemnification  for  liabilities  arising  under the
Securities Act of 1933 may be permitted to directors,  officers and  controlling
persons of the registrant  pursuant to the foregoing  provisions,  or otherwise,
the  registrant  has been  advised  that in the  opinion of the  Securities  and
Exchange  Commission such  indemnification is against public policy expressed in
the  Act  and is,  therefore,  unenforceable.  In the  event  that a  claim  for
indemnification  against  such  liabilities  (other  than  the  payment  by  the
registrant of expenses  incurred or paid by a director,  officer or  controlling
person of the  registrant  in the  successful  defense  of any  action,  suit or
proceeding)  is  asserted by such  director,  officer or  controlling  person in
connection with the securities being registered,  the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit  to a  court  of  appropriate  jurisdiction  the  question  whether  such
indemnification  by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

         (c) The undersigned registrant hereby undertakes that it will:

     (1) For  determining  any liability  under the  Securities  Act,  treat the
information  omitted  from  the  form  of  prospectus  filed  as  part  of  this
registration  statement  in reliance  upon Rule 430A and  contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497 (h)
under the Securities Act as part of this  registration  statement as of the time
the Commission declared it effective.

     (2) For  determining  any liability  under the  Securities  Act, treat each
post-effective   amendment   that  contains  a  form  of  prospectus  as  a  new
registration statement for the securities offered in the registration statement,
and that  offering  of the  securities  at that  time as the  initial  bona fide
offering of those securities.



SIGNATURES

In  accordance  with  the  requirements  of  the  Securities  Act of  1933,  the
registrant certifies that it has reasonable grounds to believe that it meets all
of the  requirements  of filing  on Form S-1 and  authorized  this  registration
statement  to be signed  on its  behalf  by the  undersigned  in the City of San
Antonio, Texas on November 27, 2006.


Tidelands Oil & Gas Corporation


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


By: /s/ James B. Smith
   -----------------------------
   James B. Smith, Sr. V.P., CFO
   and Principal Accounting Officer


Pursuant to the  requirements  of the Securities  Act of 1933, as amended,  this
registration  statement  has  been  signed  by  the  following  persons  in  the
capacities and as of the dates indicated.


Signature                          Title                             Date


 /s/ Michael Ward            President, CEO, Director         November 27, 2006
------------------------
Michael Ward


 /s/ James B. Smith          Sr. V.P, CFO, Director           November 27, 2006
------------------------     Principal Accounting Officer
James B. Smith


                             Director                         November 27, 2006
------------------------
Carl Hessel


 /s/ Ahmed Karim             Director                         November 27, 2006
------------------------
Ahmed Karim