# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# REPORT ON FORM 10-K

(Mark one)

/X/
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the fiscal year ended December 31, 2004 or

/
/ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from  to .

Commission File No.0-20975

TENGASCO, INC.

(Name of registrant
as specified in its charter)

|Tennessee                                                      |  | 87-0267438                         
|-------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. EmployerIdentification No.)

603
Main Avenue, Knoxville, Tennessee 37902(Address
of Principal Executive Offices) (Zip Code)



Registrants
telephone number, including area code:(865) 523-1124.

Securities registered pursuant to
Section 12(b) of the Act: None.

Securities registered pursuant to Section
12(g) of the Act: Common Stock, $.001 par value per share.

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

Indicate
by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation SK
is not contained in this form and no disclosure will be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business
day of the registrants most recently completed second quarter (June 30, 2004 closing
price $0.38): $11,854,484

State
the number of shares outstanding of the registrants $.001 par value common stock as
of the close of business on the latest practicable date (February 1, 2005): 48,927,828

Documents
Incorporated By Reference: None.

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|Table of Contents |                                                                                                                                                                                                                           | Page
|----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|PART I            | Item 1.    Business.....................................................................................                                                                                                                  | 1   
|                  | Item 2.    Properties..................................................................................                                                                                                                   | 16  
|                  | Item 3.    Legal Proceedings...........................................................................                                                                                                                   | 24  
|                  | Item 4.     Submission of Matters to a Vote of Security Holders.........................................                                                                                                                  | 24  
|PART II           | Item 5.     Market for Registrants Common Equity, Related Stockholder
         Matters and Issuer Purchases of Equity Securities..............................................................................           | 25  
|                  | Item 6.     Selected Financial Data.....................................................................                                                                                                                  | 27  
|                  | Item 7.     Managements Discussion and Analysis of Financial Condition
         and Results of Operation............................................................................................................     | 28  
|                  | Item 7A.    Quantitative and Qualitative Disclosures About Market Risk....................................                                                                                                                | 37  
|                  | Item 8.     Financial Statements and Supplementary Data.................................................                                                                                                                  | 38  
|                  | Item 9. ...........Changes in and Disagreements With Accountants on Accounting
         and Financial Disclosure......................................................................................................... | 38  
|                  | Item 9A.    Controls and Procedures..........................................................................................                                                                                             | 39  
|                  | Item 9B.    Other Information................................................................................................                                                                                             | 40  
|PART III          | Item 10.    Directors and Executive Officers of the Registrant...........................................                                                                                                                 | 40  
|                  | Item 11.    Executive Compensation.......................................................................                                                                                                                 | 47  
|                  | Item 12.     Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters...................................................................................................   | 50  
|                  | Item 13.   Certain Relationships and Related Transactions....................................................................                                                                                             | 53  
|                  | Item 14.   Principal Accountant Fees and Services............................................................................                                                                                             | 55  
|PART IV           | Item 15.  Exhibits and Financial Statement Schedules............................................................................                                                                                          | 56  
|SIGNATURES        | ..................................................................................................................................                                                                                        | 59  



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# FORWARD LOOKING
STATEMENTS

The
information contained in this Report, in certain instances, includes forward-looking
statements within the meaning of applicable securities laws. Forward-looking statements
include statements regarding the Companys expectations,
anticipations, intentions, beliefs, or strategies
regarding the future. Forward-looking statements also include statements regarding
revenue, margins, expenses, and earnings analysis for 2004 and thereafter; the
Companys ability to continue as a going concern; oil and gas prices; exploration
activities; development expenditures; costs of regulatory compliance; environmental
matters; technological developments; future products or product development; the
Companys products and distribution development strategies; potential acquisitions or
strategic alliances; liquidity and anticipated cash needs and availability; prospects for
success of capital raising activities; prospects or the market for or price of the
Companys common stock; and control of the Company. All forward-looking statements
are based on information available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. The Companys
actual results could differ materially from the forward-looking statements. Among the
factors that could cause results to differ materially are the factors discussed in
Risk Factors below in Item 1 of this Report.

Projecting
the effects of commodity prices on production, and timing of development expenditures
include many factors beyond the Companys control. The future estimates of net cash
flows from the Companys proved reserves and their present value are based upon
various assumptions about future production levels, prices, and costs that may prove to be
incorrect over time. Any significant variance from assumptions could result in the actual
future net cash flows being materially different from the estimates.

# PART I

# History of the Company

The
Company was initially organized under the laws of the State of Utah in 1916, under the
name Gold Deposit Mining & Milling Company. The Company subsequently
changed its name to Onasco Companies, Inc. The Company was formed for the purpose of
mining, reducing and smelting mineral ores. In 1972, the Company conveyed to an
unaffiliated entity substantially all of its assets and ceased all business operations.
From approximately 1983 to 1991, the operations of the Company were limited to seeking out
the acquisition of assets, property or businesses.

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In
1995, the Company acquired certain oil and gas leases, equipment, securities and vehicles
owned by Industrial Resources Corporation, a Kentucky corporation, changed its name from
Onasco Companies, Inc. to Tengasco, Inc., and changed the domicile of the Company from the
State of Utah to the State of Tennessee by merging into Tengasco, Inc., a Tennessee
corporation, formed by the Company solely for this purpose.

# Overview

The
Company is in the business of exploring for, producing and transporting oil and natural
gas in Tennessee and Kansas. The Company leases producing and non-producing properties
with a view toward exploration and development. Emphasis is also placed on pipeline and
other infrastructure facilities to provide transportation services. The Company utilizes
seismic technology to improve the recovery of reserves.

The
Companys activities in the oil and gas business commenced in May 1995 with the
acquisition of oil and gas leases in Hancock, Claiborne, Knox, Jefferson and Union
counties in Tennessee. The Companys current lease position in these areas in
Tennessee is approximately 21,188 acres.

To
date, the Company has drilled primarily on a portion of its Tennessee leases known as the
Swan Creek Field in Hancock County focused within what is known as the Knox formation, one
of the geologic formations in that field. During 2004, the Company produced an average of
approximately 611 thousand cubic feet of natural gas per day and 1,126 barrels of oil per
month from 22 producing gas wells and five producing oil wells in the Swan Creek Field.

In
2001, the Companys wholly-owned subsidiary, Tengasco Pipeline Corporation
(TPC) which was formed to manage the construction and operation of the
Companys pipeline facilities, completed a 65-mile intrastate pipeline from the Swan
Creek Field to Kingsport, Tennessee. Until the Companys pipeline was completed, the
gas wells that had been drilled in the Swan Creek Field could not be placed into actual
production and the gas transported and sold to the Companys industrial customers in
Kingsport.

In
1998, the Company acquired from AFG Energy, Inc.(AFG), a private company,
approximately 32,000 acres of leases in the vicinity of Hays, Kansas (the Kansas
Properties). Included in that acquisition were 273 wells, including 208 working
wells, of which 149 were producing oil wells and 59 were producing gas wells, a related
50-mile pipeline and gathering system, three compressors and 11 vehicles. The total
purchase price of these assets was approximately $5.5 million. During 2004, the Kansas
Properties produced an average of approximately 716 MMcf of natural gas per day and 9,840
barrels of oil per month. Gross revenues from the Kansas Properties during 2004 were
$4,606,901.

# General

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# 1. The Swan Creek Field

Amoco
Production Company, during the late 1970s and early 1980s acquired
approximately 50,500 acres of oil and gas leases in the Eastern Overthrust in the
Appalachian Basin, including the area now referred to as the Swan Creek Field. In 1982,
Amoco successfully drilled two natural gas discovery wells in the Swan Creek Field to the
Knox Formation. These wells, once completed, had a high pressure and apparent volume of
deliverability of natural gas. In the mid-1980s, however, development of this Field
was cost prohibitive due to a substantial decline in worldwide oil and gas prices which
was further exacerbated by the high cost of constructing a necessary 23-mile pipeline
across three rugged mountain ranges and crossing the environmentally protected Clinch
River from Sneedville, Tennessee to deliver gas from the Swan Creek Field to the closest
market in Rogersville, Tennessee. In 1987, Amoco farmed out its leases to Eastern American
Energy Company which held the leases until July 1995. In July 1995, the Company concluded
a legal action under state law and acquired the Swan Creek leases.

# A. Swan Creek Pipeline
Facilities

In
July 1998, the Company completed Phase I of its pipeline from the Swan Creek Field, a
30-mile pipeline made of six and eight-inch steel pipe running from the Swan Creek Field
into the main city gate of Rogersville, Tennessee. The Company utilized the Tennessee
Valley Authoritys already-cleared right-of-way along its main power line grid for
most of the pipeline being laid from the Swan Creek Field to the Hawkins County Gas
Utility District located in Rogersville. The cost of constructing Phase I of the pipeline
was approximately $4,200,000.

In
March 2001, construction of Phase II of the Companys pipeline system was completed.
Phase II was an additional 35 miles of eight and 12-inch pipe laid at a cost of
approximately $11.1 million, extending the Companys pipeline from a point near the
terminus of Phase I and connecting to meter station at Eastman Chemical Companys
(Eastman) plant in Kingsport, Tennessee. The completed pipeline system extends
65 miles from the Companys Swan Creek Field to Kingsport, Tennessee and was built
for a total cost of approximately $16,414,842.

# B. Swan Creek
Production and Development

The
Company began delivering gas through its pipeline in April 2001 and deliveries to Eastman
began in May 2001. Daily production in June 2001 averaged 4,936.2 Mcf and in July 2001
daily production averages increased to 5,497 Mcf per day. Although the Companys gas
production in mid-2001 was at anticipated levels, the Company was unable to maintain those
production levels. This was due to initial fluid problems in some wells as well as natural
production declines from the type of reservoir that actual production has now shown to
exist in the Swan Creek Field. The Company had initially intended to offset expected
natural declines in production by drilling new wells, but was largely prevented from doing
so during

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2002 through 2004 due to ongoing disputes with Bank One, the Companys
principal lender, and the resulting lack of available capital. That dispute was finally
settled in May 2004.

After
the Bank One lawsuit was resolved, the Company drilled two new wells in 2004 in the Swan
Creek Field to the Knox Formation. This resulted in one producing well, the Steve Lawson
#8, which is currently producing approximately 10,000 cubic feet of natural gas per day.
The other well, the Hazel Sutton #3, did not result in the production of commercial
volumes of gas. An attempt was made to have this well produce oil from the Trenton
formation, a shallower interval, but this also proved unsuccessful. The Company does not
believe it is likely that commercial quantities of oil or gas will occur from the Hazel
Sutton #3 well and it is anticipated that upon final review it will be plugged.

Because
the Knox formation of the Swan Creek Field has been now been more specifically defined by
the accumulation of data from previously drilled wells and seismic data, the Company now
believes that drilling new gas wells in the Field will not contribute to achieving any
significant increase in daily gas production totals from the Field. As a result, the
Company does not have any plans at the present time to drill any new gas wells in the Swan
Creek Field.

Further,
the Company now expects that even if new wells were drilled in the Swan Creek Field, the
deliverability of natural gas from the Field will not be sufficient to satisfy the volumes
deliverable under its contracts with Eastman and BAE in Kingsport, Tennessee. The Eastman
contract provides that Eastman will buy a minimum of the lesser of eighty percent of that
customers daily usage or 10,000 MMBtu per day, and the BAE contract provides that
BAE will buy a minimum of all of that customers usage or 5,000 MMbtu per day after
Eastmans volumes have been provided. The Companys current production from the
Swan Creek field is approximately 745 MMBtu per day. The Companys contracts with
these customers are only for gas produced from the Swan Creek Field. So long as that Field
is not capable of supplying these volumes, the Company is not in breach or violation of
these contracts. No penalty is associated with the inability of the Field to produce the
volumes that the Company could deliver and buyers would be obligated to buy under its
industrial contracts if the volumes were physically available from the Field. However, in
the event that the Company were found to be in breach of its obligations for failure to
deliver any volumes of gas that is produced from the Swan Creek Field to either of these
customers, the agreements limit potential exposure to damages. Damages are limited to no
more than $.40 per MMBtu for any replacement volumes that are proved in a court proceeding
as having been obtained to replace volumes required to be furnished but not furnished by
the Company.

The
experienced decline in actual production levels from existing wells in the Swan Creek
Field was expected and does not diminish either the shut-in pressure or the Companys
actual reserves in the Swan Creek Field. The declines, however, suggest the production
rates from some of the Companys wells will continue to be slower, which may result
in such wells lasting longer than originally expected. Although there can be no assurance,
the Company expects these natural rates of decline will be less than the decline
experienced to date,

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and that ongoing production from existing wells will tend to
stabilize near current production levels. The Company anticipates that the natural decline
of production from existing wells is now predictable in the Swan Creek Field, that the
total volume of its reserves remains largely intact, and that these reserves can be
extracted primarily through existing wells.

Natural
gas production from the Swan Creek Field during 2004 averaged 611 thousand cubic feet per
day compared to 1.053 million cubic feet per day in 2003.

During
2004, the Company had 22 producing gas wells and 5 producing oil wells in the Swan Creek
Field. Miller Petroleum, Inc. and others had a participating interest in 7 of these wells.
See, Item 2  Description of Property  Property Location, Facilities,
Size and Nature of Ownership. In total, the Company has completed 47 wells in the
Swan Creek Field. The majority of these gas wells were drilled prior to the completion of
the pipeline system so only test data was available prior to full production. Of the
completed wells, 12 are not producing commercial quantities of hydrocarbons and will not
be tied in to the Companys pipeline since the expense of connection is not justified
in view of the expected volumes to be produced.

# 2. The Kansas
Properties

In
1998, the Company acquired the Kansas Properties, which presently include 129 producing
oil wells and 51 producing gas wells in the vicinity of Hays, Kansas and a 50 mile gas
gathering system. The Company also acquired 37 other wells, which now serve as saltwater
disposal wells in the vicinity of Hays, Kansas. These saltwater disposal wells reduce
operating costs by eliminating the need for transportation out of the area of the salt
water produced in the oil production process. The aggregate production for the Kansas
Properties in 2004 was 716 Mcf of gas and 326 barrels of oil per day. Revenue for the
Kansas Properties was approximately $383,909 per month in 2004. The Company employs a full
time geologist in Kansas to oversee operations of the Kansas Properties.

In
2004, the Company drilled one new well in Kansas, the Lewis No. 3 Well. This well was
drilled to the Arbuckle formation, and is currently producing 39 barrels of oil per day.
In December 2004, the Company commenced a lease acquisition program in Kansas and as of
the date of this report, has increased its lease position from 32,158 acres to 42,895
acres by acquiring oil and gas leases in an area near its previous lease holdings where
the Company believes there is a likelihood of additional oil production. This newly
acquired acreage is largely undrilled, and the Company believes that current seismic
exploration technology will enable the Company to establish additional oil production by
efficient location of new wells to be drilled by the Company. The Company intends to
continue to acquire additional leases in the area of its existing wells.

In
February and March 2005, the Company began drilling the first two wells of an eight-well
drilling program in Kansas (the Drilling Program or the Program).
The Program was offered to the holders of the Companys Series A 8% Cumulative
Convertible Preferred

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Stock (Series A Shares) in exchange for their Series A
Shares. The Company, acting as operator of the Program, is charging the participants in
the Program a turnkey fee of $250,000 for each of the eight units in the
Program. Participation in the Program was accepted by five of the thirteen Series A
Shareholders who received 6.5 units of the Drilling Program with the Company retaining the
remaining 1.5 units. This resulted in the Series A Shareholders acquiring approximately an
81% working interest in the eight wells and the Company retaining the remaining 19%
working interest. For a further discussion of this drilling program see, Item 7
Managements Discussion and Analysis of Financial Condition and Results of
Operation  Liquidity and Capital Resources.

In
addition, there are several capital development projects that the Company has considered
to increase current oil production with respect to the Kansas Properties, including
recompletion of wells and major workovers. Management has made the decision to undertake
as many of these projects as may be paid from current cash flow, as the Company does not
presently have the necessary funds to perform all workovers simultaneously. To date, a
limited number of workovers on the Companys oil wells in Kansas has been successful.
The workovers included a treatment of wells by injection of polymers (a type of plastic
compound) that has sealed off almost all of the water from entering the fluid stream that
is naturally produced from the wells, while at the same time increasing the total quantity
of crude oil that is actually produced per day from the treated wells. Although there can
be no assurances, similar workovers when completed might reduce water production and its
associated removal expense and increase oil production in Kansas from many of the
Companys other existing oil wells.

The
Companys gas producing properties in Kansas were physically separated from the oil
properties, and were all located in Rush County, Kansas. The Company believes that there
is a limited possibility of significant additional net revenues being obtained by the
Company from these properties. Consequently, on March 4, 2005 the Company sold fifty-three
(53) producing gas wells and saltwater disposal wells and the associated gathering system
as well as the underlying leases and rights of way constituting all of the gas wells,
leases and gathering systems in Rush County, Kansas that were purchased by the Company
from AFG in 1998 to Bear Petroleum, Inc. for $2.4 million. As a result, the Companys
Kansas Properties now consist exclusively of oil producing properties.

# 3. Other Areas of
Development

The
Company has evaluated other geological structures in the East Tennessee area that are
similar to the Swan Creek Field. These target evaluations were made using any available
third party seismic data, the Companys own seismic investigations, and drilling
results and geophysical logs from the existing wells in the region. While these areas are
of interest, and may be further evaluated at some future time, based on its review to date
the Company does not currently intend to actively explore these areas with its own funds.
However, the Company may consider entering into partnerships where further exploration and
drilling costs can be largely borne by third parties. There can be no assurances that any
third party would participate in a

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drilling program in these structures, that any of these
prospects will be drilled, and if they were drilled that they would result in commercial
production.

The
Company is seeking to purchase and has attempted to acquire additional existing oil and
gas production in the Mid-Continent (USA) area. The Company is particularly interested in
areas of Kansas, Oklahoma, and Texas. Although financing plans are uncertain, management
believes that when a suitable property becomes available, a combination of such a property
when combined with our current reserves would allow the Company to create a financing
mechanism that would make a purchase of the property possible. However, there is no
assurance that a suitable property will become available or that terms will be established
leading to a completion of such a purchase.

The
Company also intends to establish and explore all business opportunities for connection of
the pipeline system owned by the Companys subsidiary, TPC, to other sources of
natural gas so that revenues from third parties for transportation of gas across the
pipeline system may be generated. Although no assurances can be made, such connections may
also enable the Company to purchase natural gas from other sources and to then market
natural gas to new customers in the Kingsport, Tennessee area at retail rates under a
franchise agreement already granted to the Company by the City of Kingsport, subject to
approval by the Tennessee Regulatory Authority.

The
Company also intends to explore the feasibility of obtaining natural gas or substitutes
for natural gas from unconventional sources if such gas can be economically treated and
tendered in commercial volumes for transportation through the Companys existing
pipeline system or other delivery mechanisms for the purposes of supplementing the
Companys existing supply to existing customers, and sale to additional customers.

# Governmental Regulations

The
Company is subject to numerous state and federal regulations, environmental and otherwise,
that may have a substantial negative effect on its ability to operate at a profit. For a
discussion of the risks involved as a result of such regulations, see, Effect of
Existing or Probable Governmental Regulations on Business and Costs and
Effects of Compliance with Environmental Laws hereinafter in this section.

# Principal Products or
Services and Markets

The
principal markets for the Companys crude oil are local refining companies, local
utilities and private industry end-users. The principal markets for the Companys
natural gas are local utilities, private industry end-users, and natural gas marketing
companies.

Gas
production from the Swan Creek Field can presently be delivered through the Companys
completed pipeline to the Powell Valley Utility District in Hancock County, Eastman and
BAE in Sullivan County, as well as other industrial customers in the Kingsport area. The
Company has acquired all necessary regulatory approvals and necessary property

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rights for
the pipeline system. The Companys pipeline can not only provide transportation
service for gas produced from the Companys wells, but could provide transportation
of gas for small independent producers in the local area as well. The Company could,
although there can be no assurance, sell its products to certain local towns, industries
and utility districts.

Natural
gas from the Kansas Properties is delivered to Oneok Bushton Processing, Inc. in Bushton,
Kansas. At present, crude oil is sold to the National Cooperative Refining Association in
McPherson, Kansas, 120 miles from Hays. National Cooperative is solely responsible for
transportation of the oil it purchases whether by truck or pipeline.

# Drilling Equipment

On
July 28, 2004 the Company sold an Ingersoll Rand RD20 drilling rig and related equipment.
The Company does not currently own a drilling rig or any related drilling equipment. The
Company obtains drilling services as required from time to time from various companies as
available in the Swan Creek Field area and various drilling contractors in Kansas.

# Distribution Methods of Products or Services

Crude
oil is normally delivered to refineries in Tennessee and Kansas by tank truck and natural
gas is distributed and transported via pipeline.

# Competitive Business
Conditions, Competitive Position in the Industryand Methods of
Competition

The
Companys contemplated oil and gas exploration activities in the States of Tennessee
and Kansas will be undertaken in a highly competitive and speculative business atmosphere.
In seeking any other suitable oil and gas properties for acquisition, the Company will be
competing with a number of other companies, including large oil and gas companies and
other independent operators with greater financial resources. Management does not believe
that the Companys initial competitive position in the oil and gas industry will be
significant.

The
Companys principal competitors in the State of Tennessee are Nami Resources, LLC,
Miller Petroleum, Inc. and Knox Energy Development. Nami Resources, Miller Petroleum, and
Knox Energy Development are in the business of exploring for and producing oil and natural
gas in the Kentucky and East Tennessee areas. These companies are in competition with the
Company for lease positions in the known producing areas in which the Company currently
operates, as well as other potential areas of interest.

There
are numerous producers in the area of the Kansas Properties. Some are larger with greater
financial resources.

Although
management does not foresee any difficulties in procuring contracted drilling rigs,
several factors, including increased competition in the area, may limit the availability
of drilling rigs, rig operators and related personnel and/or equipment in the future.

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Such limitations would have a natural adverse impact on the profitability of the Companys
operations.

The
Company anticipates no difficulty in procuring well drilling permits in any state.They are
usually issued within one week of application. The Company generally does not apply for a
permit until it is actually ready to commence drilling operations.

The
prices of the Companys products are controlled by the world oil market and the
United States natural gas market. Thus, competitive pricing behaviors are considered
unlikely; however, competition in the oil and gas exploration industry exists in the form
of competition to acquire the most promising acreage blocks and obtaining the most
favorable prices for transporting the product.

# Sources and Availability
of Raw Materials

Excluding the development of oil and gas reserves and the  production of oil and gas, the Company's operations are not dependent on the acquisition of
any raw materials.

# Dependence On One or a
Few Major Customers

The
Company is presently dependent upon a small number of customers for the sale of gas from
the Swan Creek Field, principally Eastman and BAE, and other industrial customers in the
Kingsport area with which the Company may enter into gas sales contracts.

Natural
gas from the Kansas Properties is delivered to Kansas-Nebraska Energy, Inc. in Bushton,
Kansas. At present, crude oil from the Kansas Properties is being trucked and transported
through pipelines to the National Cooperative Refining Association in McPherson, Kansas,
120 miles from Hays, Kansas. National Cooperative is solely responsible for transportation
of products whether by truck or pipeline.

# Patents, Trademarks,
Licenses, Franchises, Concessions, Royalty Agreements or
Labor Contracts, Including Duration

Royalty
agreements relating to oil and gas production are standard in the industry. The amount of
the Companys royalty payments varies from lease to lease.

# Need For Governmental
Approval of Principal Products or Services

None
of the principal products offered by the Company require governmental approval, although
permits are required for drilling oil or gas wells. In addition the transportation service
offered by TPC is subject to regulation by the Tennessee Regulatory Authority to the
extent of certain construction, safety, tariff rates and charges, and nondiscrimination
requirements under state law. These requirements are typical of those imposed on regulated
common carriers or utilities in the State of Tennessee. TPC presently has

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all required
approvals necessary to transport natural gas to all customers of the Company.

The
City of Kingsport, Tennessee has also enacted an ordinance granting to TPC a franchise for
twenty years to construct, maintain and operate a gas system to import, transport, and
sell natural gas to the City of Kingsport and its inhabitants, institutions and businesses
for domestic, commercial, industrial and institutional uses. This ordinance and the
franchise agreement it authorizes also require approval of the Tennessee Regulatory
Authority under state law. The Company will not initiate the required approval process for
the ordinance and franchise agreement until such time that it can supply gas to the City
of Kingsport. Although the Company anticipates that regulatory approval would be granted,
there can be no assurances that it would be granted, or that such approval would be
granted in a timely manner, or that such approval would not be limited in some manner by
the Tennessee Regulatory Authority.

TPC
presently has all required tariffs and approvals necessary to transport natural gas to all
customers of the Company.

# Effect of Existing or
Probable Governmental Regulations On Business

Exploration
and production activities relating to oil and gas leases are subject to numerous
environmental laws, rules and regulations. The Federal Clean Water Act requires the
Company to construct a fresh water containment barrier between the surface of each
drilling site and the underlying water table. This involves the insertion of a seven-inch
diameter steel casing into each well, with cement on the outside of the casing. The
Company has fully complied with this environmental regulation, the cost of which is
approximately $10,000 per well.

The
State of Tennessee also requires the posting of a bond to ensure that the Companys
wells are properly plugged when abandoned. A separate $2,000 bond is required for each
well drilled. The Company currently has the requisite amount of bonds on deposit.

As
part of the Companys purchase of the Kansas Properties it acquired a statewide
permit to drill in Kansas. Applications under such permit are applied for and issued
within one to two weeks prior to drilling. At the present time, the State of Kansas does
not require the posting of a bond either for permitting or to insure that the
Companys wells are properly plugged when abandoned. All of the wells in the Kansas
Properties have all permits required and the Company believes that it is in compliance
with the laws of the State of Kansas.

The
Companys exploration, production and marketing operations are regulated extensively
at the federal, state and local levels. The Company has made and will continue to make
expenditures in its efforts to comply with the requirements of environmental and other
regulations. Further, the oil and gas regulatory environment could change in ways that
might substantially increase these costs. Hydrocarbon-producing states regulate
conservation practices and the protection of correlative rights. These regulations affect
the Companys operations and limit the quantity of hydrocarbons it may produce and
sell. In addition, at the federal level, the Federal Energy Regulatory Commission
regulates interstate transportation of natural gas under the Natural Gas Act. Other
regulated matters include marketing, pricing, transportation and

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valuation of royalty
payments.

The
Companys operations are also subject to numerous and frequently changing laws and
regulations governing the discharge of materials into the environment or otherwise
relating to environmental protection. The Company owns or leases, and has in the past
owned or leased, properties that have been used for the exploration and production of oil
and gas and these properties and the wastes disposed on these properties may be subject to
the Comprehensive Environmental Response, Compensation and Liability Act, the Oil
Pollution Act of 1990, the Resource Conservation and Recovery Act, the Federal Water
Pollution Control Act and analogous state laws. Under such laws, the Company could be
required to remove or remediate previously released wastes or property contamination.

Laws
and regulations protecting the environment have generally become more stringent and, may
in some cases, impose strict liability for environmental damage. Strict
liability means that the Company may be held liable for damage without regard to whether
it was negligent or otherwise at fault. Environmental laws and regulations may expose the
Company to liability for the conduct of or conditions caused by others or for acts that
were in compliance with all applicable laws at the time they were performed. Failure to
comply with these laws and regulations may result in the imposition of administrative,
civil and criminal penalties.

While
management believes that the Companys operations are in substantial compliance with
existing requirements of governmental bodies, the Companys ability to conduct
continued operations is subject to satisfying applicable regulatory and permitting
controls. The Companys current permits and authorizations and ability to get future
permits and authorizations may be susceptible, on a going forward basis, to increased
scrutiny, greater complexity resulting in increased costs or delays in receiving
appropriate authorizations.

The
Companys Board of Directors has adopted resolutions to form an Environmental
Response Policy and Emergency Action Response Policy Program. A plan was adopted which
provides for the erection of signs at each well and at strategic locations along the
pipeline containing telephone numbers of the Companys office and the home telephone
numbers of key personnel. A list is maintained at the Companys office and at the
home of key personnel listing phone numbers for fire, police, emergency services and
Company employees who will be needed to deal with emergencies.

The
foregoing is only a brief summary of some of the existing environmental laws, rules and
regulations to which the Companys business operations are subject, and there are
many others, the effects of which could have an adverse impact on the Company. Future
legislation in this area will no doubt be enacted and revisions will be made in current
laws. No assurance can be given as to what effect these present and future laws, rules and
regulations will have on the Companys current and future operations.

# Research and Development

11

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The
Company has not expended any material amount in research and development activities during
the last two fiscal years.

# Number of Total
Employees and Number of Full-Time Employees

The
Company presently has twenty-four full time employees and no part-time employees.

# Risk Factors

In
addition to the other information in this document, investors in the Companys common
stock should consider carefully the following risks with respect to the Companys
business operations:

# The Companys
Auditors Have Issued Their Audit Report,                  Which Includes An
Explanatory Paragraph Emphasizing                  Substantial Doubt About
the Companys Ability To Continue                  As A Going Concern For
One Year From The Balance                  Sheet Date (December
31, 2004).

# 

# 

# 

# 

Management
has disclosed in the notes to the Companys Consolidated Financial Statements for the
year ended December 31, 2004, certain circumstances that raise substantial doubt about the
Companys ability to continue as a going concern, which depends upon the
Companys ability to obtain long-term financing or raise capital to satisfy the
Companys cash flow requirements. The Company must make substantial capital
expenditures for the acquisition, exploration and development of oil and gas reserves.
Historically, the Company has paid for these expenditures with cash from operating
activities, proceeds from debt and equity financings and asset sales. The Companys
ability to re-work existing wells, drill new wells and acquire new properties is dependent
upon the Companys ability to fund these expenditures. Although the Company
anticipated that after the resolution of its dispute with its primary lender, Bank One, it
would be able to find alternative institutional sources of financing for its activities;
to date it has been unable to do so. The Companys inability to obtain a replacement
credit facility to fund its operations combined with the fact that the Company is still in
the early stages of its oil and gas operating history, during which time it has a history
of losses from operations and has an accumulated deficit of $33,385,524 and a working
capital deficit of $6,753,721 as of December 31, 2004, the Companys Independent
Registered Public Accounting Firm issued their report which emphasized the substantial
doubt about the Companys ability to continue as a going concern as described above.

At
the present time and if and until the Company is able to obtain institutional financing,
the Company must obtain the necessary funds to proceed with the Companys operations
from other sources, such as equity investments or joint ventures with other companies. In
addition, the Companys revenues or cash flows could decline in the future

12

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because of
a variety of reasons, including lower oil and gas prices or the inoperability of some or
all of the Companys existing wells. If the Companys revenues or cash flows
decrease or the Company is unable to procure additional financing, the Company would be
required to reduce production over time or would otherwise be adversely affected, which
would adversely impact the Companys ability to continue in business. Where the
Company is not the majority owner or operator of an oil and gas project, the Company may
have no control over the timing or amount of capital expenditures required with the
particular project. If the Company cannot fund the Companys capital expenditures in
such projects, the Companys interests in such projects may be reduced or forfeited.
In addition to the Companys operational cash requirements, the Company has a
significant amount of loans and other obligations either due or maturing May 25, 2005. As
a result of the sale of the gas producing properties in Kansas, the Company was able to
reduce amounts owed on high-interest debts. As of the filing date of this report, the
Companys remaining interest-bearing loans have an aggregate principal amount of
approximately $700,000. The Company also has accrued and unpaid dividends on preferred
stock in an aggregate amount in excess of $649,000. See below, Item 7 
Managements Discussion and Analysis of Financial Condition and Results of Operation
 Liquidity and Capital Resources. The Company can make no assurances that it
will be able to obtain any additional funding required as described above, in which event
it may not be able to continue as a going concern.

# Declines In Oil and
Gas Prices WillMaterially Adversely
Affect the Company.

The
Companys future financial condition and results of operations will depend in part
upon the prices obtainable for the Companys oil and natural gas production and the
costs of finding, acquiring, developing and producing reserves. Prices for oil and natural
gas are subject to fluctuations in response to relatively minor changes in supply, market
uncertainty and a variety of additional factors that are beyond the Companys
control. These factors include worldwide political instability (especially in the Middle
East and other oil-producing regions), the foreign supply of oil and gas, the price of
foreign imports, the level of drilling activity, the level of consumer product demand,
government regulations and taxes, the price and availability of alternative fuels and the
overall economic environment. A substantial or extended decline in oil and gas prices
would have a material adverse effect on the Companys financial position, results of
operations, quantities of oil and gas that may be economically produced, and access to
capital. Oil and natural gas prices have historically been and are likely to continue to
be volatile. This volatility makes it difficult to estimate with precision the value of
producing properties in acquisitions and to budget and project the return on exploration
and development projects involving the Companys oil and gas properties. In addition,
unusually volatile prices often disrupt the market for oil and gas properties, as buyers
and sellers have more difficulty agreeing on the purchase price of properties.

# There Are Risks In
Rates Of Oil and Gas Production,Development
Expenditures, and Cash Flows.

13

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Projecting
the effects of commodity prices on production, and timing of development expenditures
include many factors beyond the Companys control. The future estimates of net cash
flows from the Companys proved reserves and their present value are based upon
various assumptions about future production levels, prices, and costs that may prove to be
incorrect over time. Any significant variance from assumptions could result in the actual
future net cash flows being materially different from the estimates.

# Oil and Gas Operations
Involve Substantial Costsand Are Subject To
Various Economic Risks.

# 

The
Companys oil and gas operations are subject to the economic risks typically
associated with exploration, development and production activities, including the
necessity of significant expenditures to locate and acquire producing properties and to
drill exploratory wells. In conducting exploration and development activities, the
presence of unanticipated pressure or irregularities in formations, miscalculations or
accidents may cause the Companys exploration, development and production activities
to be unsuccessful. This could result in a total loss of the Companys investment. In
addition, the cost and timing of drilling, completing and operating wells is often
uncertain.

# The Company Has
Significant Costs To Conform ToGovernment Regulation
Of The Oil and Gas Industry.

The
Companys exploration, production and marketing operations are regulated extensively
at the federal, state and local levels. The Company has made and will continue to make
large expenditures in its efforts to comply with the requirements of environmental and
other regulations. Further, the oil and gas regulatory environment could change in ways
that might substantially increase these costs. Hydrocarbon-producing states regulate
conservation practices and the protection of correlative rights. These regulations affect
the Companys operations and limit the quantity of hydrocarbons it may produce and
sell. In addition, at the federal level, the Federal Energy Regulatory Commission
regulates interstate transportation of natural gas under the Natural Gas Act. Other
regulated matters include marketing, pricing, transportation and valuation of royalty
payments.

# The Company Has
Significant Costs Related To Environmental Matters.

The
Companys operations are subject to numerous and frequently changing laws and
regulations governing the discharge of materials into the environment or otherwise
relating to environmental protection. The Company owns or leases, and has owned or leased,
properties that have been leased for the exploration and production of oil and gas and
these properties and the wastes disposed on these properties may be subject to the
Comprehensive Environmental Response, Compensation and Liability Act, the Oil Pollution
Act of 1990, the Resource Conservation and Recovery Act, the Federal Water Pollution
Control Act and similar state laws. Under such laws, the Company could be required to
remove or remediate wastes or property contamination.

14

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Laws
and regulations protecting the environment have generally become more stringent and, may
in some cases, impose strict liability for environmental damage. Strict
liability means that the Company may be held liable for damage without regard to whether
it was negligent or otherwise at fault. Environmental laws and regulations may expose the
Company to liability for the conduct of or conditions caused by others or for acts that
were in compliance with all applicable laws at the time they were performed. Failure to
comply with these laws and regulations may result in the imposition of administrative,
civil and criminal penalties.

The
Companys ability to conduct continued operations is subject to satisfying applicable
regulatory and permitting controls. The Companys current permits and authorizations
and ability to get future permits and authorizations may be susceptible, on a going
forward basis, to increased scrutiny, greater complexity resulting in increased costs or
delays in receiving appropriate authorizations.

# Insurance Does Not
Cover All Risks.

Exploration
for and production of oil and natural gas can be hazardous, involving unforeseen
occurrences such as blowouts, cratering, fires and loss of well control, which can result
in damage to or destruction of wells or production facilities, injury to persons, loss of
life, or damage to property or the environment. Although the Company maintains insurance
against certain losses or liabilities arising from its operations in accordance with
customary industry practices and in amounts that management believes to be prudent,
insurance is not available to the Company against all operational risks.

# The Company Is Not
Competitive WithRespect To
Acquisitions Or Personnel.

# 

The
oil and gas business is highly competitive. In addition, the Company is presently in a
weak financial condition. In seeking any suitable oil and gas properties for acquisition,
or drilling rig operators and related personnel and equipment, the Company is not able to
compete with most other companies, including large oil and gas companies and other
independent operators with greater financial and technical resources and longer history
and experience in property acquisition and operation.

# The Company Depends On
Key Personnel,Whom It May Not Be
Able To Retain Or Recruit.

Members
of present management and certain Company employees have substantial expertise in the
areas of endeavor presently conducted and to be engaged in by the Company. To the extent
that their services become unavailable, the Company would be required to retain other
qualified personnel. The Company does not know whether it would be able to recruit and
hire qualified persons upon acceptable terms. The Company does not maintain Key
Person insurance for any of the Companys key employees.

15

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# General Economic
Conditions.

Virtually
all of the Companys operations are subject to the risks and uncertainties of adverse
changes in general economic conditions, the outcome of pending and/or potential legal or
regulatory proceedings, changes in environmental, tax, labor and other laws and
regulations to which the Company is subject, and the condition of the capital markets
utilized by the Company to finance its operations.

# Available Information

The
Company is a reporting company, as that term is defined under the Securities Acts, and
therefore, files reports, including Quarterly Reports on Form 10-Q and Annual Reports on
Form 10-K such as this Report, proxy information statements and other materials with the
Securities and Exchange Commission (SEC). You may read and copy any materials
the Company files with the SEC at the SECs Public Reference Room at 450 Fifth
Street, N.W., Washington D.C. 20549 upon payment of the prescribed fees. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.

In
addition, the Company is an electronic filer and files its Reports and information with
the SEC through the SECs Electronic Data Gathering, Analysis and Retrieval system
(EDGAR). The SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding issuers that file electronically
through EDGAR with the SEC, including all of the Companys filings with the SEC. The
address of such site is (http://www.sec.gov).

The
Companys website is located at http://www.tengasco.com. Under the
Finance section of the website, you may access, free of charge the
Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, Section 16 filings (Form 3, 4 and 5) and any amendments to those reports as
reasonably practicable after the Company electronically files such reports with the SEC.
The information contained on the Companys website is not part of this Report or any
other report filed with the SEC.

# ITEM 2. PROPERTIES

# Property Location,
Facilities, Size and Nature of Ownership

# Swan Creek Field

The Companys
Swan Creek Leases are on approximately 21,188 acres in Hancock, Claiborne, Knox,
Jefferson, Morgan and Union Counties in Tennessee. The initial terms of these leases vary
from one to five years. Some of them will terminate unless the

16

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Company has commenced
drilling. In 2002, the Company reduced the acreage comprising the Swan Creek Field from
approximately 50,500 acres to 41,088 acres. In 2003, the acreage in the Swan Creek Field
was again reduced to 28,338 acres. In 2004, the acreage in the Swan Creek was further
reduced to the present 21,188 acres. These reductions in acreage were a result of the
Company having a better understanding of the geological and geophysical makeup of the Swan
Creek Field. Management believes the acreage eliminated from the Field does not have the
potential to produce commercial quantities of oil or gas and that the reduction of this
acreage does not affect the reserves of the Swan Creek Field. Further, the elimination of
the leases for this acreage will result in beneficial cost savings to the Company.

Morita
Properties, Inc., an affiliate of Shigemi Morita, a former Director of the Company,
currently has a 25% overriding royalty in nine of the Companys existing wells, and a
50% overriding royalty and 6% overriding royalty, respectively, in two of the
Companys other existing wells. All of these wells are located in the Swan Creek
Field and all but two are presently producing wells. In addition, to those interests,
Morita Properties, Inc. previously owned a 25% working interest in three of the
Companys other existing wells and 12.5% working interest in another of the
Companys wells which it subsequently sold.

An
individual who is not an affiliate of the Company purchased 25% working interests in two
other wells, the Stephen Lawson No. 1 and the Patton No. 1. Both of these wells are
located in the Swan Creek Field. Of these two wells only the Stephen Lawson No. 1
continues to produce.

Another
individual has a 29% revenue interest in the Laura Jean Lawson No. 3 well by virtue of
having contributed her unleased acreage to the drilling unit and paying her proportionate
share of the drilling costs of the well. The Company was obligated to allow that
individual to participate on that basis in accordance with both customary industry
practice and the requirements of the procedures of the Tennessee Oil and Gas Board in a
forced pooling action brought by the Company to require the acreage to be included in the
unit so that the well could be drilled. The forced pooling procedure was concluded by her
contribution of acreage and agreement to pay her proportionate share of drilling costs.

The
Company also entered into a farmout agreement with Miller Petroleum, Inc.
(Miller) for ten wells to be drilled in the Swan Creek Field with the Company
having an option to award up to an additional ten future wells. All locations were to be
mutually agreed upon. Net revenues, as defined, are to be 81.25% to Miller. The
Companys subsidiary TPC will transport Millers gas. The Company reserved all
offset locations to wells drilled under the farmout agreement. All ten wells have been
drilled under the farmout agreement. The Company acquired back from Miller a 50% working
interest from Miller in nine of those ten wells in addition to its rights under the
farmout agreement. In addition, the Company and Miller have drilled two additional wells
on a 50-50 basis, although the Company declined to exercise its option for a ten-well
extension of the farmout agreement. Of the wells in which Miller owns an interest, six are
presently producing.

17

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Other
than the working interests described or referred to in this Item, the Company retains all
other working interests in wells drilled or to be drilled in the Swan Creek Field.

Other
working interest owners in oil and gas wells in which the Company has working interests
are entitled to market their respective shares of production to purchasers other than
purchasers with whom the Company has contracted. Absent such contractual arrangements
being made by the working interest owners, the Company is authorized but is not required
to provide a market for oil or gas attributable to working interest owners
production. At this time, the Company has not agreed to market gas for any working
interest owner to customers other than customers of the Company. If the Company were to
agree to market gas for working interest owners to customers other than the Companys
customers, the Company would have to agree, at that time, to the terms of such marketing
arrangements and it is possible that as a result of such arrangements, the Companys
revenues from such production may be correspondingly reduced. If the working interest
owners make their own arrangements to market their natural gas to other end users along
the Companys pipeline such gas would be transported by TPC at published tariff
rates. The current published tariff rate is for firm transportation at a demand or
reservation charge of five cents per MMBtu per day plus a commodity charge of
$0.80 per MMBtu. If the working interest owners do not market their production, either
independently or through the Company, then their interest will be treated as not yet
produced and will be balanced either when marketing arrangements are made by such working
interest owners or when the well ceases to produce in accordance with customary industry
practice.

# Kansas Properties

The
Kansas Properties as of December 31, 2004 contained 138 leases totaling 42,895 acres in
the vicinity of Hays, Kansas. The increase in the Companys acreage in Kansas from
32,158 acres in 2003 to the current total is due to the Companys acquisition of new
leases in those areas close to its existing, productive wells. The Company intends to
increase its acreage in Kansas through the continued acquisition of new leases. The terms
on the Companys original leases in the Kansas properties were from 1 to 10 years and
in most cases have expired. Most of these leases, however, are still in effect because
they are being held by production. The Company maintains a 100% working interest in most
wells. The leases provide for a landowner royalty of 12.5%. Some wells are subject to an
overriding royalty interest from 0.5% to 9%.

Although
the Company does not pay taxes on its Swan Creek leases, it pays ad valorem taxes on its
Kansas Properties. The Company has general liability insurance for the Kansas Properties
and the Swan Creek Field.

The
Company leases its principal executive offices, consisting of approximately 5,647 square
feet located at 603 Main Avenue, Suite 500, Knoxville, Tennessee at a rental of $5,176 per
month and an office in Hays, Kansas at a rental of $500 per month.

# Reserve Analyses

18

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Ryder
Scott Company, L.P. of Houston, Texas (Ryder Scott) has performed reserve
analyses of all the Companys productive leases. Ryder Scott and its employees and
its registered petroleum engineers have no interest in the Company, and performed these
services at their standard rates. The net reserve values used hereafter were obtained from
a reserve report dated January 17, 2005 (the Report) prepared by Ryder Scott
as of December 31, 2004.

The
Report indicates the Companys TOTAL PROVEN ALL CATEGORIES reserves for
the Company to be as follows: net production volumes of 1,090,000 barrels of oil and 7,947
MMCF of gas. The pre-tax present value discounted at 10% (PV10) is stated to be
$26,731,142. The Report indicates the proven developed producing reserves for
the Company to be as follows: net production volumes of 783,000 barrels of oil and 5,342
MMCF of gas. The pre-tax present value discounted at 10% (PV10) is stated to be
$17,304,770.

In
substance, the Report used estimates of oil and gas reserves based upon standard petroleum
engineering methods which include production data, decline curve analysis, volumetric
calculations, pressure history, analogy, various correlations and technical factors.
Information for this purpose was obtained from owners of interests in the areas involved,
state regulatory agencies, commercial services, outside operators and files of Ryder
Scott. The net reserve values in the Report were adjusted to take into account the working
interests that have been sold by the Company in various wells in the Swan Creek Field.

The
Company believes that the reserve analysis reports prepared by Ryder Scott for the Company
for the Swan Creek Field and Kansas Properties provide an essential basis for review and
consideration of the Companys producing properties by all potential industry
partners and all financial institutions across the country. It is standard in the industry
for reserve analyses such as these to be used as a basis for financing of drilling costs.

The
Company has not filed the reserve analysis reports prepared by Ryder Scott or any other
reserve reports with any Federal authority or agency other than the SEC. The Company,
however, has filed the information in the Report of the Companys reserves with the
Energy Information Service of the Department of Energy in compliance with that
agencys statutory function of surveying oil and gas reserves nationwide.

The
term Proved Oil and Gas Reserves is defined in Rule 4-10(a)(2) of Regulation
S-X promulgated by the SEC as follows:

|2. | Proved oil and gas reserves. Proved oil and gas reserves are the estimated
          quantities of crude oil, natural gas, and natural gas liquids which geological
          and engineering data demonstrate with reasonable certainty to be recoverable in
          future years from known reservoirs under existing economic and operating
          conditions, i.e., prices and costs as of the date the estimate is made. Prices
          include consideration of changes in existing prices provided
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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| | only by contractual
          arrangements, but not on escalations based upon future conditions.
| | ------------------------------------------------------------------------------------------------

|i. | Reservoirs are considered proved if economic producibility is supported by
          either actual production or conclusive formation test. The area of a reservoir
          considered proved includes (A) that portion delineated by drilling and defined
          by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining
          portions not yet drilled, but which can be reasonably judged as economically
          productive on the basis of available geological and engineering data. In the
          absence of information on fluid contacts, the lowest known structural occurrence
          of hydrocarbons controls the lower proved limit of the reservoir.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ii. | Reserves which can be produced economically through application of improved
          recovery techniques (such as fluid injection) are included in the proved
          classification when successful testing by a pilot project, or the operation of
          an installed program in the reservoir, provides support for the engineering
          analysis on which the project or program was based.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|iii. | Estimates of proved reserves do not include the following: (A) oil that may
          become available from known reservoirs but is classified separately as indicated
          additional reserves; (B) crude oil, natural gas, and natural gas liquids, the
          recovery of which is subject to reasonable doubt because of uncertainty as to
          geology, reservoir characteristics, or economic factors; (C) crude oil, natural
          gas, and natural gas liquids, that may occur in undrilled prospects; and (D)
          crude oil, natural gas, and natural gas liquids, that may be recovered from oil
          shales, coal, gilsonite and other such sources.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Production

The
following tables summarize for the past three fiscal years the volumes of oil and gas
produced to the Companys interests, the Companys operating costs and the
Companys average sales prices for its oil and gas. The information does not include
volumes produced to royalty interests or other working interests.

20

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|     |  | TENNESSEE |  |          
|---- |  | --------- |  | ---------
|
|
|2004 |  |           |  | 13,515.00
|2003 |  |           |  | 19,277.00
|2002 |  |           |  | 15,111.54

|     |  | KANSAS |  |           
|---- |  | ------ |  | ----------
|
|
|2004 |  |        |  | 115,701.00
|2003 |  |        |  | 104,511.00
|2002 |  |        |  | 105,473.54

# Oil and Gas Drilling
Activities

21

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The
Companys oil and gas developmental drilling for the past three fiscal years are as
set forth in the following tables. In 2003, due to the Companys inability to raise
capital because of its dispute with its primary lender, Bank One, N.A., the Company did
not have sufficient funds to drill any new wells.

In
2004 the Company drilled two wells in the Swan Creek Field which resulted in one producing
well, the Steve Lawson #8. This well was completed as a Knox gas well with an average
monthly production of approximately 235 Mcf. The other well, the Hazel Sutton #3 was
drilled to the Knox formation, but did not result in the production of commercial volumes
of gas. An attempt was made to have this well produce oil from the Trenton formation, a
shallower interval, but this also proved unsuccessful as the wellbore encountered
technical problems. The Company does not believe it is likely that commercial quantities
of oil or gas will occur from this well and it is anticipated that upon final review it
will be plugged.

In
August 2004, the Company, based on 3D seismic data also drilled one well in Kansas to the
Arbuckle formation, the Lewis #3. This well is currently producing approximately 39
barrels per day and has produced 3,785 gross barrels since its completion. The success of
the Lewis #3 and the ongoing success of the Company and the industry in Kansas through the
use of 3D seismic data indicates that the potential return on drilling investments in
Kansas remains strong.

During
the past three fiscal years, the Company drilled one exploratory well in 2002 in Cocke
County, Tennessee which did not result in finding commercial quantities of hydrocarbons.

# Gross and Net Wells

The
following tables set forth for the fiscal years ending December 31, 2002, 2003, and 2004
the number of gross and net development wells drilled by the Company. The dry holes set
forth in the table below are the Cocke County well and the Hazel Sutton #3 in the Swan
Creek Field referred to above. The term gross wells means the total number of wells in
which the Company owns an interest, while the term net wells means the sum of the
fractional working interests the Company owns in gross wells.

22

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|                          | YEAR ENDED DECEMBER 31 |  | 
|------------------------- | ---------------------- |  | 
|
|
|TennesseeProductive Wells |                        |  | 
|                          |                       
|Dry Holes                 |                        |  | 
|                          |                       
|Kansas                    |                        | 
|                          |                       
|Productive Wells          |                        |  | 
|                          |                       
|Dry Holes                 |                        |  | 
|                          |                       

# Productive Wells

The
following table sets forth information regarding the number of productive wells in which
the Company held a working interest as of December 31, 2004. Productive wells are either
producing wells or wells capable of commercial production although currently shut-in. One
or more completions in the same bore hole are counted as one well.

23

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|          | GAS | OIL
|--------- | --- | ---
|
|
|Tennessee |     |    
|          |     |    
|Kansas    |     |    
|          |     |    

# Developed and
Undeveloped Oil and Gas Acreage

As
of December 31, 2004, the Company owned working interests in the following developed and
undeveloped oil and gas acreage. Net acres refers to the Companys interest less the
interest of royalty and other working interest owners.

|          |  |  |  |       
|--------- |  |  |  | ------
|
|
|Tennessee |  |  |  | 1,280 
|          |  |  |  |       
|          |  |  |  |       
|Kansas    |  |  |  | 12, 73
|          |  |  |  |       

# ITEM 3.  LEGAL
PROCEEDINGS

The
Company is not a party to any pending material legal proceeding. To the knowledge of
management, no federal, state or local governmental agency is presently contemplating any
proceeding against the Company which would have a result materially adverse to the
Company. To the knowledge of management, no director, executive officer or affiliate of
the Company or owner of record or beneficially of more than 5% of the Companys
common stock is a party adverse to the Company or has a material interest adverse to the
Company in any proceeding.

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

None
during the fourth quarter of 2004.

24

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# PART II

# Market Information

| | The
Companys common stock is listed on the American Stock Exchange (AMEX)
under the symbol TGC. The range of high and low closing prices for shares of common stock
of the Company during the fiscal years ended December 31, 2004 and December 31, 2003 are
set forth below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For the Quarters Ending | High | Low
|----------------------- | ---- | ---
|March 31, 2004          |      |    
|June 30, 2004           |      |    
|September 30, 2004      |      |    
|December 31, 2004       |      |    
|March 31, 2003          |      |    
|June 30, 2003           |      |    
|September 30, 2003      |      |    
|December 31, 2003       |      |    

# Holders

As
of February 1, 2005 the number of shareholders of record of the Companys common
stock was 242 and management believes that there are approximately 3,246 beneficial owners
of the Companys common stock.

# Dividends

25

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The
Company did not pay any dividends with respect to the Companys common stock in 2004
and has no present plans to declare any further dividends with respect to its common
stock.

# Recent Sales of
Unregistered Securities

On
December 28, 2004, the Company issued 100,000 shares of restricted shares of its common
stock each to Clarke H. Bailey and John A. Clendening and 50,000 shares of restricted
stock to Neal F. Harding who are Directors of the Company for their services as members of
the Companys Audit Committee. No other equity securities that were not registered
under the Securities Act of 1933, as amended, were sold or issued by the Company during
2004.

# Purchases of Equity
Securities by the Companyand Affiliated
Purchasers

# 

Neither
the Company or any of its affiliates repurchased any of the Companys equity
securities during 2004.

# The Rights Offering

On
October 17, 2003, the Company filed a Registration Statement on Form S-1 with the SEC for
a rights offering of the Companys common stock (the Rights Offering). On
December 29, 2003; February 11, 2004; and February 13, 2004, the Company filed amendments
to the Registration Statement. On February 13, 2004, the SEC deemed effective the
Registration Statement on Form S-1 as amended.

The
Rights Offering was a distribution to the holders of the Companys common stock
outstanding at the record date, February 27, 2004, at no charge, of nontransferable
subscription rights at the rate of one right to purchase three shares of the
Companys common stock for each share of common stock owned at the subscription price
of $0.75 in the aggregate, or $0.25 per each share purchased.

The
record date for the Rights Offering was set as of February 27, 2004. The offering expired
at 5:00 p.m., New York City time, on March 18, 2004.

Each
subscription right in addition to the right to purchase three shares of common stock
carried with it an over-subscription privilege. The over-subscription privilege provided
stockholders that exercise all of their basic subscription privileges with the opportunity
to purchase those shares that were not purchased by other stockholders through the
exercise of their basic subscription privileges at the same subscription price per share.
In no event could any subscriber purchase shares of the Companys common stock in the
offering that, when aggregated with all of the shares of the Companys common stock
otherwise owned by the subscriber and his, her or its affiliates, would immediately
following the closing represent more than 50% of the Companys issued and outstanding
shares.

26

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The
net proceeds of the Rights Offering were initially used to pay non-bank indebtedness in
the aggregate amount of up to approximately $6 million (including to satisfy all of the
Companys outstanding loans to Dolphin in the principal amount of $3,850,000 plus
accrued interest) the balance of the net proceeds were used to repay bank indebtedness and
for working capital purposes, including the drilling of additional wells. See, Item
13 -Certain Relationships and Related Transactions.

At
the time the Rights Offering closed on March 18, 2004 all 36.3 million shares offered had
been subscribed for and, as a result the Company raised approximately $9.1 million. The
total number of shares subscribed for actually exceeded the 36.3 million shares available
for issuance under the offering. Consequently, all shares subscribed for under the basic
privilege were issued and the number of shares issued under the over subscription
privilege was proportionately reduced to equal the number of remaining shares. The
allocation and issuance of the oversubscribed shares was made by Mellon Investor Services,
the Companys subscription agent who also returned payments for those oversubscribed
shares that were not available.

Pursuant
to the Rights Offering, 7,029,604 rights were exercised pursuant to the basic subscription
privilege, resulting in the purchase of 21,088,812 shares at $0.25 per share for gross
proceeds to the Company of $5,272,203. A total of 15,211,188 shares were purchased
pursuant to the oversubscription privilege, resulting in additional gross proceeds to the
Company of $3,802,797. See, Item 13  Certain Relationships and Related
Transactions for a complete list of the shares purchased pursuant to the Rights
Offering by Directors and Officers of the Company and entities controlled by such persons.

# ITEM 6. SELECTED
FINANCIAL DATA

The
following selected financial data has been derived from the Companys financial
statements, and should be read in conjunction with those financial statements, including
the related footnotes.Years Ended December 313,

|                              | 2004 | 2003 | 2002 | 2001       | 2000
|----------------------------- | ---- | ---- | ---- | ---------- | ----
|
|Oil and Gas Revenues          |      |      | $    | 6,013,374  |     
|                              |      |      |      |            |     
|Production Costs and Taxes    |      |      | $    | 3,364,429  |     
|                              |      |      |      |            |     
|General and Administrative    |      |      | $    | 1,177,183  |     
|                              |      |      |      |            |     
|Interest Expense              |      |      | $    | 1,367,180  |     
|                              |      |      |      |            |     
|Net Loss                      |      |      |      | (1,994,025 | )   
|                              |      |      |      |            |     
|Net Loss Attributable to      |      |      |      |            |     
|Common Stockholders           |      |      | $    | (1,994,025 | )   
|                              |      |      |      |            |     
|Net Loss Attributable to      |      |      |      |            |     
|Common Stockholders Per Share |      |      | $    | (0.05      | )   
|                              |      |      |      |            |     

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# As of December 314 5 6 ,

|                            | 2004 | 2003 | 2002 | 2001       | 2000
|--------------------------- | ---- | ---- | ---- | ---------- | ----
|
|Working Capital Deficit     |      |      | $    | (6,753,721 | )   
|                            |      |      |      |            |     
|Oil and Gas Properties, Net |      |      | $    | 12,826,903 |     
|                            |      |      |      |            |     
|Pipeline Facilities, Net    |      |      | $    | 14,602,639 |     
|                            |      |      |      |            |     
|Total Assets                |      |      | $    | 29,209,749 |     
|                            |      |      |      |            |     
|Long-Term Debt              |      |      | $    | 1,940,890  |     
|                            |      |      |      |            |     
|Redeemable Preferred Stock  |      |      |      | 0          |     
|                            |      |      |      |            |     
|Stockholders Equity         |      |      | $    | 18,349,687 |     
|                            |      |      |      |            |     

# ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

28

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# Results of Operations

The
Company incurred a net loss to holders of common stock of $1,994,025 ($0.05 per share) in
2004 compared to a net loss of $3,451,580 ($0.29 per share) in 2003 and compared to a net
loss of $3,661,344 ($0.33 per share) in 2002.

During
2003, the Company implemented Statement of Financial Accounting Standard
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150), resulting in
a gain on a cumulative effect from a change in accounting principle of $365,675.
Additionally, the Company implemented Statement of Financial Accounting Standard No. 143,
Asset Retirement Obligations in July 1, 2003, resulting in a loss on a
cumulative effect from a change in accounting principle of $351,204. See Notes to the
Consolidated Financial Statements in Item 8 of this report.

During
2004, the Company recorded a gain from extinguishment of debt in the amount of $336,820
from the Bank One litigation settlement and a gain on disposal of preferred stock of
$458,310. The Company also recorded a loss on sale of a drill rig during 2004 of
$107,744.See, Note 16 in the Companys Notes to the Consolidated Financial Statements
in Item 8 of this report.

The
Company realized oil and gas revenues of $6,013,374 in 2004 compared to $6,040,872 in 2003
and compared to $5,437,723 in 2002. Revenues remained stable in 2004 from 2003 levels with
a slight increase in 2003 from 2002 levels due to increases in prices received for sales
of oil and gas. The volume of gas sold from the Swan Creek Field decreased to 223,078 Mcf
in 2004 from 384,238 Mcf in 2003 and the volume of oil sold from Swan Creek Field
decreased to 13,515 barrels in 2004 from 24,284 barrels in 2003. The decline in volumes of
oil and gas produced in the Swan Creek Field from existing wells is normal for any
producing well and the declines as experienced were not unexpected. The decrease in
volumes was offset by increases in price of the oil and gas volumes sold. Oil and gas
volumes produced from the Companys Kansas Properties remained relatively constant,
experiencing expected small declines in production consistent with the age of the
producing properties. Again, such declines are normal and are expected to continue.

Gas
prices received for sales of gas from the Swan Creek Field averaged $6.13 per Mcf in 2004,
$5.38 in 2003, and $3.22 in 2002. Oil prices received for sales of oil from the Swan Creek
field averaged $36.57 in 2004, $26.87 in 2003, and $21.85 in 2002. Gas prices received for
sales of each Mcf of gas in Kansas averaged $4.86 in 2004, $4.73 in 2003, and $2.96 in
2002. Oil prices received for sales of oil in Kansas averaged $39.41 per barrel in 2004,
$29.00 in 2003, and $23.89 in 2002.

The
Companys subsidiary, TPC, had pipeline transportation revenues of $92,599

29

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in 2004, a
decrease from $163,393 in 2003 and $259,677 in 2002 resulting from the decrease in volumes
of gas produced from the Swan Creek Field.

The
Companys production costs and taxes have increased from 2002 to 2004. Production
costs and taxes in 2004 of $3,364,429 remained consistent with 2003 levels. The production
costs and taxes increased in 2003 to $3,412,201 from $3,094,731 in 2002. This increase was
due to the fact that the Companys field personnel cost was capitalized as the
Company was drilling new wells in 2002, compared to 2003 and 2004. In 2003 and 2004 all
employees were working to maintain production and these costs, including field salaries in
Swan Creek, were expensed. The remaining increase is due to increased property taxes on
the pipeline because it has been assessed at a higher value after completion.

Depletion,
depreciation, and amortization decreased to $2,067,566 in 2004 from $2,308,007 in 2003 and
$2,413,597 in 2002. The decrease in 2004 was due to declines in volumes produced and a
reduction in depreciation taken on equipment sold in 2004.

The
Company reduced its general administrative costs to $1,177,183 in 2004 from $1,486,280 in
2003 and $1,868,141 in 2002 . Management has made a significant effort to control costs in
every aspect of its operations. Some of these cost reductions include the reduction of
personnel from 2003 and 2002 levels and utilization of existing employees to perform
drafting and file preparation services previously performed by third parties at additional
cost. The Company also closed its New York office in late 2002 and a field office in
Tennessee in 2003.

The
Company recorded an impairment loss of $495,000 relating to an oil rig in 2003.

Interest
expense for 2004 increased significantly over 2003 and 2002 levels due to the adoption of
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 143
(SFAS 143) which deals with asset retirement obligations and SFAS No.150
regarding preferred stock and dividends on preferred stock being recognized as interest
expense beginning in the third quarter of 2003. Interest expense in 2004 was $1,367,180
compared to $1,120,738 in 2003 and $578,039 in 2002.

Public
relations costs were significantly reduced to $35,347 in 2004 and $31,183 in 2003,
compared to $193,229 in 2002 as the Company applied cost saving methods in the preparation
of its annual report and in publishing of press releases.

Professional
fees in 2004 were $779,180 compared to $549,503 in 2003 and $707,296 in 2002. These fees
remained at a high level due to legal services primarily related to the Bank One
litigation.

Dividends
on preferred stock decreased to $0 in 2004 from $268,389 in 2003 and $506,789 in 2002, as
a result of the Companys adoption of SFAS No.150 effective July 1, 2003.

30

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The 2003
amount reflects dividends for the first six months of 2003. Dividends were charged against
the Companys liability, Shares subject to mandatory redemption. All
dividends and accretion were expensed in 2004. See, Note 9 to the Companys
Consolidated Financial Statements for more information.

# Liquidity and Capital
Resources

On
November 8, 2001, the Company signed a credit facility agreement with the Energy Finance
Division of Bank One, N.A. in Houston, Texas. The Company instituted litigation in May
2002 based on certain actions taken by Bank One. On May 13, 2004, the Company resolved its
dispute with Bank One. The Company had anticipated that when its dispute with Bank One was
resolved it would be able to obtain financing from other institutional lenders to allow
the Company to continue to both develop existing properties and locate and purchase
additional properties. To date, however, due to the financial status of the Company
including debt obligations owed, the Companys credit history, and the inability of
the Company to pay accrued distributions on its preferred stock, the Company has not been
able to establish a banking relationship with another institutional lender. Although
management continues to attempt to locate a source or sources of institutional financing
for Company operations, there can be no assurances that such relationships can be
established or that bank financing will be obtained or of the terms of such relationship.

Management
believes that the Company has made significant progress in 2004 in meeting the
Companys obligations under previous financing vehicles for Company operations and
positioning the Company for future growth. In 2004, all material litigation involving the
Company was resolved, eliminating the substantial ongoing costs and expenses of such
litigation to the Company. In 2004, the Companys rights offering successfully raised
sufficient capital to pay in full all preexisting secured debt in the amount of $3.8
million, most of which had been obtained at relatively high interest rates. In addition,
unsecured convertible notes entered into in 1998 in the principal amount of $1.5 million
were fully paid; and other convertible notes entered into in 2002 in the original
principal amount of $650,000 were paid in full in March 2004.

Additionally,
in December, 2004 the Company completed an exchange offer to the thirteen holders of all
of the Companys Series A 8% Cumulative Convertible Preferred Stock (Series A
Shares) in the face amount of $2,867,900. Seven of the thirteen holders elected to
exchange their shares for cash. Accordingly, the face amount of $1,085,000 of Series A
Shares was exchanged on or before December 31, 2004 for $723,370 in cash. The Company
obtained funds for the exchange from cash on hand and the proceeds of a loan from Dolphin
Offshore Partners, L.P. (Dolphin). The Company recognized a gain on shares
exchanged for cash of $458,310 as of December 31, 2004. The loan from Dolphin was in the
form of a note in principal amount of $550,000 bearing 12% interest per annum interest
only payable until due on May 20, 2005 and secured by a lien on the Companys
Tennessee and Kansas assets. Five of the thirteen Series A shareholders selected the
Drilling Program exchange option and on

31

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December 31, 2004 the face value of
$1,582,900 of Series A Shares plus dividend valued at $31,658 were exchanged for
approximately 6.5 units in the Program. The remaining 1.5 units in the Drilling Program
continue to be owned by the Company. Under the terms of the Drilling Program exchange, the
former Series A shareholders participating in the drilling program will receive all the
cash flow from each of eight wells to be drilled in Kansas, until they have recovered 80%
of the value of the Series A Shares exchanged. At that point, the Company will begin to
receive 85% of the cash flow from these wells as a management fee, and the former Series A
owners will continue to receive 15% of the cash flow for the productive life of the wells.
As a result, as of December 31, 2004 the Company has remaining only one Series A
shareholder owning Series A Shares with a face value of $200,000. Management believes this
was a successful and beneficial exchange for both the Company and the former Series A
shareholders.

On
March 4, 2005, the Company sold its gas producing properties in Rush County, Kansas for
$2.4 million and used the net proceeds of the sale to pay down the $2.5 million debt
incurred by the Company to fund the settlement of the litigation with Bank One in May,
2004. This has the effect of reducing the payment of high interest on this note, and
reducing the total secured debt owed by the Company to approximately $700,000 as of the
date of this report, consisting of about $150,000 remaining principal of the $2.5 million
note, and the principal of the $550,000 note used for the cash exchange of Series A
Shares.

As
a result of the payment of this secured and unsecured debt, and the exchange of most of
the Series A Shares, management believes the Company is now better positioned to both
establish a banking relationship with an institutional lender on acceptable terms to fund
the Companys activities. Although the Company is hopeful that as a result of the
substantial reduction of its debt position that it will soon be able to establish such a
relationship, there is no assurance it will be able to do so. Until the Company is able to
establish such a relationship, it will be necessary to fund its operations, including
capital expenditures for the acquisition, exploration and development of oil and gas
reserves from other sources, such as the rights offering as well as equity investment,
private loans or a joint venture with other companies, as to which there can be no
assurances. In addition to its operational cash requirements, the Company also has a
significant amount of loans and other obligations which will either become due or mature
on May 18, 2005, including secured promissory notes due to Dolphin in the principal amount
of $700,000 plus interest thereon, as well as the payment of the accrued distributions on
the Companys Series B 8% Cumulative Convertible Preferred Stock in the amount of
$180,000, and the scheduled redemption of both the Series B and Series C 6% Cumulative
Convertible Preferred Stock which become due on August 25, 2005 and April 30, 2007,
respectively. See, Item 13  Certain Relationships and Related Transacti
ns.

As
of December 31, 2004, the Company had total stockholders equity of $18,349,687 and
total assets of $29,209,749. The Company had a net working capital deficiency at December
31, 2004 of $6,753,721 compared to a net deficiency of $10,822,717 at December 31, 2003.

32

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Net
cash used in operating activities for 2004 was $370,137 compared to net cash provided by
operating activities of $316,027 in 2003. The Companys net loss in 2004 decreased to
$1,994,025 from $3,197,662 in 2003. The impact on cash used in operating activities was
due to the net loss for 2004 and was primarily offset by non-cash depletion, depreciation,
and amortization of $2,067,566, non-cash compensation and services paid by insurance of
equity instruments of $82,500 and accretion of liabilities of $825,371. Cash flow used in
working capital items in 2004 was $913,831 compared to cash provided by working capital
items of $60,282 in 2003. This resulted in 2004 from decreases from 2003 in accounts
payable of $756,129, a decrease in other assets of $155,477, an increase in accounts
receivable of $198,374, and a decrease in accrued interest payable of $208,954.

Net
cash provided by operating activities for 2003 was $316,027 as compared to net cash used
in operating activities of $566,017 in 2002. The Companys net loss in 2003 increased
to $3,197,662 from $3,154,555 in 2002. The impact on cash provided by operating activities
was due to the net loss for 2003 and was primarily offset by non-cash depletion,
depreciation, and amortization of $2,308,007, non-cash compensation and services paid by
insurance of equity instruments of $203,812, loss on impairment of long-term assets of
$495,000 and accretion of liabilities of $459,691. Cash flow from working capital items in
2003 was $60,282 as compared to $126,321 in 2002. This resulted from decreases in 2003
from 2002 in accounts payable of $320,813 and in accounts receivable of $222,289 and an
increase in accrued interest payable in 2003 from 2002 of $173,179.

Net
cash used in investing activities amounted to $876,854 for 2004 compared to net cash used
in the amount of $65,069 for 2003. The increase in net cash used for investing activities
during 2004 was primarily attributable to an increase in oil and gas properties of
$1,122,903 offset by a decrease in other property and equipment of $296,865.

Net
cash used in investing activities amounted to $65,069 for 2003 compared to $2,889,937 for
2002. The decrease in net cash used for investing activities during 2003 was primarily
attributable to the fact that in 2003 additions to oil and gas properties was $133,501
compared to $1,982,529 in 2002. In 2003 there was a reduction in expenditures used for the
construction of Phase II of the pipeline system from $841,750 in 2002 to $5,775, and in
2003 the Company did not make any expenditures for additions to other property and
equipment whereas in 2002 the Company expended $214,897 for these items.

Net
cash provided by financing activities increased to $1,202,060 in 2004 from cash used by
financing activities of $122,422 in 2003. In 2004 the primary sources of financing
included proceeds from borrowings of $3,310,815 compared to $3,256,171 in 2003. The
primary use of cash in financing activities in 2004 was the use of funds received from the
rights offering of $8,848,341 to repay the Companys prior borrowings of $9,848,560.
In 2003 cash from financing activities of $3,432,470 was used primarily to make payments
to Bank One in 2003 and for working capital.

Net
cash used in financing activities amounted to $122,422 in 2003 compared to net cash
provided by financing activities of $3,246,633 in 2002. The primary sources of

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financing
include proceeds from borrowings of $3,256,171 in 2003 compared to $2,063,139 in 2002,
private placements of common stock of $250,000 in 2003 compared to $2,677,000 in 2002,
convertible redeemable preferred stock of $1,303,168 in 2002 compared to none in 2003 and
proceeds from the exercise of options of $47,000 in 2003 compared to none in 2002. The
primary use of cash in financing activities was the repayment of borrowings of $3,432,470
in 2003 compared to $2,378,273 in 2002.

# Critical Accounting
Policies

The
Companys accounting policies are described in the Notes to Consolidated Financial
Statements in Item 8 of this Report. The Company prepares its Consolidated Financial
Statements in conformity with accounting principles generally accepted in the United
States of America, which requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. Actual results could differ from those estimates.
The Company considers the following policies to be the most critical in understanding the
judgments that are involved in preparing the Companys financial statements and the
uncertainties that could impact the Companys results of operations, financial
condition and cash flows.

# Revenue Recognition

The
Company recognizes revenues based on actual volumes of oil and gas sold and delivered to
its customers. Natural gas meters are placed at the customers location and usage is
billed each month. Crude oil is stored and at the time of delivery to the customers,
revenues are recognized.

# Full Cost Method of
Accounting

The
Company follows the full cost method of accounting for oil and gas property acquisition,
exploration and development activities. Under this method, all productive and
non-productive costs incurred in connection with the acquisition of, exploration for and
development of oil and gas reserves for each cost center are capitalized. Capitalized
costs include lease acquisitions, geological and geophysical work, daily rentals and the
costs of drilling, completing and equipping oil and gas wells. The Company capitalized
$1,122,903, $480,421 and $1,982,529 of these costs in 2004, 2003 and 2002, respectively.
Costs, however, associated with production and general corporate activities are expensed
in the period incurred. Interest costs related to unproved properties and properties under
development are also capitalized to oil and gas properties. Gains or losses are recognized
only upon sales or dispositions of significant amounts of oil and gas reserves
representing an entire cost center. Proceeds from all other sales or dispositions are
treated as reductions to capitalized costs. The capitalized oil and gas property, less
accumulated depreciation, depletion and amortization and related deferred income taxes, if

34

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any, are generally limited to an amount (the ceiling limitation) equal to the sum of: (a)
the present value of estimated future net revenues computed by applying current prices in
effect as of the balance sheet date (with consideration of price changes only to the
extent provided by contractual arrangements) to estimated future production of proved oil
and gas reserves, less estimated future expenditures (based on current costs) to be
incurred in developing and producing the reserves using a discount factor of 10% and
assuming continuation of existing economic conditions; and (b) the cost of investments in
unevaluated properties excluded from the costs being amortized. No ceiling write-downs
were recorded in 2004, 2003 or 2002.

# Oil and Gas
Reserves/Depletion Depreciationand Amortization of
Oil and Gas Properties

# 

The
capitalized costs of oil and gas properties, plus estimated future development costs
relating to proved reserves and estimated costs of plugging and abandonment, net of
estimated salvage value, are amortized on the unit-of-production method based on total
proved reserves. The costs of unproved properties are excluded from amortization until the
properties are evaluated, subject to an annual assessment of whether impairment has
occurred.

The
Companys proved oil and gas reserves as at December 31, 2004 were estimated by Ryder
Scott, L.P., Petroleum Consultants. Projecting the effects of commodity prices on
production, and timing of development expenditures include many factors beyond the
Companys control. The future estimates of net cash flows from the Companys
proved reserves and their present value are based upon various assumptions about future
production levels, prices, and costs that may prove to be incorrect over time. Any
significant variance from assumptions could result in the actual future net cash flows
being materially different from the estimates.

# Asset Retirement
Obligations

The
Company is required to record the effects of contractual or other legal obligations on
well abandonments for capping and plugging wells. Management periodically reviews the
estimate of the timing of the wells closure as well as the estimated closing costs,
discounted at the credit adjusted risk free rate of 12%. Quarterly, management accretes
the 12% discount into the liability and makes other adjustments to the liability for well
retirements incurred during the period.

Recent
Accounting Pronouncements

In
March 2004, The Emerging Issues Task Force (EITF) reached a consensus that
mineral rights, as defined in EITF Issue No. 04-02, Whether Mineral Rights are
Tangible or Intangible Asset, are tangible assets and that they should be removed as
examples of intangible assets in SFAS Nos. 141 and 142. The FASB has recently ratified
this consensus and directed the FASB staff to amend SFAS Nos. 141 and 142 through the
issuance of FASB Staff Positions FSP

35

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FAS 141-1 and FSP FAS 142-1. Historically the Company
has included the cost of such mineral rights as tangible assets, which is consistent with
the EITFs consensus. As such , EITF 04-02 will not affect the Companys
consolidated condensed financial statements.

Staff
Accounting Bulletin (SAB) No. 106, regarding the application of FASB Statement
No. 143, Accounting for Asset Retirement Obligations, by oil and gas producing companies
following the full cost accounting method was issued in September 2004. SAB 106 provided
an interpretation of how a company, after adopting Statement 143, should compute the full
cost ceiling to avoid double-counting the expected future cash outflows associated with
asset retirement costs. The provisions of this interpretation have been applied by the
Company and has no impact on the financial statements.

In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This
statement is a revision to SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. This statement establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services, primarily
focusing on the accounting for transactions in which an entity obtains employee services
in share-based payment transactions. Companies will be required to measure the cost of
employee services received in exchange for an award of equity instruments based on the
grant date fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service, the requisite
service period (usually the vesting period), in exchange for the award. The grant date
fair value of employee share options and similar instruments will be estimated using
option-pricing models. If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the fair value of
the modified award over the fair value of the original award immediately before the
modifications. SFAS No. 123R will be effective for periods beginning after June 15, 2005
and allows for several alternative transition methods. Accordingly, the Company will adopt
SFAS No. 123R in its third quarter of fiscal 2005. The Company is currently evaluating the
provisions of SFAS No. 123R and has not determined the impact that this Statement will
have on its results of operations or financial position.

36

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# CONTRACTUAL OBLIGATIONS

The
following table summarizes the Companys contractual obligations at December 31,
2004:

|                             | Payments Due By Period |  |  
|---------------------------- | ---------------------- |  | -
|
|Long-Term Debt Obligations7  |                        |  | $
|Capital Lease Obligations    |                        |  | $
|Operating Lease Obligations8 |                        |  | $
|Purchase Obligations         |                        |  | $
|Other Long-Term Liabilities9 |                        |  | $
|Total                        |                        |  | $

The
Company has entered into a Drilling Program with former holders of its Series A Preferred
Stock. The Company is contractually obligated to drill 8 wells in the Program, 6 of which
are expected to be completed in 2005. The Company has recorded an aggregate liability of
$1,755,603 on its consolidated balance sheet as of December 31, 2004. This amount is
included in Other Long-Term Liabilities in the table above.

# ITEM 7A QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

# Commodity Risk

37

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The
Companys major market risk exposure is in the pricing applicable to its oil and gas
production. Realized pricing is primarily driven by the prevailing worldwide price for
crude oil and spot prices applicable to natural gas production. Historically, prices
received for oil and gas production have been volatile and unpredictable and price
volatility is expected to continue. Monthly oil price realizations ranged from a low of
$29.77 per barrel to a high of $51.12 per barrel during 2004. Gas price realizations
ranged from a monthly low of $4.11 per Mcf to a monthly high of $7.78 per Mcf during the
same period. The Company did not enter into any hedging agreements in 2005 to limit
exposure to oil and gas price fluctuations.

# Interest Rate Risk

At
December 31, 2004, the Company had debt outstanding of approximately $3,183,000 at a fixed
rate. The Company did not have any open derivative contracts relating to interest rates at
December 31, 2004.

# Forward-Looking
Statements And Risk

Certain
statements in this report, including statements of the future plans, objectives, and
expected performance of the Company, are forward-looking statements that are dependent
upon certain events, risks and uncertainties that may be outside the Companys
control, and which could cause actual results to differ materially from those anticipated.
Some of these include, but are not limited to, the market prices of oil and gas, economic
and competitive conditions, inflation rates, legislative and regulatory changes, financial
market conditions, political and economic uncertainties of foreign governments, future
business decisions, and other uncertainties, all of which are difficult to predict.

There
are numerous uncertainties inherent in projecting future rates of production and the
timing of development expenditures. The total amount or timing of actual future production
may vary significantly from estimates. The drilling of exploratory wells can involve
significant risks, including those related to timing, success rates and cost overruns.
Lease and rig availability, complex geology and other factors can also affect these risks.
Additionally, fluctuations in oil and gas prices, or a prolonged period of low prices, may
substantially adversely affect the Companys financial position, results of
operations and cash flows.

# ITEM 8                FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

The
financial statements and supplementary data commence on page F-1.

# ITEM 9         CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON                       ACCOUNTING AND FINANCIAL DISCLOSURE

38

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None.

# ITEM 9A       CONTROLS AND
PROCEDURES

# Evaluation of Disclosure
Controls and Procedures

The
Companys disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports it files or submits under the
Securities Exchange Act of 1934, as amended, including this Report, is recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms.

The
Companys management, including the Companys President and Chief Financial
Officer (the Certifying Officers), as previously reported in the
Companys Quarterly Report on Form 10-Q for the quarter ending September 30, 2004
concluded that in one matter in 2004 that the Companys disclosure controls and
procedures were not effective with respect to that matter to ensure that material
information was recorded, processed, summarized and reported by management of the Company
on a timely basis in order to comply with the Companys disclosure obligations under
the Securities Exchange Act of 1934, and the rules and regulations thereunder. The matter
involved an error in the calculation of the estimated fair value of the Companys
mandatory preferred stock for presentation in accordance with Statement of Financial
Accounting Standard No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. The Company previously reported that
this deficiency constituted a material weakness, and detailed the facts surrounding the
matter. Management noted that the matter (i) related principally to the implementation of
complex and new calculations under a newly implemented accounting standard, and (ii) that
the error described did not result from the failure of the Companys disclosure
controls and procedures to make known to the appropriate officials and auditors the facts
concerning the Companys convertible preferred stock. Management determined that
continuing education and professional development of accounting staff on new accounting
pronouncements and their application would be sufficient to prevent any similar
reoccurrence. The Company is continuing to provide necessary and appropriate educational
and professional development and believes that such efforts have remediated the material
weakness described herein. As a result, the Companys Certifying Officers have
concluded based on their evaluation of the effectiveness of the design and operation of
the Companys disclosure controls and procedures pursuant to Rule 13a-14 and 15d-14
under the Securities Exchange Act of 1934, as amended, as of the date of this Report were
effective to ensure that material information was accumulated and communicated to
management, including the Companys Certifying Officers, as appropriate to allow
timely decisions regarding required disclosure in the Companys filings with the SEC.

# Changes in Internal
Controls

Except
as noted above, there have been no changes to the Companys system of internal
control over financial reporting during the quarter ended December 31, 2004 that has

39

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materially affected, or is reasonably likely to materially affect, the Companys
system of controls over financial reporting.

# ITEM 9B         OTHER INFORMATION

None.

# PART III

# ITEM 10         DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

# Identification of
Directors and Executive Officers

The
following table sets forth the names of all current directors and executive officers of
the Company. These persons will serve until the next annual meeting of stockholders (to be
held at such time as the Board of Directors shall determine) or until their successors are
elected or appointed and qualified, or their prior resignations or terminations.

|Name                     | Positions Held | Date of Initial Election
 or Designation
|------------------------ | -------------- | ----------------------------------------
|Clarke H. Bailey         |                |                                         
|1865 Palmer Avenue       |                |                                         
|Larchmont, NY 10538      |                |                                         
|                         |                |                                         
|Jeffrey R. Bailey        |                |                                         
|2306 West Gallaher Ferry |                |                                         
|Knoxville, TN 37932      |                |                                         
|                         |                |                                         
|John A. Clendening       |                |                                         
|1031 Saint Johns Drive   |                |                                         
|Maryville, TN 37801      |                |                                         
|Neal F. Harding          |                |                                         
|2509 Plantside Drive     |                |                                         
|Louisville, KY 40299     |                |                                         
|Carlos P. Salas          |                |                                         
|129 East 17th Street     |                |                                         
|New York, NY 10003       |                |                                         
|Peter E. Salas           |                |                                         
|129 East 17th Street     |                |                                         
|New York, NY 10003       |                |                                         

40

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|Name                           | Positions Held | Date of Initial Election
 or Designation
|------------------------------ | -------------- | ----------------------------------------
|Richard T. Williams            |                |                                         
|4472 Deer Run Drive            |                |                                         
|Louisville, TN 37777           |                |                                         
|Mark A. Ruth                   |                |                                         
|9400 Hickory Knoll Lane        |                |                                         
|Knoxville, TN 37931            |                |                                         
|Robert M. Carter               |                |                                         
|760 Prince George Parish Drive |                |                                         
|Knoxville, TN 37931            |                |                                         
|Cary V. Sorensen               |                |                                         
|5517 Crestwood Dr.             |                |                                         
|Knoxville, TN 379194           |                |                                         

Richard
T. Williams resigned as Chief Executive Officer of the Company as of December 31, 2004.
Effective January 1, 2005, the Company merged all duties of the Chief Executive Officer
with and into the office of President of the Company, currently held by Jeffrey R. Bailey,
and the position of Chief Executive Officer was eliminated.

# Business Experience

# Directors

Clarke
H. Bailey is 50 years old. He is currently Chairman of the Board and Chief Executive
Officer of Glenayre Technologies, Inc. (NasdaqNM:GEMS), a company engaged in the
development and sale of software and equipment in the wireless communications industry. He
has been a director of Glenayre since December 1990, Chairman since October 1999, and CEO
since October 2003. From January 1999 to March 2002 he was Chairman and CEO of
ShipXact.com, Inc. From February 1995 to January 1998 he was Chairman and CEO of United
Acquisition Company and its parent, United Gas Holding Corporation until their acquisition
by Iron Mountain Incorporated (NYSE:IRM), a records and information management services
company, in 1998. He has served on the Board of Directors of Iron Mountain since January
1998. He also served as Chairman of Arcus, Inc. from July 1995 to January 1998, and
Co-Chairman of Highgate Capital L.L.C. from February 1995 to March 2002. He holds a
Bachelors degree in Economics and a Bachelors degree in Rhetoric from the
University of California, Davis and a Master of Business Administration degree from The
Wharton School, University of Pennsylvania. Mr. Bailey serves as the Chairman of the
Companys Audit Committee and as the financial expert of that Committee.

Jeffrey
R. Bailey is 47 years old. He graduated in 1980 from New Mexico

41

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Institute of Mining and
Technology with a B.S. degree in Geological Engineering. Upon graduation he joined
Gearhart Industries as a field engineer working in Texas, New Mexico, Kansas, Oklahoma and
Arkansas. Gearhart Industries later merged with Halliburton Company. In 1993 after 13
years working in various field operations and management roles primarily focused on
reservoir evaluation, log analysis and log data acquisition he assumed a global role with
Halliburton as a Petrophysics instructor in Fort Worth, Texas. His duties were to teach
Halliburton personnel and customers around the world log analysis and competition
technology and to review analytical reservoir problems. In this role Mr. Bailey had the
opportunity to review reservoirs in Europe, Latin America, Asia Pacific and the Middle
East developing a special expertise in carbonate reservoirs. In 1997 he became technical
manager for Halliburton in Mexico focusing on finding engineering solutions to the
production challenges of large carbonate reservoirs in Mexico. He joined the Company as
its Chief Geological Engineer on March 1, 2002. He was elected as President of the Company
on July 17, 2002 and as a Director on February 28, 2003 and served as a Director until
August 11, 2004. He was again elected to the Companys Board of Directors on October
21, 2004.

Dr.John A. Clendening is 73 years old. He received B.S. (1958), M.S. (1960) and Ph.
          D. (1970) degrees in geology from West Virginia University. He was employed as a
          Palynologist-Coal Geologist at the West Virginia Geological Survey from 1960
          until 1968. He joined Amoco in 1968 and remained with Amoco as a senior
          geological associate until 1992. Dr. Clendening has served as President and
          other offices of the American Association of Stratigraphic Palynologists and the
          Society of Organic Petrologists. From 1992  1998 he was engaged in
          association with Laird Exploration Co., Inc. of Houston, Texas, directing
          exploration and production in south central Kentucky. In 1999 he purchased all
          the assets of Laird Exploration in south central Kentucky and operates
          independently. While with Amoco Dr. Clendening was instrumental in Amocos
          acquisition in the early 1970s of large land acreage holdings in Northeast
          Tennessee, based upon his geological studies and recommendations. His work led
          directly to the discovery of what is now the Companys Paul Reed # 1 well.
          He further recognized the area to have significant oil and gas potential and is
          credited with discovery of the field which is now known as the Companys
          Swan Creek Field. Dr. Clendening previously served as a Director of the Company
          from September 1998 to August 2000. He was again elected as a Director of the
          Company on February 28, 2003.

Neal
F. Harding is 63 years old. He received a Bachelors of Science degree in Social Sciences
from Campbellsville University in 1964. He is the Chairman and Chief Executive Officer of
the Heritage Companies based in Cocoa Beach, Florida which are three management companies
specializing in the development, construction, and management of more than 6,000 single
and multi-family affordable housing units. Mr. Harding through various partnerships,
currently owns in excess of 16,000 affordable housing units throughout the country. He is
the owner of R.M.D. Corp., the largest franchisee of Hooters restaurants. He is also the
majority shareholder of World Wide Wings, a Hooters franchisee which owns and manages six
international units located in Canada and England. Mr. Harding is also the majority
shareholder in F & H Development Company, which owns and operates a semi-public
PGA-designed 18-hole golf course in Sikeston, Missouri. Additionally, Mr. Harding is the
sole shareholder of

42

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Harding Construction Services, Inc., a real estate company
specializing in the acquisition and development of commercial and residential properties.
Mr. Harding is the exclusive franchisee of Qdoba Mexican Grill Restaurants in south
Florida. Mr. Harding previously served as a director of the Company from August 31, 1999
to August 7, 2000.

Carlos
P. Salas is 33 years old. He is a principal of Dolphin Advisors, L.L.C., which manages a
private-equity investment fund focused on middle-market opportunities. Before joining
Dolphin Advisors, Mr. Salas led an investor group in the acquisition of a private
engineering and manufacturing firm in 2001, and joined the company to lead a financial and
operating restructuring as CFO in 2002. Previously, Mr. Salas led corporate finance and
mergers and acquisitions advisory assignments for middle-market clients as an investment
banker with the Los Angeles office of Donaldson, Lufkin & Jenrette (DLJ),
and when DLJ was acquired by Credit Suisse First Boston Corporation (CSFB),
joined CSFBs mergers and acquisitions group. Prior to joining DLJ in 1999, Mr. Salas
practiced law with Cleary, Gottlieb, Steen & Hamilton in New York, advising financial
sponsors and corporate clients in connection with financings and cross-border mergers and
acquisitions transactions. Mr. Salas received his J.D. from The University of Chicago in
1996, and his B.A. in Philosophy from New York University in 1992. He was elected to the
Companys Board of Directors on August 12, 2004.

Peter
E. Salas is 50 years old. He has been President of Dolphin Asset Management Corp. and its
related companies since he founded it in 1988. Prior to establishing Dolphin, he was with
J.P. Morgan Investment Management, Inc. for ten years, becoming Co-manager, Small Company
Fund and Director-Small Cap Research. He received an A.B. degree in Economics from Harvard
in 1976. Mr. Salas was elected to the Board of Directors on October 8, 2002.

Dr.   
          Richard T. Williams is 54 years old. He has been a member of the faculty of the
          Department of Geological Sciences at The University of Tennessee in Knoxville,
          Tennessee, since 1987, after holding faculty positions at West Virginia
          University and the University of South Carolina since 1979. He has been engaged
          in reflection seismology and geophysical studies in the Appalachian Overthrust
          since 1980. He earned his Ph.D. in Geophysics from Virginia Tech in 1979. Dr.
          Williams was elected to the Board of Directors of the Company effective June 28,
          2002. He was appointed Chief Operating Officer of the Company on January 10,
          2003, and on February 3, 2003, he was elected Chief Executive Officer of the
          Company. He served in that position until December 31, 2004.

# Officers

Mark
A. Ruth is 46 years old. He is a certified public accountant with 24 years accounting
experience. He received a B.S. degree in accounting with honors from the University of
Tennessee at Knoxville. He has served as a project controls engineer for Bechtel Jacobs
Company, LLC; business manager and finance officer for Lockheed Martin Energy Systems;
settlement department head and senior accountant for the Federal Deposit Insurance
Corporation; senior financial analyst/internal auditor for Phillips Consumer Electronics
Corporation; and, as

43

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an auditor for Arthur Andersen and Company. From December 14, 1998 to
August 31, 1999 he served as the Companys Chief Financial Officer. On August 31,
1999 he was elected as a Vice-President of the Company and on November 8, 1999 he was
again appointed as the Companys Chief Financial Officer.

Robert
M. Carter is 68 years old. He attended Tennessee Wesleyan College and Middle Tennessee
State College between 1954 and 1957. For 35 years he was an owner of Carter Lumber &
Building Supply Company and Carter Warehouse in Loudon County, Tennessee. He has been with
the Company since 1995 and during that time has been involved in all phases of the
Companys business including pipeline construction, leasing, financing, and the
negotiation of acquisitions. Mr. Carter was elected Vice-President of the Company in
March, 1996, as Executive Vice-President in April 1997 and on March 13, 1998 he was
elected as President of the Company. He served as President of the Company until he
resigned from that position on October 19, 1999. On August 8, 2000 he again was elected as
President of the Company and served in that capacity until July 31, 2001. He has served as
President of Tengasco Pipeline Corporation, a wholly owned subsidiary of the Company, from
June 1, 1998 to the present.

Cary
V. Sorensen is 57 years old. He is a 1976 graduate of the University of Texas School of
Law and has undergraduate and graduate degrees form North Texas State University and
Catholic University in Washington, D.C. Prior to joining the Company in July, 1999, he had
been continuously engaged in the practice of law in Houston, Texas relating to the energy
industry since 1977, both in private law firms and a corporate law department, most
recently serving for seven years as senior counsel with the litigation department of Enron
Corp. before entering private practice in June, 1996. He has represented virtually all of
the major oil companies headquartered in Houston and all of the operating subsidiaries of
Enron Corp., as well as local distribution companies and electric utilities in a variety
of litigated and administrative cases before state and federal courts and agencies in five
states. These matters involved gas contracts, gas marketing, exploration and production
disputes involving royalties or operating interests, land titles, oil pipelines and gas
pipeline tariff matters at the state and federal levels, and general operation and
regulation of interstate and intrastate gas pipelines. He has served as General Counsel of
the Company since July 9, 1999.

# Committees

The
Companys Board has operating audit, nomination and governance, compensation/stock
option, and frontier exploration committees.

Clarke
H. Bailey, Neal F. Harding and John A. Clendening are the members of the Companys
audit committee. Mr. Bailey is the Chairman of this committee and the Board of Directors
has determined that Mr. Bailey is an audit committee financial expert as
defined by applicable SEC regulations. Each of the members of the audit committee meets
the independence and experience requirements of the applicable laws, regulations and stock
market rules, including the Sarbanes-Oxley Act, regulations and rules promulgated by the
Securities and Exchange

44

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Commission and the American Stock Exchange.

Mr.
          Harding, Clarke H. Bailey and Carlos P. Salas, with Mr. Salas acting as
          Chairman, are the members of the nomination and governance committee which,
          among other duties, determines the slate of director candidates to be presented
          for election at the Companys annual meeting of shareholders. On November
          18, 2004, the nominating/governance committee adopted procedures for the process
          of nominating persons for election to the Companys Board of Directors.
          Among the procedures adopted were the method by which shareholders of the
          Company could nominate individuals for election to the Board. The nomination
          procedures are posted on the Companys internet website at
          www.Tengasco.com. The procedures adopted have not been amended. However, in the
          event of any such amendment to the procedures, the Company intends to disclose
          the amendments on the Companys internet website within five business days
          following such amendment.

Mr.
          Clendening and Carlos P. Salas are the members of the compensation/stock option
          committee. Richard T. Williams, Jeffrey R. Bailey, Carlos P. Salas and Mr.
          Clendening comprise the frontier exploration committee.

# Family
Relationships/Arrangements

There
are no family relationships between any of the present directors or executive officers of
the Company except that Carlos P. Salas, a Director of the Company, is the second cousin
of Peter E. Salas, also a director of the Company. Mr. Carlos P. Salas is also one of
seven members of Dolphin Advisors, LLC which serves as the managing general partner of
Dolphin Direct Equity Partners, L.P., a private company investment fund that is not a
shareholder of the Company. The majority owner of Dolphin Advisors, LLC is Dolphin
Management, Inc, the sole shareholder of which is Peter E. Salas. Dolphin Management, Inc.
is also the managing partner of Dolphin Offshore Partners, L.P. which directly owns
16,244,452 shares of the Companys common stock. Peter E. Salas is the controlling
person of Dolphin Offshore Partners, L.P. Although Carols P. Salas has no direct or
indirect ownership interest in Dolphin Offshore Partners, L.P., he nonetheless may be
deemed an affiliate of Dolphin Offshore Partners, L.P. and Peter E. Salas.

There
is no family or other relationship between Clarke H. Bailey, a Director of the Company and
Jeffrey R. Bailey, the President and a Director of the Company. Mr. Clarke H. Bailey owns
an approximately 1.5% investment interest in Dolphin Offshore Partners, L.P. and in
Dolphin Direct Equity Partners, L.P. Management believes that Mr. Bailey is not an
affiliate of either of these entities as a result of his minor investment in those
companies.

There are no family relationships
between any of the other Directors or executive officers of the Company.

There
is no understanding or arrangement between any Director, officer or any other persons
pursuant to which such individual was or is to be selected as a Director or officer of the
Company.

45

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# Involvement in Certain
Legal Proceedings

To
the knowledge of management, during the past five years, no present or former director,
executive officer, affiliate or person nominated to become a director or an executive
officer of the Company:

|(1) | Filed a petition under the federal bankruptcy laws or any state insolvency law,
          nor had a receiver, fiscal agent or similar officer appointed by a court for the
          business or property of such person, or any partnership in which he or she was a
          general partner at or within two years before the time of such filing, or any
          corporation or business association of which he or she was an executive officer
          at or within two years before the time of such filing;
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Was convicted in a criminal proceeding or named the subject of a pending
          criminal proceeding (excluding traffic violations and other minor offenses);
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Was the subject of any order, judgment or decree, not subsequently reversed,
          suspended or vacated, of any court of competent jurisdiction, permanently or
          temporarily enjoining him or her from or otherwise limiting his or her
          involvement in any type of business, commodities, securities or banking
          activities;
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Was found by a court of competent jurisdiction in a civil action or by the SEC
          or the Commodity Futures Trading Commission (CFTC) to have violated
          any federal or state securities law or Federal commodities law, and the judgment
          in such civil action or finding by the SEC or CFTC has not been subsequently
          reversed, suspended, or vacated.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Section 16(a) Beneficial
Ownership Reporting Compliance

Section
16(a) of the Securities Exchange Act of 1934 requires the Companys executive
officers, directors and persons who beneficially own more than 10% of the Companys
Common Stock to file initial reports of ownership and reports of changes in ownership with
SEC. In fiscal 2004, Robert M. Carter, President of TPC, the Companys wholly-owned
subsidiary, failed to timely file one Form 4 Report involving one transaction. Clarke H.
Bailey, John A. Clendening and Neal F. Harding, Directors of the Company, recently each
filed a Form 5 Report which indicated they failed to file one Form 4 Report for fiscal
2004 involving one transaction each.

# Code of Ethics

The
Companys Board of Directors has adopted a Code of Ethics that applies to the
Companys Chief Executive Officer, financial officers and executive officers,
including its

46

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President and Chief Financial Officer. A copy of this Code of Ethics can be
found at the Companys internet website at www.Tengasco.com. The Company intends to
disclose any amendments to its Code of Ethics, and any waiver from a provision of the Code
of Ethics granted to the Companys Chief Executive Officer, President, Chief
Financial Officer, or persons performing similar functions, on the Companys Internet
website within five business days following such amendment or waiver. The information
contained on or connected to the Companys Internet website is not incorporated by
reference into this Form 10-K and should not be considered part of this or any other
report that the Company files with or furnishes to the SEC.

# ITEM 11        EXECUTIVE COMPENSATION

The
following table sets forth a summary of all compensation awarded to, earned or paid to,
the Companys Chief Executive Officer during fiscal years ended December 31, 2004,
December 31, 2003 and December 31, 2002. None of the Companys other executive
officers earned compensation in excess of $100,000 per annum for services rendered to the
Company in any capacity during those periods.

# Summary Compensation Table

|                          |  |  | -----------Long Term Awards--------------- |  |  |  
|------------------------- |  |  | ------------------------------------------ |  |  | -
|
|
|Richard T. Williams,      |  |  | 2004                                       |  |  | $
|Chief Executive Officer   |  |  | 2003                                       |  |  | $
|                          | 
|Malcolm E. Ratliff,       |  |  | 2002                                       |  |  | $
|Chief Executive Officer11 |  | 

# Option Grants For Fiscal
2004

No
stock options or stock appreciation rights were granted during fiscal year

47

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ended December
31, 2004 to the Chief Executive Officer. None of the Companys other executive
officers earned compensation in excess of $100,000 per annum for services rendered to the
Company in any capacity during the fiscal year ended December 31, 2004.

# Aggregate Option
Exercises For Fiscal 2004and Year End Option
Values

|                    |  |        | Number of Securities
Underlying Unexercised
Options/SARs at
December 31, 2004 | Value12 of Unexercised
In-the-Money
Options/SARs at
December 31, 2003
|------------------- |  | ------ | ----------------------------------------------------------------------------- | ---------------------------------------------------------------------
|
|Richard T. Williams |  | 50,000 |                                                                               | $8,500                                                               
|                    |  |        |                                                                               |                                                                      

None of
the Companys other executive officers earned compensation in excess of $100,000 per
annum for services rendered to the Company in any capacity.

The
Company adopted an employee health insurance plan in August 2001. The Company does not
presently have a pension or similar plan for its directors, executive officers or
employees. Management has considered adopting a 401(k) plan and full liability insurance
for directors and executive officers. However, there are no immediate plans to do so at
this time.

# Compensation of Directors

48

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The
Board of Directors has resolved to compensate members of the Board of Directors for
attendance at meetings at the rate of $250 per day, together with direct out-of-pocket
expenses incurred in attendance at the meetings, including travel. The Directors, however,
have waived such fees due to them as of this date for prior meetings.

Members
of the Board of Directors may also be requested to perform consulting or other
professional services for the Company from time to time. The Board of Directors has
reserved to itself the right to review all directors claims for compensation on an
ad hoc basis.

Directors
who are on the Companys Audit, Compensation/Stock Option and Nomination and
Goverance Committees are independent and therefore, do not receive any consulting,
advisory or compensatory fees from the Company. However, such Board members may receive
fees from the Company for their services on those committees. On December 28, 2004, the
Company issued 100,000 shares of restricted shares of its common stock each to Clarke H.
Bailey and John A. Clendening and 50,000 shares of restricted stock to Neal F. Harding who
are Directors of the Company for their services as members of the Companys Audit
Committee. The Company intends to implement a plan for the payment of those committee
members for their services on an annual basis.

# Employment Contracts

The
Company had entered into an employment contract with its Chief Executive Officer, Richard
T. Williams for a period of two years through December 31, 2004 at an annual salary of
$80,000. Dr. Williams resigned as Chief Executive Officer of the Company at the expiration
of his employment contract. There are presently no other employment contracts relating to
any member of management. However, depending upon the Companys operations and
requirements, the Company may offer long term contracts to directors, executive officers
or key employees in the future.

# Compensation Committee
InterlockingAnd Insider Participation

There
are no interlocking relationships between any member of the Companys Compensation
Committee and any member of the compensation committee of any other company, nor has any
such interlocking relationship existed in the past. No member of the Compensation
Committee is or was an officer or an employee of the Company during the past three years.

# ITEM 12       SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

49

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# Security Ownership of
Certain Beneficial Owners

The
following tables set forth the share holdings of the Companys directors and
executive officers and those persons who own more than 5% of the Companys common
stock as of March 15, 2005 with these computations being based upon 48,927,828 shares of
common stock being outstanding as of that date and as to each shareholder, as it may
pertain, assumes the exercise of options or warrants or the conversion of preferred stock
granted or held by such shareholder as of March 15, 2005.

# Five Percent Stockholders14

|Name and Address           | Title | Number of Shares
Beneficially Owned | Percent of
Class
|-------------------------- | ----- | ----------------------------------- | ----------------
|Dolphin Offshore           |       | Stockholder                         |                 
|Partners, L.P.             |      
|129 East 17th Street       |      
|New York, NY 10003         |      
|SC Fundamental Value       |       | Stockholder                         |                 
|Fund, L.P.                 |      
|747 Third Avenue, 27th Fl. |      
|New York, NY 10017         |      

# Directors and Officers17

50

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|Name and Address                  | Title | Number of Shares
Beneficially Owned | Percent
of Class
|--------------------------------- | ----- | ----------------------------------- | ----------------
|Clarke H. Bailey                  |       | Director                            |                 
|1865 Palmer Avenue                |      
|Larchmont, NY 10538               |      
|Jeffrey R. Bailey                 |       | Director;                           |                 
|2306 West Gallaher Ferry          |       | President                           |                 
|Knoxville, TN 37932               |      
|John A. Clendening                |       | Director                            |                 
|1031 Saint Johns Drive            |      
|Maryville, TN 37801               |      
|Neal F. Harding                   |       | Director                            |                 
|2509 Plantside Drive              |      
|Louisville, KY 40299              |      
|Carlos P. Salas                   |       | Director                            |                 
|129 East 17th Street              |      
|New York, NY 10003                |      
|Peter E. Salas                    |       | Director                            |                 
|129 East 17th Street              |      
|New York, NY 10003                |      
|Richard T. Williams               |       | Director                            |                 
|4477 Deer Run DriveLouisville, TN |      

51

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|Name and Address                 | Title | Number of Shares
Beneficially Owned | Percent
of Class
|-------------------------------- | ----- | ----------------------------------- | ----------------
|Robert M. Carter                 |       | President                           |                 
|441 Glen Abbey Blvd.             |       | Tengasco                            |                 
|Knoxville, TN 37922              |       | Pipeline Corporation                |                 
|Mark A. Ruth                     |       | Chief                               |                 
|9400 Hickory Knoll Lane          |       | Financial                           |                 
|Knoxville, TN 37931              |       | Officer                             |                 
|Cary V. Sorensen                 |       | Vice-                               |                 
|5517 Crestwood Drive             |       | President; General                  |                 
|Knoxville, TN 37919              |       | Counsel; Secretary                  |                 
|All Officers, Directors          |       |                                     |                 
|and Director-Nominees as a group |      

# Changes in Control

Except
as indicated below, to the knowledge of the Companys management, there are no
present arrangements or pledges of the Companys securities which may result in a
change in control of the Company.

# Equity Compensation Plan Information

52

---



|Plan Category       | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a) | Weighted-average
exercise price of
outstanding, options,
warrants and rights
(b) | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)
|------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation |                                                                                                 |                                                                                  |                                                                                                                                                
|plans approved by   |                                                                                                
|security holders28  |                                                                                                 | 295,153                                                                          |                                                                                                                                                
|                    |                                                                                                 |                                                                                  |                                                                                                                                                
|Equity compensation |                                                                                                
|plans not approved  |                                                                                                
|by security holders |                                                                                                 | 0                                                                                |                                                                                                                                                
|                    |                                                                                                 |                                                                                  |                                                                                                                                                
|Total               |                                                                                                 | 295,153                                                                          |                                                                                                                                                
|                    |                                                                                                 |                                                                                  |                                                                                                                                                

# ITEM 13       CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

# Transactions with
Management and Others

Except
as set forth hereafter, there have been no material transactions, series of similar
transactions or currently proposed transactions during 2004, to which the Company or any
of its subsidiaries was or is to be a party, in which the amount involved exceeds $60,000
and in which any director or executive officer or any security holder who is known to the
Company to own of record or beneficially more than 5% of the Companys common stock,
or any member of the immediate family of any of the foregoing persons, had a material
interest.

The
Companys Board of Directors has not adopted any general policy with respect to these
transactions, many of which were effected on behalf of the Company by senior management
prior to consideration of the transaction by the Board of Directors in light of senior
managements perceived urgency of the funding requirements, the availability of
alternative sources and the terms of such transactions were at least as favorable to the
Company as could have been obtained through arms-length negotiations with unaffiliated
third parties. In each of the loans to the Company by Dolphin Offshore Partners, L.P.
(Dolphin), which owns more than ten percent of the Companys outstanding Common
Stock and whose general partner, Peter E. Salas, is a Director of the Company, Mr. Salas
negotiated with on behalf of Dolphin with senior

53

---



management of the Company as to the terms
thereof and did not participate in any Board action with respect thereto.

On
February 2, 2004, Dolphin loaned the Company the sum of $225,000 which was used for making
payment of principal and interest to Bank One for February, 2004. This loan was evidenced
by a promissory note bearing interest at the rate of 12% per annum, with payments of
interest only payable quarterly and the principal balance payable on April 4, 2004. The
obligations under the loan were secured by an undivided interest in the Companys
Tennessee and Kansas pipelines.

In
March, 2004, net proceeds from the Companys Rights Offering in the amount of
$3,850,000 were used to pay the principal amount plus accrued indebtedness owed by the
Company to Dolphin for all loans previously made by Dolphin to the Company, including the
loan made on February 2, 2004 described above.

The
following table sets forth the number of shares of Common Stock purchased in connection
with the Rights Offering by persons who at the time were either Directors and Officers of
the Company or owners of more than ten percent of the Companys outstanding Common
Stock.

|Name                              | Position | Shares Purchased                
|--------------------------------- | -------- | --------------------------------
|Stephen W. Akos                   |          | Director                        
|Jeffrey R. Bailey                 |          | Director; President             
|John A. Clendening                |          | Director                        
|Robert L. Devereux                |          | Director                        
|Richard T. Williams               |          | Director; Chief ExecutiveOfficer
|                                  |          |                                 
|Dolphin Offshore Partners, L.P.30 |          |                                 

On
May 18, 2004, Dolphin loaned the Company $2,500,000 bearing interest at 12% per annum with
interest payable monthly beginning June 18, 2004 and principal payable on May 18, 2005.
This loan is secured by a first lien on the Companys Tennessee and Kansas

54

---



producing
properties and the Tennessee pipeline. The proceeds of this loan were used to fund in part
the Companys settlement of its litigation with Bank One.

On
December 28, 2004, Neal F. Harding, a Director of the Company, pursuant to the offering
made to all Series A shareholders exchanged all of his 1,985 Series A Shares for 4.48
units in the Companys Kansas drilling program. See, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operation 
Liquidity and Capital Resources.

On
December 30, 2004 Dolphin loaned the Company $550,000 bearing interest at 12% per annum
with interest payable quarterly and principal payable on May 20, 2005. This loan is
secured by a first lien on the Companys Tennessee and Kansas producing properties
and the Tennessee pipeline. The proceeds of this loan were used to fund in part the
Companys exchange of cash for a portion of the Companys outstanding Series A
Shares.

On
March 4, 2005, the Company sold its gas wells, associated gathering system, underlying
leases and rights of way located on its Kansas Properties for $2.4 million. The net
proceeds from the sale were used to pay down the Companys note to Dolphin dated May
18, 2004 from its original amount of $2,500,000 to $150,000.

# Indebtedness of
Management

No
officer, director or security holder known to the Company to own of record or beneficially
more than 5% of the Companys common stock or any member of the immediate family of
any of the foregoing persons is indebted to the Company.

# Parent of the Issuer

The Company has no parent.

# ITEM 14       PRINCIPAL
ACCOUNTANTS FEES AND SERVICES

The
following table presents the fees for professional audit services rendered by BDO Seidman,
LLP for the audit of the Companys annual consolidated financial statements for the
fiscal years ended December 31, 2004 and December 31, 2003, and fees for other services
rendered by BDO Seidman, LLP during those periods:

55

---



|Fee Category       | Fiscal 2004 | Fiscal 2003  
|------------------ | ----------- | -------------
|Audit Fees         |             | $155,000     
|Audit-Related Fees |             | $           0
|Tax Fees           |             | $           0
|All Other Fees     |             | $  12,000    
|Total Fees         |             | $167,000     

Audit
fees include fees related to the services rendered in connection with the annual audit of
the Companys consolidated financial statements, the quarterly reviews of the
Companys quarterly reports on Form 10-Q and the reviews of and other services
related to registration statements and other offering memoranda. The audit fees in 2004
were substantially less than in 2003 due to the settlement of the Companys
litigation with Bank One in May 2004

Audit-related
fees are for assurance and related services by the principal accountants that are
reasonably related to the performance of the audit or review of the Companys
financial statements.

Tax
Fees include (i) tax compliance, (ii) tax advice, (iii) tax planning and (iv) tax
reporting.

All
Other Fees includes fees for all other services provided by the principal accountants not
covered in the other categories such as litigation support, etc. In 2004, the amount of
fees in this category were higher than in 2003 due to fees for services performed by BDO
Seidman, LLP in connection with the Companys filling of a registration statement on
Form S-1 with the SEC for the Rights Offering which offering was completed in March 2004.

All
of the services for 2003 and 2004 were performed by the full-time, permanent employees of
BDO Seidman, LLP

All
of the 2004 services described above were approved by the Audit Committee pursuant to the
SEC rule that requires audit committee pre-approval of audit and non-audit services
provided by the Companys independent auditors to the extent that rule was applicable
during fiscal year 2004. The Audit Committee has considered whether the provisions of such
services, including non-audit services, by BDO Seidman, LLP is compatible with maintaining
BDO Seidman, LLPs independence and has concluded that it is.

# PART IV

# ITEM 15       EXHIBITS and
FINANCIAL STATEMENT SCHEDULES

56

---



A.    
          The following documents are filed as part of this Report:

1.    
          Financial Statements:

|                                                | 
|----------------------------------------------- | 
|Consolidated Balance Sheets                     | 
|Consolidated Statements of Loss                 | 
|Consolidated Statements of Stockholders' Equity | 
|Consolidated Statements of Cash Flows           | 
|Notes to Consolidated Financial Statements      | 

2.    
          Financial Schedules:

Schedules
have been omitted because the information required to be set forth therein is not
applicable or is included in the Consolidated Financial Statements or notes thereto.

3.    
          Exhibits.

The
following exhibits are filed with, or incorporated by reference into this Report:

2.         Exhibit Index

|Exhibit Number | Description                                                                                                                                                                                                                                                                                                                                       
|-------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            | Charter (Incorporated by reference to Exhibit 3.7 to the registrant's registration
                            statement on Form 10-SB filed August 7, 1997 (the "Form 10-SB"))                                                                                                                                                                   
|3.2            | Articles of Merger and Plan of Merger (taking into account the formation of the
                            Tennessee wholly-owned subsidiary for the purpose of changing the Company's
                            domicile and effecting reverse split) (Incorporated by reference to Exhibit 3.8 to
                            the Form 10-SB)
|3.3            | Articles of Amendment to the Charter dated June 24, 1998 (Incorporated by reference
                            to Exhibit 3.9 to the registrant's annual report on Form 10-KSB filed April 15,
                            1999 (the "1998 Form 10-KSB"))                                                                                        
|3.4            | Articles of Amendment to the Charter dated October 30, 1998 (Incorporated by
                            reference to Exhibit 3.10 to the 1998 Form 10-KSB)                                                                                                                                                                                       
|3.5            | Articles of Amendment to the Charter filed March 17, 2000 (Incorporated by
                            reference to Exhibit 3.11 to the registrant's annual report on Form 10-KSB filed
                            April 14, 2000 (the "1999 Form 10-KSB"))                                                                                      
|3.6            | By-laws (Incorporated by reference to Exhibit 3.2 to the Form 10-SB)                                                                                                                                                                                                                                                                              
|4.1            | Form of Rights Certificate Incorporated by reference to registrant's statement on
                            Form S-1 filed February 13, 2004 Registration File No. 333-109784 (the "Form S-1")                                                                                                                                                  
|10.1           | Natural Gas Sales Agreement dated November 18, 1999 between Tengasco, Inc. and
                            Eastman Chemical Company (Incorporated by reference to Exhibit 10.10 to the
                            registrant's current report on Form 8-K filed November 23, 1999)                                                               
|10.2           | Amendment Agreement between Eastman Chemical Company and Tengasco, Inc. dated March
                            27, 2000 (Incorporated by reference to Exhibit 10.14 to the registrant's 1999 Form
                            10-KSB)                                                                                                            

57

---



|       |                                                                                                                                                                                                                                                                                                                                                                                                        
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3   | Natural Gas Sales Agreement between Tengasco, Inc. and BAE SYSTEMS Ordnance Systems
                            Inc. dated March 30, 2001 (Incorporated by reference to Exhibit 10.20 to the 2000
                            Form 10-KSB)                                                                                                                                                             
|10.4   | Reducing and Revolving Line of Credit Up to $35,000,000 from Bank One, N.A.  to
                            Tengasco, Inc. Tennessee Land & Mineral Corporation and Tengasco Pipeline
                            Corporation dated November 8, 2001 (Incorporated by reference to Exhibit 10.21 to
                            the registrant's quarterly report on Form 10-Q filed November 14, 2001)
|10.5   | Tengasco, Inc. Incentive Stock Plan (Incorporated by reference to Exhibit 4.1 to
                            the registrant's registration statement on Form S-8 filed October 26, 2000)                                                                                                                                                                                                               
|10.6   | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated October 7, 2002 in the principal amount of $500,000
                            (Incorporated by reference to Exhibit 10.35 to the Form S-1)                                                                                                               
|10.7   | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated December 4, 2002 in the principal amount of $250,000
                            (Incorporated by reference to Exhibit 10.36 to the Form S-1)                                                                                                              
|10.8   | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated February 3, 2003 in the principal amount of $250,000
                            (Incorporated by reference to Exhibit 10.37 to the Form S-1)                                                                                                              
|10.9   | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated February 28, 2003 in the principal amount of $250,000
                            (Incorporated by reference to Exhibit 10.38 to the Form S-1)                                                                                                             
|10.10  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated May 20, 2003 in the principal amount of $750,000
                            (Incorporated by reference to Exhibit 10.39 to the Form S-1)                                                                                                                  
|10.11  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated August 6, 2003 in the principal amount of $150,000
                            (Incorporated by reference to Exhibit 10.40 to the Form S-1)                                                                                                                
|10.12  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Jeffrey
                            R. Bailey dated May 20, 2003 in the principal amount of $84,000 (Incorporated by
                            reference to Exhibit 10.41 to the Form S-1)                                                                                                                               
|10.13  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated December 3, 2003 in the principal amount of $225,000
                            (Incorporated by reference to Exhibit 10.42 to the registrant's current report on
                            Form 8-K dated December 3, 2003 (the "2003 Form 8-K")       
|10.14  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated December 9, 2003 in the principal amount of $250,000
                            (Incorporated by reference to Exhibit 10.43 to the 2003 Form 8-K)                                                                                                         
|10.15  | Continuing Security Agreement dated December 3, 2003 by the Company and Tengasco
                            Pipeline Corporation as Obligors and Dolphin Offshore Partners, LP as Secured Party
                            (Incorporated by reference to Exhibit 10.44 to the 2003 Form 8-K)                                                                                                         
|10.16  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated December 24, 2003 in the principal amount of $1,000,000
                            (Incorporated by reference to Exhibit 10.45 to the Form S-1)                                                                                                           
|10.17  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Jeffrey
                            R. Bailey dated February 2, 2004 in the principal amount of $225,000 (Incorporated
                            by reference to Exhibit 10.46 to the Form S-1)                                                                                                                          
|10.18  | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                            Offshore Partners, LP dated May 18, 2004 in the principal amount of $2,500,000
                            (Incorporated by reference to Exhibit 10.47 to the registrant's quarterly report on
                            Form 10-Q filed May 20, 2004)                               
|10.19* | Promissory Note made by Tengasco, Inc. and Tengasco Pipeline Corporation to Dolphin
                                               Offshore Partners, LP dated December 30, 2004 in the principal amount of $550,000                                                                                                                                                                                   
|       |                                                                                                                                                                                                                                                                                                                                                                                                        

58

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|      |                                                                                                                                                                                                                                                                                               
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20 | Asset Purchase Agreement dated March 4, 2005 between Tengasco, Inc. and Bear
                            Petroleum, Inc. (Incorporated by reference to Exhibit 10.1 the registrant's current
                            report on Form 8-K dated March 9, 2005 (the "March 9, 2005 Form 8-K")
|10.21 | Assignment and Bill of Sale between Tengasco, Inc. and Bear Petroleum, Inc.
                            (Incorporated by reference to Exhibit 10.2 to the March 9, 2005 Form 8-K)                                                                                                             
|14    | Code of Ethics (Incorporated by reference to Exhibit 14 to the registrant's annual
                            report on Form 10-K filed March 30, 2004)                                                                                                                                      
|21    | List of subsidiaries (Incorporated by reference to Exhibit 21 to the registrant's
                            annual report on Form 10-K filed March 31, 2003 (the "2002 Form 10-KSB"))                                                                                                       
|23.1* | Consent of Ryder Scott Company, L.P.                                                                                                                                                                                                                                                          
|31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                 
|31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                                               
|32.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                            adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 
|32.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                            adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 

* Exhibit filed with this Report

# SIGNATURES

Pursuant
to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: March 31, 2005

|                                                                          | 
|------------------------------------------------------------------------- | 
|TENGASCO, INC.(Registrant)                                                | 
|By:s/Jeffrey R. BaileyJeffrey R. Bailey,President                         | 
|By: s/Mark A. RuthMark A. Ruth,Principal Financial and Accounting Officer | 
|                                                                          | 

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

59

---



|Signature             | Title | Date                  
|--------------------- | ----- | ----------------------
|s/Clarke H. Bailey    |       | Director              
|Clarke H. Bailey      |      
|s/Jeffrey R. Bailey   |       | Director;             
|Jeffrey R. Bailey     |       | President             
|s/John A. Clendening  |       | Director              
|John A. Clendening    |      
|s/Neal F. Harding     |       | Director              
|Neal F. Harding       |      
|s/Carlos P. Salas     |       | Director              
|Carlos P. Salas       |      
|s/Peter E. Salas      |       | Director              
|Peter E. Salas        |      
|s/Richard T. Williams |       | Director              
|Richard T. Williams   |      
|s/Mark A. Ruth        |       | Principal Financial   
|Mark A. Ruth          |       | and Accounting Officer

60

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---

| |  |  | 1 |  | A BOE is a barrel of oil equivalent. A barrel of oil contains approximately 6
Mcf of natural gas by heating content. The volumes of gas produced have been converted
into barrels of oil equivalent for the purposes of calculating costs of
production.
| |  |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 2 |  | Although the actual total cost of production for the Swan Creek Field in 2004 as compared
to 2003 remained constant, the cost per BOE increased substantially because of an
approximate 43% decrease in production of oil and gas.
| |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 3 |  | All references in this table to common stock and per share data have been retroactively
adjusted to reflect the 5% stock dividend declared by the Company effective as of
September 4, 2001.
| |  |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 4 |  | With respect to the pipeline facilities, during the years ended December 31, 2000 and
1999, this included portions which were under construction.
| |  |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 5 |  | No cash dividends have been declared or paid by the Company for the periods presented.
| |  |  | - |  | --------------------------------------------------------------------------------------

| |  |  | 6 |  | On July 1, 2003, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 150 under which mandatorily redeemable preferred stock shall be reclassified
at estimated fair value to a liability. Thus, in 2003, it was determined that each of the
Companys series of preferred stock qualifies as shares subject to mandatory
redemption and should be classified as a liability. Also, see Note 9 to the Consolidated
Financial Statements in Item 8 of this Report.
| |  |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 7 |  | See, Note 7 to Consolidated Financial Statements in Item 8 of this Report.
| |  |  | - |  | --------------------------------------------------------------------------

| |  |  | 8 |  | See,
Note 8 to Consolidated Financial Statements in Item 8 of this Report.
| |  |  | - |  | --------------------------------------------------------------------------

| |  |  | 9 |  | See, Note 9 to Consolidated Financial Statements in Item 8 of this Report.
| |  |  | - |  | --------------------------------------------------------------------------

| |  |  | 10 |  | Number of shares underlying options has been retroactively adjusted for a 5% stock
dividend declared by the Company as of September 4, 2001.
| |  |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 11 |  | Malcolm E. Ratliff served as the Company's Chief Executive Officer throughout 2002. Richard T. Williams  replaced Mr.
        Ratliff as Chief Executive Officer on February 3, 2003 and continued in that position until he resigned as of December 31, 2004.
| |  |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 12 |  | Unexercised options are in-the-money if the fair market value of the underlying securities
exceeds the exercise price of the option. The fair market value of the Common Stock was
$0.26 per share on December 31, 2004, as reported by The American Stock Exchange. Prior to
his becoming Chief Executive Officer of the Company. Dr. Williams on August 5, 2002 was
granted an option to purchase 13,125 shares of the Companys common stock at a price
of $2.69 per shares. That option expires on August 4, 2005. Since the exercise price of
shares underlying that option had a negative value as of December 31, 2004 they are not
included in this chart.
| |  |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 13 |  | Value realized in dollars is based upon the difference between the fair market value of
the underlying securities on the date of exercise, and the exercise price of the option.
On February 25, 2004, Dr. Williams exercised his option to the extent of purchasing 50,000
shares of the Companys common stock at $0.50 per share. The closing price of the
Companys common stock on February 25, 2004 as reported on by the American Stock
Exchange was $0.67 per share.
| |  |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 14 |  | Unless otherwise stated, all shares of Common Stock are directly held with sole voting and
dispositive power. The shares set forth in the table reflect shares issued in connection
with the Companys Rights Offering completed in 2004.
| |  |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 15 |  | Consists of 16,244,452 shares held directly by Dolphin Offshore Partners, L.P.
(Dolphin) of which Peter E. Salas, a Director of the Company, is the
controlling person; a warrant held by Dolphin to purchase 10,500 shares at $7.98 per
share; 117,188 shares underlying 9,000 shares of the Companys Series B 8% Cumulative
Convertible Preferred Stock held directly by Dolphin; and, 168,000 shares held directly by
Peter E. Salas.
| |  |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 16 |  | Ownership of shares reported on Schedule 13F filed with the SEC by member of a group
consisting of SC Fundamental Value Fund , L.P., SC Fundamental LLC, SC-BVI Partners,
PMC-BVI, Inc., SC Fundamental Value BVI, Inc., Peter M. Collery and Neil H. Koffler.This
group initially reported its ownership on a Schedule 13G filed with the SEC.
| |  |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 17 |  | Unless otherwise stated, all shares of Common Stock are directly held with sole voting and
dispositive power. The shares set forth in the table are as of March 15, 2005 and reflect
the results of the Companys Rights Offering to shareholders of record February 27,
2004.
| |  |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 18 |  | Consists of shares held directly.
| |  |  | -- |  | ---------------------------------

| |  |  | 19 |  | Consists of 76,287 shares held directly and an option to purchase 73,125 shares.
| |  |  | -- |  | --------------------------------------------------------------------------------

| |  |  | 20 |  | Consists of shares held directly.
| |  |  | -- |  | ---------------------------------

| |  |  | 21 |  | Consists of shares held directly.
| |  |  | -- |  | ---------------------------------

| |  |  | 22 |  | Consists of 168,000 shares held directly, 16,244,452 shares held directly by Dolphin
Offshore Partners, L.P. (Dolphin) of which Peter E. Salas is the controlling
person; a warrant held by Dolphin to purchase 10,500 shares at $7.98 per share; and,
117,188 shares underlying 9,000 shares of the Companys Series B 8% Cumulative
Convertible Preferred Stock held by Dolphin which is convertible into the Companys
Common Stock.
| |  |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 23 |  | Consists of 250,000 shares held directly and options to purchase 13,125 shares.
| |  |  | -- |  | -------------------------------------------------------------------------------

| |  |  | 24 |  | Consists
of 7,696 shares held directly and options to purchase 13,125 shares.
| |  |  | -- |  | -----------------------------------------------------------------------------

| |  |  | 25 |  | Consists of 100 shares held directly and options to purchase 69,187shares.
| |  |  | -- |  | --------------------------------------------------------------------------

| |  |  | 26 |  | Consists of shares underlying options.
| |  |  | -- |  | --------------------------------------

| |  |  | 27 |  | Consists of shares held directly and indirectly by management, shares held by Dolphin,
216,437 shares underlying options, 10,500 shares underlying warrants and 117,188 shares
underlying convertible preferred stock.
| |  |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 28 |  | Refers to Tengasco, Inc. Stock Incentive Plan
| |  |  | -- |  | ---------------------------------------------

| |  |  | 29 |  | Consists of 352,012 shares purchased directly with his spouse and 60,445 shares purchased
by a limited liability company. The shares purchased by the limited liability company have
been adjusted to reflect Mr. Devereuxs beneficial ownership interest in the shares
purchased by the limited liability company.
| |  |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 30 |  | Peter E. Salas, a Director of the Company, is the general partner and controlling person
of Dolphin Offshore Partners, L.P.
| |  |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------

| |  |  | 31 |  | Consists of 14,104,732 shares purchased directly by Dolphin Offshore Partners, L.P. and 144,000 shares purchased by Peter E. Salas.
| |  |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------



Tengasgo,Inc.  and Subsidiaries

---

Consolidated Financial
StatementsYears Ended December 31, 2004, 2003 and 2002





# Tengasco, Inc.and Subsidiaries

# Consolidated Financial
StatementsYears Ended December 31, 2004, 2003 and 2002

---

|Report of Independent Registered Public Accounting Firm | F-3        
|------------------------------------------------------- | -----------
|Consolidated Financial Statements                       |            
|Consolidated Balance sheets                             | F-4 - F-5  
|Consolidated Statements of loss                         | F-6        
|Consolidated Statements of stockholders' equity         | F-7        
|Consolidated Statements of cash flows                   | F-8 - F-9  
|Notes to consolidated financial statements              | F-10 - F-34
|                                                        |            

F-2

---



# Report of Independent
Registered Public Accounting Firm

Board of Directors
Tengasco, Inc. and SubsidiariesKnoxville,Tennessee

We have audited the accompanying
consolidated balance sheets of Tengasco, Inc. and Subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of loss, stockholders equity and
comprehensive loss and cash flows for each of the three years in the period ended December
31, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement.The Company is not required
to have, nor were we engaged to perform an audit of its internal control over financial reporting.Our audits included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Tengasco, Inc. and Subsidiaries as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.

The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses
from operations and, at December 31, 2004, has an accumulated deficit of $33,385,524 and a
working capital deficit of $6,753,721. The working capital deficiency has resulted in the
Companys inability to pay cumulative dividends and mandatory redemption requirements
on the Companys shares subject to mandatory redemption. Such matters raise
substantial doubt about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the outcome of
this uncertainty.

As discussed in Notes 9 & 10 to
the consolidated financial statements, the Company implemented the provisions of Statement
of Financial Accounting Series No. 143, Asset Retirement Obligations on
January 1, 2003 and the provisions of Statement of Financial Accounting Series No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity on July 1, 2003.

Atlanta, Georgia March 21,
2005

F-3

---



# Tengasco, Inc. and
Subsidiaries

# Consolidated Balance
Sheets

# 

|December 31,                                       | 2004 | 2003 |  
|-------------------------------------------------- | ---- | ---- | -
|
|Current                                            |      |      |  
|Cash and cash equivalents                          |      |      | $
|Investments                                        |      |      |  
|Accounts receivable                                |      |      |  
|Participant receivables                            |      |      |  
|Inventory                                          |      |      |  
|Deferred loan fees, net of accumulated             |      |     
|amortization of $518,166 and $367,030              |      |      |  
|Other current assets                               |      |      |  
|                                                   |     
|Total current assets                               |      |      |  
|Oil and gas properties, net (on the basis          |      |     
|of full cost accounting) (Notes 4 and 18)          |      |      |  
|Pipeline facilities, net of accumulated            |      |     
|depreciation of $1,812,204 and $1,265,003 (Note 5) |      |      |  
|Other property and equipment, net (Note 6 )        |      |      |  
|                                                   |     
|                                                   |      |      | $

F-4

---



|December 31,                                                  | 2004 | 2003
|------------------------------------------------------------- | ---- | ----
|
|Current liabilities                                           |      |     
|Current maturities of long-term debt (Note 7)                 |      |     
|Accounts payable                                              |      |     
|Accrued interest payable                                      |      |     
|Other accrued liabilities                                     |      |     
|Notes payable to related parties (Note 3)                     |      |     
|Drilling program (Note 9)                                     |      |     
|Current shares subject to mandatory redemption (Note 9)       |      |     
|                                                              |     
|Total current liabilities                                     |      |     
|Shares subject to mandatory redemption (Note 9)               |      |     
|Drilling program (Note 9)                                     |      |     
|Asset retirement obligations (Note 10)                        |      |     
|Long term debt, less current maturities (Note 7)              |      |     
|                                                              |     
|Total liabilities                                             |      |     
|                                                              |     
|Commitments and Contingencies (Notes 5, 7, 8, and 10)         |      |     
|Stockholders' equity (Note 11)                                |      |     
|Common stock, $.001 par value; authorized 100,000,000 shares; |      |     
|48,756,977 and 12,064,977 shares issued and outstanding       |      |     
|Additional paid-in capital                                    |      |     
|Accumulated deficit                                           |      |     
|Accumulated other comprehensive loss                          |      |     
|                                                              |     
|Total stockholders' equity                                    |      |     
|                                                              |     
|                                                              |      |     
|                                                              |     

See accompanying
notes to consolidated financial statements.

F-5

---



---

# Tengasco, Inc. and
Subsidiaries

# Consolidated
Statements of Loss

|Years ended December 31,                                        | 2004 | 2003 | 2002
|--------------------------------------------------------------- | ---- | ---- | ----
|
|Revenues and other income                                       |      |      |     
|Oil and gas revenues                                            |      |      | $   
|Pipeline transportation revenues                                |      |      |     
|Interest Income                                                 |      |      |     
|                                                                |     
|Total revenues and other income                                 |      |      |     
|                                                                |     
|Costs and expenses                                              |      |     
|Production costs and taxes                                      |      |      |     
|Depreciation, depletion and amortization                        |      |     
|(Notes 4, 5 and 6)                                              |      |      |     
|General and administrative                                      |      |      |     
|Interest expense (Notes 9, 10 and 13)                           |      |      |     
|Public relations                                                |      |      |     
|Professional fees                                               |      |      |     
|Loss on impairment of long-lived asset                          |      |      |     
|Loss on sale of equipment, net                                  |      |      |     
|                                                                |     
|Total costs and expenses                                        |      |      |     
|                                                                |     
|Operating loss                                                  |      |      |     
|Gain from extinguishment of debt (Note 16)                      |      |      |     
|Gain on Preferred Stock (Note 9)                                |      |      |     
|                                                                |     
|Net loss                                                        |      |      |     
|Dividends on preferred stock (Note 9)                           |      |      |     
|                                                                |     
|Net loss attributable to common stockholders before             |      |     
|cumulative effects of a changes in accounting principle         |      |      |     
|Cumulative effect of a change in accounting principle (Note 10) |      |      |     
|Cumulative effect of a change in accounting principle (Note 9)  |      |      |     
|                                                                |     
|Net loss attributable to common stockholders                    |      |      | $   
|                                                                |     
|Net loss attributable to common stockholders per shares         |      |     
|Basic and diluted:                                              |      |     
|Operations                                                      |      |      | $   
|                                                                |      |      |     
|Cumulative effect of a change in accounting principle (Note 10) |      |      |     
|Cumulative effect of a change in accounting principle (Note 9)  |      |      |     
|                                                                |     
|Total                                                           |      |      | $   
|                                                                |      |      |     
|                                                                |     
|Weighted average shares outstanding                             |      |      |     
|                                                                |     

See accompanying notes
to consolidated financial statements

F-6

---



Tengasco, Inc. and
Subsidiaries

Consolidated Statements
of Stockholders Equity and Comprehensive
Losses for the years ending 
December 31, 2004, 2003 and 2002

|                                                                                      | Common
      Stock |            | Paid-In
      Capital |   | Accumulated
      Deficit |  | Comprehensive
      Loss |            | Accumulated
      Other
      Comprehensive
      Income (Loss) |   | Treasury
      Stock
      Shares |   | Amount |            | Total |  
|------------------------------------------------------------------------------------- | ------------------ | ---------- | --------------------- | - | ------------------------- |  | ------------------------ | ---------- | --------------------------------------------------------------- | - | --------------------------------- | - | ------ | ---------- | ----- | -
|
|                                                                                      |                   
|Balance,
      December 31, 2001                                                      |                    | 10,560,605 |                       | $ | 10,561                    |  | $                        | 39,242,555 |                                                                 | $ | (24,115,382                       | ) | $      |           |       | $
|Net
      loss                                                                        |                    |           |                       |   |                          |  |                          |           |                                                                 |   | (3,154,555                        | ) |        |           |       |  
|Comprehensive
      loss:                                                            
|Net
      loss                                                                        |                    |           |                       |   |                          |  |                          |           |                                                                 |   |                                  |   |        | (3,154,555 | )     |  
|Other
      comprehensive loss                                                        |                    |           |                       |   |                          |  |                          |           |                                                                 |   |                                  |   |        | (115,500   | )     |  
|2002
      comprehensive loss                                                         |                    |           |                       |   |                          |  |                          |           |                                                                 |   |                                  |   |        | (3,270,055 | )     |  
|Common
      stock issued in private placements, 
           net of related expenses  |                    | 850,000    |                       |   | 850                       |  |                          | 2,676,150  |                                                                 |   |                                  |   |        |            |       |  
|Common
      stock issued on conversion of debt                                       |                    | 20,592     |                       |   | 20                        |  |                          | 119,980    |                                                                 |   |                                  |   |        |           |       |  
|Common
      stock issued in purchase of 
            equipment                       |                    | 19,582     |                       |   | 20                        |  |                          | 149,980    |                                                                 |   |                                  |   |        |           |       |  
|Common
      stock issued for services                                                |                    | 8,500      |                       |   | 9                         |  |                          | 48,611     |                                                                 |   |                                   |   |        |           |       |  
|Dividends
      on convertible redeemable 
            preferred stock                |                    |           |                       |   |                          |  |                          |           |                                                                 |   | (506,789                          | ) |        |            |       |  
|                                                                                      |                    |            |                       |  
|                                                                                      |                    |            |                       |   |                           |  |                          |            |                                                                 |   |                                   |   |        |            |       |  
|Balance,
      December 31, 2002                                                      |                    | 11,459,279 |                       |   | 11,460                    |  |                          | 42,237,276 |                                                                 |   | (27,776,726                       | ) |        |           |       |  
|Net
      loss                                                                        |                    |           |                       |   |                          |  |                          |           |                                                                 |   | (3,197,662                        | ) |        |           |       |  
|Cumulative
      effects of changes in accounting 
            principles             |                    |           |                       |   |                          |  |                          |           |                                                                 |   | 14,471                            |   |        |           |       |  
|Comprehensive
      loss:                                                            
|Net
      loss                                                                        |                    |           |                       |   |                          |  |                          |           |                                                                 |   |                                  |   |        | (3,197,662 | )     |  
|Other
      comprehensive gain                                                        |                    |           |                       |   |                          |  |                          |           |                                                                 |   |                                  |   |        | 25,500     |       |  
|2003
      comprehensive loss                                                         |                    |           |                       |   |                          |  |                          |           |                                                                 |   |                                  |   |        | (3,172,162 | )     |  
|Common
      stock issued in private placements, 
            net of related expenses |                    | 227,275    |                       |   | 227                       |  |                          | 249,773    |                                                                 |   |                                  |   |        |           |       |  
|Common
      stock issued on conversion of debt                                       |                    | 60,528     |                       |   | 61                        |  |                          | 69,538     |                                                                 |   |                                  |   |        |           |       |  
|Common
      stock issued for charity                                                 |                    | 3,571      |                       |   | 4                         |  |                          | 5,710      |                                                                 |   |                                  |   |        |           |       |  
|Common
      stock issued for services                                                |                    | 55,500     |                       |   | 70                        |  |                          | (64,458    | )                                                               |   |                                  |   |        |           |       |  
|Common
      stock issued for exercised 
            options                          |                    | 94,000     |                       |   | 94                        |  |                          | 46,906     |                                                                 |   |                                  |   |        |           |       |  
|Common
      stock issued for preferred 
            dividends in arrears             |                    | 154,824    |                       |   | 154                       |  |                          | 170,155    |                                                                 |   |                                  |   |        |           |       |  
|Common
      stock issued for litigation 
            settlement                      |                    | 10,000     |                       |   | 10                        |  |                          | 6,390      |                                                                 |   |                                  |   |        |           |       |  
|Accretion
      of issue cost on preferred stock- 
            series B & C           |                    |           |                       |   |                          |  |                          |           |                                                                 |   | (163,193                          | ) |        |           |       |  
|Dividends
      on convertible redeemable 
            preferred stock                |                    |           |                       |   |                          |  |                          |           |                                                                 |   | (268,389                          | ) |        |           |       |  
|                                                                                      |                    |            |                       |  
|                                                                                      |                    |            |                       |   |                           |  |                          |            |                                                                 |   |                                   |   |        |            |       |  
|Balance,
      December 31, 2003                                                      |                    | 12,064,977 |                       |   | 12,080                    |  |                          | 42,721,290 |                                                                 |   | (31,391,499                       | ) |        |           |       |  
|                                                                                      |                    |            |                       |   |                           |  |                          |            |                                                                 |   |                                   |   |        |            |       |  
|Net
      Loss                                                                        |                    |           |                       |   |                          |  |                          |           |                                                                 |   | (1,994,025                        | ) |        |           |       |  
|Common
      stock issued for exercised options                                       |                    | 142,000    |                       |   | 142                       |  |                          | 70,858     |                                                                 |   |                                   |   |        |           |       |  
|Common
      stock issued in Rights Offering                                          |                    | 36,300,000 |                       |   | 36,285                    |  |                          | 8,812,056  |                                                                 |   |                                   |   |        |           |       |  
|Common
      stock issued for services                                                |                    | 250,000    |                       |   | 250                       |  |                          | 82,250     |                                                                 |   |                                   |   |        |           |       |  
|Transfer
      of investment (Note 15)                                                |                    |           |                       |   |                          |  |                          |           |                                                                 |   |                                   |   |        |           |       |  
|                                                                                      |                    |            |                       |  
|                                                                                      |                    |            |                       |   |                           |  |                          |            |                                                                 |   |                                   |   |        |            |       |  
|Balance,
      December 31, 2004                                                      |                    | 48,756,977 |                       | $ | 48,757                    |  | $                        | 51,686,454 |                                                                 | $ | (33,385,524                       | ) | $      |           |       | $
|                                                                                      |                   
|                                                                                      |                    |            |                       |   |                           |  |                          |            |                                                                 |   |                                   |   |        |            |       |  

See accompanying notes
to consolidated financial statements

F-7

7

---



# Tengasco, Inc. and
Subsidiaries

# Consolidated
Statements of Cash Flows

|Years ended December 31,                               | 2004 | 2003 | 2002 |           
|------------------------------------------------------ | ---- | ---- | ---- | ----------
|
|Operating activities   Net loss                        |      |      | $    | (1,994,025
|Adjustments to reconcile net loss to net cash          |      |     
|provided by (used in) operating activities:            |      |     
|Depreciation, depletion and amortization               |      |      |      | 2,067,566 
|Compensation and services paid in stock options, stock |      |     
|warrants, and common stock                             |      |      |      | 82,500    
|Loss on impairment of long-lived assets                |      |      |      | --        
|Accretions of liabilities                              |      |      |      | 825,371   
|Loss (gain) on sale of equipment, net                  |      |      |      | 99,456    
|Loan fee amortization                                  |      |      |      | 107,956   
|Gain on extinguishment of debt                         |      |      |      | (336,820  
|Gain on exchange of preferred stock                    |      |      |      | (458,310  
|Realized loss on investment                            |      |      |      | 150,000   
|Changes in assets and liabilities:                     |      |     
|Accounts receivable                                    |      |      |      | (198,374  
|Participant receivables                                |      |      |      | (4,614    
|Inventory                                              |      |      |      | (61,052   
|Other assets                                           |      |      |      | 155,477   
|Accounts payable - trade                               |      |      |      | (756,129  
|Accrued interest payable                               |      |      |      | (208,954  
|Other accrued liabilities                              |      |      |      | 193,062   
|Asset retirement obligation                            |      |      |      | (33,247   
|                                                       |     
|Net cash  (used in) provided by operating activities   |      |      |      | (370,137  
|                                                       |     

|                                                       |  |  |  |           
|------------------------------------------------------ |  |  |  | ----------
|Investing activities                                   |  |  |  |           
|Additions to other property & equipment                |  |  |  | (40,815   
|(Increases) decreases to other property and equipment  |  |  |  | 296,865   
|Net additions to oil and gas properties                |  |  |  | (1,122,903
|Additions to pipeline facilities                       |  |  |  | (10,001   
|Decrease  in restricted cash                           |  |  |  | --        
|Other                                                  |  |  |  | --        
|                                                       | 
|Net cash used in investing activities                  |  |  |  | (876,854  
|                                                       | 
|Financing activities                                   |  |  |  |           
|Proceeds from exercise of options                      |  |  |  | 71,000    
|Proceeds from borrowings                               |  |  |  | 3,310,815 
|Repayments of borrowings                               |  |  |  | (9,848,560
|Proceeds from issuance of common stock                 |  |  |  | 8,848,341 
|Proceeds from private placements of convertible        |  | 
|redeemable preferred stock, net                        |  |  |  | --        
|Dividends paid  on preferred stock                     |  |  |  | (456,166  
|Exchange of Series A preferred stock for cash (Note 9) |  |  |  | (723,370  
|Payment of loan and offering fees                      |  |  |  | --        
|                                                       | 

F-8

---



|                                                    |  | 
|--------------------------------------------------- |  | 
|Net cash provided by (used in) financing activities |  | 
|                                                    | 
|                                                    |  | 
|Net change in cash and cash equivalents             |  | 
|                                                    |  | 
|Cash and cash equivalents, beginning of year        |  | 
|                                                    | 
|                                                    |  | 
|Cash and cash equivalents, end of year              |  | 
|                                                    | 
|Supplemental disclosure of non-cash investing and   |  | 
|financing activities:                               |  | 
|Issuance of common stock on conversion of debt      |  | 
|Issuance of common stock and stock options for      |  | 
|services received and charitable contributions made |  | 
|Purchase of equipment by issuing common stock       |  | 
|Capitalization of lawsuit settlement                |  | 
|relating to the pipeline                            |  | 
|                                                    |  | 
|Capitalization of future asset retirement           |  | 
|obligations to oil and gas properties               |  | 
|Conversion of Series A  Preferred Stock             |  | 
|into a drilling program                             |  | 

See accompanying notes
to consolidated financial statements.

F-9

---



# Tengasco, Inc. and Subsidiaries

# Notes to Consolidated
Financial Statements

1.  Going ConcernUncertainty

| | The accompanying
consolidated financial statements have been prepared in conformity  with
accounting principles generally accepted in the United States of America, which
 contemplate continuation of the Company as a going concern and assume
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has incurred continuous losses
through these operating stages and has an accumulated deficit of $33,385,524 and a working capital deficit of $6,753,721 as of December 31,
2004. During 2002, the Company was informed by its primary lender (Bank One) that the
entire amount of its outstanding credit facility was immediately due and payable, as
provided for in the Credit Agreement. The amount due to its primary lender amounted to
approximately $5.1 million and was classified as a current liability as of December 31,
2003. The Company disputed its obligation to make this payment and has resolved the
dispute as discussed in Note 16 to the Consolidated Financial Statements. The Company also
has significant redemption amounts due to be satisfied in 2005 related to its Mandatorily
Redeemable Series B Preferred Shares (see Note 9). These circumstances raise substantial
doubt about the Companys ability to continue as a going concern.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Managements
plans include the continuation of its drilling efforts. The Company plans to drill wells
in new locations it has identified in Kansas on its existing leases in response to
drilling activity in the area establishing new areas of oil production. The Company
successfully drilled the Dick No. 7 well in Kansas in 2001 and completed the well as an
oil well, however it was not able to drill any new wells in Kansas in 2002 or 2003 due to
lack of funds available for such drilling caused by the Bank One situation. In September
2004, the Company drilled and completed the Lewis No. 3 well in Kansas using only funds
from the proceeds of the Companys ongoing operations. By using the Companys
own funds, it was not necessary to permit any third party to either participate in
financing of drilling or to acquire any interest in the well. The Company receives all
proceeds of production attributable to the working interest in the Lewis No.3 well. The
Company is hopeful now that the Bank One matter has been resolved that it will be able to
perform additional drilling and well workovers in Kansas to maximize production from the
Kansas Properties. The Company is also pursuing additional bank financing on terms that it
finds satisfactory and is considering means to meet its required redemption on its
preferred stock in 2005. However, the inability of the Company to obtain long-term
financing could impair the Companys ability to meet its obligations as they come
due.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2. Summary  ofSignificant  Accounting Policies

# Organization

| | Tengasco, Inc. (the "Company"),  a publicly held corporation,  was organized under the
laws of the  State of Utah on April 18,  1916,  as Gold
| | ----------------------------------------------------------------------------------------------------------------------------------------------

F-10

---



| | Deposit  Mining  and  Milling Policies Company. The Company subsequently changed its name to Onasco Companies, Inc.
| | -------------------------------------------------------------------------------------------------------------------

| | The
Company changed its domicile from the State of Utah to the State of Tennessee on May 5,
1995 and its name was changed from Onasco Companies, Inc. to Tengasco,
Inc.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys principal business consists of oil and gas exploration, production and
related property management in the Appalachian region of eastern Tennessee and in the
state of Kansas. The Companys corporate offices are in Knoxville, Tennessee. The
Company operates as one reportable business segment, based on the similarity of
activities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
1996, the Company formed Tengasco Pipeline Corporation (TPC), a wholly-owned
subsidiary, to manage the construction and operation of a 65-mile gas pipeline as well as
other pipelines planned for the future. During 2001, TPC began transmission of natural gas
through its pipeline to customers of Tengasco.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Basis of Presentation

| | The
consolidated financial statements include the accounts of the Company, Tengasco Pipeline
Corporation and Tennessee Land and Mineral, Inc. All significant intercompany balances and
transactions have been eliminated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Use of Estimates

| | The
accompanying financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America which require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. The actual
results could differ from those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Revenue Recognition

| | The
Company uses the sales method of accounting for natural gas and oil revenues. Under this
method, revenues are recognized based on actual volumes of oil and gas sold to purchasers.
Natural gas meters are placed at the customers locations and usage is billed
monthly.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

---



# Cash and Cash
Equivalents

| | The
Company considers all investments with a maturity of three months or less when purchased
to be cash equivalents.
| | --------------------------------------------------------------------------------------------------------------------

# Investment Securities

| | Investment
securities available for sale are reported at fair value, with unrealized gains and losses
reported as a separate component of stockholders equity, net of the related tax
effects. The Companys available for sale securities were transferred as part of a
lawsuit settlement in 2004. The Company recognized a realized loss of $150,000 as a result
of the transfer. See Note 15.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Inventory

| | Inventory
consists primarily of crude oil in tanks and is carried at market value.
| | ----------------------------------------------------------------------------------

# Oil and Gas Properties

| | The
Company follows the full cost method of accounting for oil and gas property acquisition,
exploration and development activities. Under this method, all productive and
nonproductive costs incurred in connection with the acquisition of, exploration for and
development of oil and gas reserves for each cost center are capitalized. Capitalized
costs include lease acquisitions, geological and geophysical work, delay rentals and the
costs of drilling, completing equipping and closing oil and gas wells. Gains or losses are
recognized only upon sales or dispositions of significant amounts of oil and gas reserves
representing an entire cost center. Proceeds from all other sales or dispositions are
treated as reductions to capitalized costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
capitalized costs of oil and gas properties, plus estimated future development costs
relating to proved reserves and estimated costs of plugging and abandonment, net of
estimated salvage value, are amortized on the unit-of-production method based on total
proved reserves. The costs of unproved properties are excluded from amortization until the
properties are evaluated, subject to an annual assessment of whether impairment has
occurred. These reserves were estimated by Ryder Scott Company, Petroleum Consultants in
2004, 2003 and 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
capitalized oil and gas properties, less accumulated depreciation, depletion and
amortization and related deferred income taxes, if any, are generally limited to an amount
(the ceiling limitation) equal to the sum of: (a) the present value of estimated future
net revenues computed by applying current prices in effect as of the balance sheet date
(with
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---



| | consideration of price changes only to the extent provided by contractual
arrangements) to estimated future production of proved oil and gas reserves, less
estimated future expenditures (based on current costs) The Company has adopted a SEC
accepted method of calculating the full cost ceiling test whereby the liability recognized
under Statement of Financial Accounting Standard No. 143 (SFAS)
Accounting for Asset Retirement Obligation (SFAS 143) is netted
against property cost and the future abandonment obligations are included in estimated
future net cash flows. No ceiling write-downs were recorded in 2004, 2003 or 2002.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Pipeline Facilities

| | Phase
I of the pipeline was completed during 1999. Phase II of the pipeline was completed on
March 8, 2001. Both phases of the pipeline were placed into service upon completion of
Phase II. The pipeline is being depreciated over its estimated useful life of 30 years;
beginning at the time it was placed in service.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Other Property and
Equipment and Long  Lived Assets

| | Other
property and equipment are carried at cost. The Company provides for depreciation of other
property and equipment using the straight-line method over the estimated useful lives of
the assets which range from five to ten years. Long-lived assets (other than oil and gas
properties) are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. When evidence indicates that
operations will not produce sufficient cash flows to cover the carrying amount of the
related asset, a permanent impairment is recorded to adjust the asset to fair value. At
December 31, 2004, management believes that carrying amounts of all of the Companys
long-lived assets will be fully recovered over the course of the Companys normal
future operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---



# Stock-Based Compensation

| | SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), was implemented in January 1996. As
permitted by SFAS 123, the Company has continued to account for stock compensation to
employees by applying the provisions of Accounting Principles Board Opinion No. 25. If the
accounting provisions of SFAS 123 had been adopted, net loss and loss per share would have
been as follows for the years ended December 31, 2004, 2003 and 2002.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), was implemented in January 1996. As
permitted by SFAS 123, the Company has continued to account for stock compensation to
employees by applying the provisions of Accounting Principles Board Opinion No. 25. If the
accounting provisions of SFAS 123 had been adopted, net loss and loss per share would have
been as follows for the years ended December 31, 2004, 2003 and 2002.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | 2004 | 2003                | 2002
|-------------------------------------------- | ---- | ------------------- | ----
|Net loss attributable to common shareholders |      |                     |     
|As reported                                  |      | $    (1,994,025     | )   
|Stock based compensation                     |      | --                  |     
|Pro forma                                    |      | $     (1,994,025    | )   
|                                             |     
|Basic and diluted loss per share             |     
|As reported                                  |      | $            (0.05) |     
|Pro forma                                    |      | $            (0.05) |     
|                                             |     

# Accounts Receivable

| | Senior
management reviews accounts receivable on a monthly basis to determine if any receivables
will potentially be uncollectible. Management includes any accounts receivable balances
that are determined to be uncollectible, along with a general reserve, in the
overall allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. Based on the
information available to us, the Company believes no allowance for doubtful accounts
as of December 31, 2004 and 2003 is necessary. However, actual write-offs may occur.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14

---



# Income Taxes

| | The
Company accounts for income taxes using the asset and liability method.
Accordingly, deferred tax liabilities and assets are determined based on the temporary
differences between the financial reporting and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets arise primarily from net operating loss carry-forwards. Management
evaluates the likelihood of realization for such assets at year-end providing a valuation
allowance for any such amounts not likely to be recovered in future periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Concentration of
Credit Risk

| | Financial
instruments which potentially subject the Company to concentrations of credit risk consist
principally of cash and accounts receivable. At times, such cash in banks is in excess of
the FDIC insurance limit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys primary business activities include oil and gas sales to several customers
in the states of Tennessee and Kansas. The related trade receivables subject the Company
to a concentration of credit risk within the oil and gas industry. The Company is
presently dependent upon a small number of customers for the sale of gas from the Swan
Creek Field, principally Eastman and BAE, and other industrial customers in the Kingsport
area with which the Company may enter into gas sales contracts.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has entered into contracts to supply two manufacturers with natural gas from the
Swan Creek Field (Tennessee) through the Companys pipeline. These customers are the
Companys primary customers of natural gas sales. Additionally, the Company sells a
majority of its crude oil primarily to two customers, one each in Tennessee and Kansas.
Although management believes that customers could be replaced in the ordinary course of
business, if the present customers were to discontinue business with the Company, it could
have a significant adverse effect on the Companys projected results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Loss per Common Share

| | Basic
loss per share is computed by dividing loss available to common shareholders by the
weighted average number of shares outstanding during each year. Shares issued during the
year are weighted for the portion of the year that they were outstanding. Diluted loss per
share does not differ from basic loss per share since the effect of all common stock
equivalents is anti-dilutive. Basic and diluted loss per share are based upon 40,855,972
weighted average common shares outstanding for the year ended December
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15

---



| | 31, 2004;
11,956,135 weighted average common shares outstanding for the year ended December 31,
2003; and 11,062,436 weighted average common shares outstanding for the year ended
December 31, 2002. Diluted loss per share does not consider approximately 0, 390,278 and
1,473,000 potential weighted average common shares for 2004, 2003, and 2002 related
primarily to common stock options and convertible preferred stock and debt. These shares
were not included in the computation of the diluted loss per share amount because the
Company was in a net loss position and, thus, any potential common shares were
anti-dilutive to the loss per share calculation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Fair Values of
Financial Instruments

| | Fair
values of cash and cash equivalents, investments and short-term debt approximate their
carrying values due to the short period of time to maturity. Fair values of long-term debt
are based on quoted market prices or pricing models using current market rates, which
approximate carrying values.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Recent Accounting
Pronouncements

# 

| | In
March 2004, The Emerging Issues Task Force (EITF) reached a consensus that
mineral rights, as defined in EITF Issue No. 04-02, Whether Mineral Rights are
Tangible or Intangible Asset, are tangible assets and that they should be removed as
examples of intangible assets in SFAS Nos. 141 and 142. The Financial Accounting Standards
Board (FASB) has recently ratified this consensus and directed the FASB staff to amend
SFAS Nos. 141 and 142 through the issuance of FASB Staff Positions FSP FAS 141-1 and FSP
FAS 142-1. Historically the Company has included the cost of such mineral rights as
tangible assets, which is consistent with the EITFs consensus. As such, EITF 04-02
will not affect Tengascos consolidated condensed financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Staff Accounting Bulletin (SAB) No. 106, regarding the application of SFAS No. 143,
Accounting for Asset Retirement Obligations (SFAS 143), by oil and gas producing companies following the full cost accounting method was issued in September
2004. (SAB 106) provided an interpretation of how a company, after adopting SFAS 143, should compute the full cost ceiling to avoid double-counting the expected
future cash outflows associated with asset retirement costs. The provisions of this interpretation has been applied by the Company and adoption of this bulletin has no impact on the
financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS
No. 123R). This Statement is a revision to SFAS No. 123, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16

---



| | Employees. This Statement establishes
standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on the accounting for transactions
in which an entity obtains employee services in share-based payment transactions.
Companies will be required to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of the award (with
limited exceptions). That cost will be recognized over the period during which an employee
is required to provide service, the requisite service period (usually the vesting period),
in exchange for the award. The grant date fair value of employee share options and similar
instruments will be estimated using option-pricing models. If an equity award is modified
after the grant date, incremental compensation cost will be recognized in an amount equal
to the excess of the fair value of the modified award over the fair value of the original
award immediately before the modifications. SFAS 123R will be effective for periods
beginning after June 15, 2005 and allows for several alternative transition methods.
Accordingly, the Company will adopt SFAS 123R in its third quarter of fiscal 2005. The
Company is currently evaluating the provisions of SFAS 123R and has not determined the
impact that this statement will have on its results of operations or financial position.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 3.Related Party Transactions

| | From December 2002 through December 9, 2003, Dolphin
          Offshore Partners, L.P.  (Dolphin) acquired a total of an 85% undivided interest in the Companys
Tennessee and Kansas pipelines as collateral for a series of seven loans. In the first five of these
transactions totaling $1,650,000, Peter E. Salas, a Director of the Company and the
general partner and controlling person of Dolphin, negotiated the terms of the loans
directly with management, which terms were approved by management in view of the
Companys immediate needs, financial condition and prospective alternatives and under
circumstances in which Dolphin was not generally engaged in the business of lending money.
These loans were made on terms that management believes were at least as favorable to the
Company as it could have obtained through arms-length negotiations with unaffiliated third
parties. The Companys Board approved the sixth and seventh loans on December 3 and
9, 2003 in the amounts of $225,000 and $250,000, respectively, with no participation by
Mr. Salas in the meeting or the vote, which was unanimous by the seven other Directors
present at the meeting. In addition, the Company entered into a continuing security
agreement, which was approved by the Board with no participation by Mr. Salas in the
meeting or vote, which was unanimous by the seven other Directors present at the meeting,
providing the terms of Dolphins security interest collateralizing all of its loans.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 24, 2003, Dolphin loaned the Company the sum of $1,000,000 which was used for
working capital and to pay all interest and principal in full of convertible loans to the
Company then being held by
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17

---



| | several persons. See Note 7 for the terms of such loans. This
loan was evidenced by a separate promissory note bearing interest at the rate of 12% per
annum, with payments of interest only payable quarterly and the principal balance payable
on April 4, 2004. The obligations under the loan were secured by an undivided
interest in the Companys Tennessee and Kansas pipelines and the security agreement
referred to above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 2, 2004, Dolphin loaned the Company the sum of $225,000 which was used for making
payment of principal and interest to Bank One for February, 2004. This loan was evidenced
by a separate promissory note bearing interest at the rate of 12% per annum, with payments
of interest only payable quarterly and the principal balance payable on April 4,
2004. The obligations under the loan were secured by an undivided interest in the
Companys Tennessee and Kansas pipelines and the security agreement referred to
above.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
notes payable to Dolphin dated prior to May 18, 2004 were repaid on March 30, 2004 from
the proceeds received by the Company from its Rights Offering.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 18, 2004, Dolphin loaned the Company $2,500,000 bearing interest at 12% per annum with
interest payable monthly beginning June 18, 2004 and principal payable on May 20, 2005,
which loan is secured by a first lien on the Companys Tennessee and Kansas producing
properties and the Tennessee pipeline. The proceeds of the loan were used to fund in part
the settlement of the Bank One litigation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 30, 2004, Dolphin loaned the Company $550,000 bearing interest at 12% per annum
with interest payable monthly and principal payable on May 20, 2005, which loan is secured
by the first lien on the Companys Tennessee and Kansas properties and the Tennessee
pipeline.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts due to related parties consisted of the following:
| | ----------------------------------------------------------

|December 31,                                                                       | 2004 | 2003
|---------------------------------------------------------------------------------- | ---- | ----
|Unsecured  note  payable to a Director due                                         |      |     
|January  2004, with interest payable                                               |      |     
|quarterly at 8%  per  annum. Note is                                               |      |     
|convertible into common stock of the                                               |      |     
|Company at a rate of $2.88 per share of                                            |      |     
|common stock                                                                       |      |     
|                                                                                   |      |     
|Notes  payable  to  a  Director  due  with                                         |      |     
|interest  payable  quarterly  at  12%  perannum. Notes are secured by the pipeline |      |     
|                                                                                   |      |     
|                                                                                   |      |     
|Notes  payable to a Director  due May 2005                                         |      |     
|with interest payable  monthly at 12% per                                          |      |     
|annum.  Notes are secured by Tennessee and                                         |      |     
|Kansas producing properties and the                                                |      |     
|pipeline                                                                           |      |     
|                                                                                   |     
|Total short term debt to related                                                   |      |     
|parties                                                                            |      |     
|                                                                                   |     

F-18

---



# 4.Oil and GasProperties

| | The following table sets forth information concerning
          the Companys oil and gas  properties:
| | ------------------------------------------------------------------------------------------------------

|December 31,                    | 2004 | 2003
|------------------------------- | ---- | ----
|Oil and gas properties, at cost |      |     
|Accumulation depreciation,      |      |     
|depletion and amortization      |      |     
|                                |     
|Oil and gas properties, net     |      |     
|                                |     

| | During
the years ended December 31, 2004 and 2003 the Company recorded depletion expense of
approximately $1,285,443 and $1,388,000 respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

# 5.Pipeline Facilities

| | In 1996, the Company began construction of a
               65-mile gas pipeline (1) connecting the Swan Creek development project to a gas
               purchaser and (2) enabling the Company to develop gas distribution business
               opportunities in the future. Phase I, a 30-mile portion of the pipeline, was
               completed in 1998. Phase II of the pipeline, the remaining 35 miles, was
               completed in March 2001. The estimated useful life of the pipeline for
               depreciation purposes is 30 years. The Company recorded approximately $547,161,
               $536,000, and $509,000 respectively in depreciation expense related to the
               pipeline for the years ended December 31, 2004, 2003 and 2002, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | January 1997, the Company entered into an agreement with the Tennessee Valley Authority
(TVA) whereby the TVA allows the Company to bury the pipeline within the
TVAs transmission line rights-of-way.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-19

---



| | In return for this right, the Company paid
$35,000 and agreed to annual payments of approximately $6,200 for 20 years. This agreement
expires in 2017 at which time the parties may renew the agreement for another 20-year term
in consideration of similar inflation-adjusted payment terms.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 6. Other propertyand Equipment

| | Other Property and equipment consisted of the following:
| | --------------------------------------------------------

|December 31,                       | Depreciable Life | 2004 | 2003   
|---------------------------------- | ---------------- | ---- | -------
|Machinery and equipment            |                  |      | 5-7 yrs
|                                   |                  |      |        
|Vehicles                           |                  |      | 5 yrs  
|                                   |                  |      |        
|Other                              |                  |      | 5 yrs  
|                                   |                 
|                                   |                  |      |        
|                                   |                  |      |        
|Less accumulated depreciation      |                  |      |        
|                                   |                 
|Other property and equipment - net |                  |      |        
|                                   |                 

| | The Company uses the straight-line method of depreciation ranging from five years to thirty
years, depending on the asset life.For
the year ended December 31, 2003, the Company recorded an impairment loss on equipment
totaling $495,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

# 7. Long Term Debt

| | Long-term debt to unrelated entities consisted of
          the following:
| | --------------------------------------------------------------------------

|December 31,                              | 2004 | 2003
|----------------------------------------- | ---- | ----
|Revolving  line of  credit  with a bank,  |      |     
|due November  2004.  The loan  agreement  |      |     
|provides for increases or decreases to    |      |     
|the borrowing base as changes in proved   |      |     
|oil and gas reserves or other             |      |     
|production levels  arise.  Borrowings     |      |     
|bear  interest at the bank's  prime rate  |      |     
|plus 0.25%(4.25% at  December 31,         |      |     
|2003). Collateralized  by the  oil  and   |      |     
|gas properties and the  related           |      |     
|operations and  revenues. See Note 16.    |      |     
|Repaid May 18, 2004                       |      |     
|                                          |      | $   
|Convertible notes  payable to  five       |      |     
|individuals; due  January  2004, with     |      |     
|interest payable quarterly at 8% per      |      |     
|annum. Notes convertible into common      |      |     
|stock of the Company at a rate of $3.00   |      |     
|per share of common stock. Repaid March   |      |     
|24, 2004                                  |      |     
|Term loan payable to a Company; due May   |      |     
|1,  2004.Interest payable at 4.75%        |      |     
|Unsecured. Repaid March 31, 2004          |      |     
|                                          |      |     
|Note payable to a financial               |      |     
|institution, with $1,773 principal        |      |     
|payments due monthly  beginning  January  |      |     
|7, 2002 through December 7, 2006          |      |     
|Interest is payable  monthly  commencing  |      |     
|on January 7, 2002 at 7.5% per  annum     |      |     
|Note is guaranteed by a  major            |      |     
|shareholder and is collateralized  by     |      |     
|certain assets of the Company             |      |     
|                                          |      |     
|Installment  notes  bearing  interest  at |      |     
|the rate of 3.9% to 11.95% per  annum     |      |     
|collateralized  by vehicles and equipment |      |     
|with monthly payments  including interest |      |     
|of approximately  $10,000  due  various   |      |     
|periods through 2006                      |      |     
|                                          |      |     
|                                          |     
|Total long-term debt                      |      |     
|Less current maturities                   |      |     
|                                          |     
|Long-term debt, less current              |      |     
|maturities                                |      |     
|                                          |     

F-20

---



# 8. Commitmentsand Contingencies

| | The Company is a party to lawsuits in the ordinary
          course of its business. While the damages sought in some of these actions are material, the Company does not believe that it is probable that the outcome of any individual action will have a material adverse
effect, or that it is likely that adverse outcomes of individually insignificant actions
will be significant enough, in number or magnitude, to have a material adverse effect in
the aggregate on its financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the ordinary course of business the Company has entered into various equipment and office
leases which have remaining term of one year. Approximate future minimum lease payments to
be made under non-cancelable operating leases in 2005 are $62,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Office
rent expense was approximately $77,110, 78,830 and $84,000 for each of the three years
ended December 31, 2004, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------

# 9. CumulativeConvertibleRedeemablePreferred
          Stock

| | The Company is authorized to create and has issued
          various classes of preferred stock (Series A, Series B and Series C). Shares of both Series A and B of Preferred  Stock
          are immediately convertible into shares of Common Stock. Each $100  liquidation preference share of preferred stock is convertible at a
          rate of $7.00 for the Series A per share of common stock. For the Series B, the conversion rate is the
average market price of the Companys common stock for 30 days before the sale of the Series B preferred stock with a minimum conversion price of $9.00 per share. The
conversion rate is subject to downward adjustment for certain events. The conversion prices have been adjusted prospectively for stock dividends and splits.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
holders of both the Series A and Series B Preferred Stock are entitled to a cumulative
dividend of 8% per quarter. However, the payment of the dividends on the Series B
Preferred Stock is subordinate to that of the Series A Preferred Stock. In the event that
the Company does not make any two of six consecutive quarterly dividend payments, the
holders of the Series A Preferred Stock have the right to appoint those directors which
would constitute of majority of the Board of Directors. In such a scenario, the holders of
the Preferred Shares would be entitled to elect a majority of the Board of Directors until
all accrued and unpaid dividends have been paid.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company may redeem both of the Series A and B Preferred Shares upon payment of $100 per
share plus any accrued and unpaid dividends. Further, with respect to the Series A
Preferred Stock, commencing on October 1, 2003 and at each quarterly date thereafter while
the Series A Preferred Stock is outstanding, the Company is required to redeem
one-twentieth of the maximum number of Series A Preferred Stock outstanding. With respect
to the Series B Preferred Stock, on the fifth anniversary after issuance (September,
2005), the Company is required to redeem all outstanding Series B Preferred Stock.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2002, the Board of Directors authorized the sale of up to 50,000 shares of Series C
Preferred Stock at $100 per share. The Company issued 14,491 shares, resulting in net
proceeds after commissions of $1,303,168. The Series C Preferred Stock accrue a 6%
cumulative dividend on the outstanding balance, payable quarterly. These dividends are
subordinate to the dividends payable to the Series A and Series B Preferred Stock holders.
This stock is convertible into the Companys common stock at the average stock
trading price 30 days prior to the closing of the sales of all the Series C Preferred
Stock being offered or $5.00 per share, whichever is greater. The Company is required to
redeem any remaining Series C Preferred Stock and any accrued and unpaid dividends in May
2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21

---



| | The
Company adopted the provisions of SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Debt (SFAS 150)
on July 1, 2003. Under SFAS 150, mandatorily redeemable preferred stock shall be
reclassified at fair value to a liability. The Company determined that each of the Series
A, Series B and Series C preferred stock qualify as shares subject to mandatory
redemption, and as such, were reclassified as liabilities upon adoption of SFAS 150.
Accordingly, the difference between the carrying amount at the date of adoption and the
fair value of the shares (discounted at rates between 12% and 12.5%) was recognized as a
cumulative effect of a change in accounting principle of $365,675 effective July 1, 2003.
The difference between the carrying amount of shares subject to mandatory redemption and
the face value amount of preferred stock is being accreted at rates between 12% and 12.5%
into interest expense and the liability until conversion or redemption of the shares.
Accretion associated with these shares subject to mandatory redemption from July 1, 2003
through December 31, 2003 was $354,735 and $752,003 for 2004. The Company has dividends in
arrears as of December 31, 2004 and 2003 of $649,692 and $600,738.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December, 2004, the Company completed an exchange offer to thirteen holders of the
Companys Series A 8% Cumulative Convertible Preferred Stock in the amount of
$2,867,900. Seven of the thirteen holders elected the cash exchange option, and the face
amount of $1,085,000 of Series A shares was exchanged on or before December 31, 2004 for
cash payments of $723,370. A gain was recorded on this transaction in the amount of
$458,310, the difference between the carrying amount and the cash settlement amount. The
Company obtained funds for the exchange from cash on hand and the proceeds of a loan from
Dolphin Offshore Partners, L.P.  The loan from Dolphin was in the form of a note in
principal amount of $550,000 bearing 12% interest per annum payable interest only until
due on May 20, 2005 and secured by a lien on the Companys Tennessee and Kansas
assets.  Five of the thirteen Series A holders elected to participate in the drilling
program in exchange for their preferred Shares, and on December 31, 2004 the amount of
$1,582,900 of Series A shares plus accrued dividend of $31,658 was exchanged for
approximately 6.5 Units in (the Drilling Program).  A liability was
recorded for (the Drilling Program) in the amount of $1,755,603 and
Shares subject to mandatory redemption was reduced by the same amount. The
Drilling Program liability recorded represents the estimated fair value of the liability
calculated upon adoption of SFAS 150 less accretion, from such date
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22

---



| | to
the date of the exchange. The remaining 1.5 units in the Drilling Program continue to be
owned by the Company.
| | -----------------------------------------------------------------------------------------------------------------

| | Under
the terms of the Drilling Program, the former Series A holders participating in the
Drilling Program will receive all the cash flow from each of eight wells to be drilled in
Kansas, until they have recovered 80% of the value of the Series A shares exchanged. At
that point, the Company will begin to receive 85% of the cash flow from these wells as a
management fee, and the former Series A owners will continue to receive 15% of the cash
flow for the productive life of the wells. In summary twelve of the 13 holders of Series A
preferred stock exchanged their Series A shares.  As a result, as of December 31,
2004 the Company has remaining only one Series A shareholder, in face amount of $200,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
mandatory redemption requirements related to the remaining Series A, B and C Preferred
Stock, as of December 31, 2004 are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------

|Year                                   | Amount
|-------------------------------------- | ------
|2005                                   |       
|2006                                   |       
|2007                                   |       
|2008                                   |       
|                                       |       
|Subtotal                               |       
|                                       |       
|Accrued dividends payable              |       
|Less Accretion cost included above     |       
|                                       |       
|Shares subject to mandatory redemption |       
|                                       |       

| | The above table presents redemption amounts due on the Company's preferred stock
 as of December 31, 2004.
| | ----------------------------------------------------------------------------------------------------------

| | The Company has classified $3,260,312 of the Company's liability related to its shares subject to redemption as short-term and
includes redemption payments due in 2005 and the related dividends.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 10. Asset RetirementObligation

| | Effective January 1, 2003, the Company  implemented the requirements of SFAS 143. Among other things,
          SFAS 143 requires entities to record a liability and corresponding
increase in long-lived assets for the present value of material obligations associated
with the retirement of tangible long-lived assets. Over the passage of time, accretion of
the liability is recognized as an operating expense and the capitalized cost is depleted
over the estimated useful life of the related asset. Additionally, SFAS 143 requires that
upon initial application of these standards, the Company must recognize a cumulative
effect of a change in accounting principle corresponding to the accumulated accretion and
depletion expense that would have been recognized had this standard been applied at the
time the long-lived assets were acquired or constructed. The Companys asset
retirement obligations relate primarily to the plugging, dismantling and removal of wells
drilled to date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Using a credit-adjusted risk fee rate of 12%, an estimated useful life of wells ranging from
30-40 years, and estimated plugging and abandonment cost ranging from $5,000 per well to $10,000 per well, the Company has recorded a non-cash charge related to the cumulative
effect of a change in accounting
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23

---



| | principle of $351,204 in the consolidated statements of
loss for the year ended December 31, 2003. Oil and gas properties were increased by
$260,191, which represents the present value of all future obligations to retire the wells
at January 1, 2003, net of accumulated depletion on this cost through that date. A
corresponding obligation totaling $611,395 was also been recorded as of January 1, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the year ended December 31, 2004 and 2003, the Company recorded accretion expenses of
$73,368 associated with this liability. These expenses are included in interest expense in
the consolidated statements of loss. Had the provisions of this Statement been reflected
in the financial statements for the year ended December 31, 2002 asset retirement
obligations of $532,269 would have been recorded as of January 1, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro-forma
net loss for the years ended December 31, 2002 is as follows:
| | -----------------------------------------------------------------------



|                   | 2002
|------------------ | ----
|Net loss:          |     
|As reported        |     
|Accretion          |     
|                   |     
|Pro-forma net loss |     
|                   |     

| | The
following is a roll-forward of activity impacting the asset retirement obligation for the
year ended December 31, 2004:
| | ---------------------------------------------------------------------------------------------------------------------------

|                           | 
|-------------------------- | 
|Balance, January 1, 2003:  | 
|Accretion expense          | 
|Liabilities Settled        | 
|                           | 
|Balance, December 31,2003: | 
|Accretion expense          | 
|Liabilities Settled        | 
|                           | 
|Balance, December 31, 2004 | 
|                           | 

# 11. Stock Options

| |  | In October 2000, the Company approved a Stock
               Incentive Plan. The Plan is effective for a ten-year period commencing on
               October 25, 2000 and ending on October 24, 2010. The aggregate number of shares
               of Common Stock as to which options and Stock Appreciation Rights may be granted
               to Employees under the plan shall not exceed 1,000,000. Options are not
               transferable, fully vest after two years of employment with the Company, are
               exercisable for 3 months after voluntary resignation from the Company, and
               terminate immediately upon involuntary termination from the Company. The
               purchase price of shares subject to this Nonqualified Stock Option Plan shall be
               determined at the time the options are granted, but are not permitted to be less
               than 85% of the Fair Market Value of such shares on the date of grant.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24



---

| |  | Furthermore, an employee in the Plan may not, immediately prior to the grant of
               an Incentive Stock Option hereunder, own stock in the Company representing more
               than ten percent of the total voting power of all classes of stock of the
               Company unless the per share option price specified by the Board for the
               Incentive Stock Options granted such an Employee is at least 110% of the Fair
               Market Value of the Companys stock on the date of grant and such option,
               by its terms, is not exercisable after the expiration of 5 years from the date
               such stock option is granted.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock
option activity in 2004, 2003 and 2002 is summarized below:

|                 | 2004 |  | 2003 |          | 2002 |  
|---------------- | ---- |  | ---- | -------- | ---- | -
|
|
|Outstanding,     |      |  |      |          |      |  
|beginning of     |      |  |      |          |      |  
|year             |      |  |      | 461,590  |      | $
|Granted          |      |  |      | --       |      |  
|Exercised        |      |  |      | (142,000 | )    |  
|Expired/canceled |      |  |      | (24,437  | )    |  
|                 |     
|Outstanding      |      |  |      |          |      |  
|and exercisable, |      |  |      |          |      |  
|end of year      |      |  |      | 295,153  |      | $
|                 |      |  |      |          |      |  

| |  |  |  |  |  | The following table summarizes information about stock options outstanding at December 31,
2004:
| |  |  |  |  |  | ------------------------------------------------------------------------------------------------

| |       | OptionsOutstanding |   | Options  Exercisable
| | ----- | ------------------ | - | --------------------
|
|
| |       |                    | $ | 0.50                
| |       |                    | $ | 2.86                
| | Total | 295,153            |   | 295,153             
| |       |                    |   |                     
| |      

| | No
options were granted in 2004. The weighted average fair value per share of options granted
during 2003 and 2002 is $0.16 and $1.45 respectively, calculated using the Black-Scholes
Option-Pricing model.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-25

---



| | No
compensation expense related to stock options was recognized in 2004, 2003 or 2002.
| | --------------------------------------------------------------------------------------

| | For
employees, the fair value of stock options used to compute pro forma net loss and loss per
share disclosures is the estimated present value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions for 2003 and 2002.
Expected volatility of 40% for 2003, 74.2% for 2002; a risk free interest rate of 3.67% in
2003, 3.67% in 2002; and an expected option life of 3 years for 2003 and 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 12. Income Taxes

| | The Company has no taxable income during each of the
               three year period ended December 31, 2004.
| | --------------------------------------------------------------------------------------------------------------

| | A
reconciliation of the statutory U.S. Federal income tax and the income tax provision
included in the accompanying consolidated statements of loss is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31,                   | 2004 | 2003 | 2002
|------------------------------ | ---- | ---- | ----
|Statutory rate                 |      |      |     
|Tax benefit at statutory rate  |      |      | $   
|State income tax benefit       |      |      |     
|Other                          |      |      |     
|Non-deductible interest        |      |      |     
|Increase in deferred tax asset |      |      |     
|valuation allowance            |      |      |     
|                               |     
|Total income tax provision     |      |      | $   
|                               |     

| | The Company's  deferred tax assets and liabilities are as
                                      follows:
| | --------------------------------------------------------------------------------------------------------

|December 31                     | 2004 | 2003 | 2002
|------------------------------- | ---- | ---- | ----
|Deferred tax assets:            |      |      |     
|Net operating loss carryforward |      |      | $   
|Capital loss carry forward      |      |      |     
|                                |     
|Total deferred tax assets       |      |      |     
|                                |     
|Deferred tax liability:         |      |      |     
|Basis difference in pipeline    |      |      |     
|                                |     
|Total deferred liability        |      |      |     
|                                |     
|Total net deferred taxes        |      |      |     
|                                |     
|Valuation allowance             |      |      |     
|                                |     
|Net deferred liability          |      |      | $   
|                                |     

F-26



| | The
Company recorded a valuation allowance at December 31, 2004, 2003 and 2002 equal to the
excess of deferred tax assets over deferred tax liabilities, as management is unable to
determine that these tax benefits are more likely than not to be realized. Potential
future reversal of the portion of the valuation allowance relative to deferred tax asset
resulting from the exercise of stock options will be recorded as additional paid in
capital realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the Company had net operating loss carry-forwards of approximately
$25,318,000 which will expire between 2011 and 2023 if not utilized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

# 13. Supplemental CashFlow Information

| | The Company paid approximately $697,000,
          $635,000 and $571,000 for interest in  2004, 2003 and
          2002, respectively. No interest was capitalized in 2004, 2003 or 2002.No income taxes were paid in 2004, 2003, or 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 14. Rights Offering

| | On October 17, 2003, the Company filed a Registration
               Statement on Form S-1 with the Securities and Exchange Commission
               (SEC). On February 13, 2004, the SEC deemed the Registration
               Statement on Form S-1 effective.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Rights Offering was a distribution to the holders of the Companys common stock
outstanding at the record date, February 27, 2004, at no charge, of nontransferable
subscription rights at the rate of one right to purchase three shares of the
Companys common stock for each share of common stock owned at the subscription price
of $0.75 in the aggregate, or $0.25 per each share purchased.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
subscription right, in addition to the right to purchase three shares of common stock,
carried with it an over-subscription privilege. The over-subscription privilege provided
stockholders that exercise all of their basic subscription privileges with the opportunity
to purchase those shares that were not purchased by other stockholders through the
exercise of their basic subscription privileges, at the same subscription price per
share.  In no event could any subscriber purchase shares of the Companys common
stock in the offering that, when aggregated with all of the shares of the Companys
common stock otherwise owned by the subscriber and his, her or its affiliates, would
immediately following the closing, represent more than 50% of the Companys issued
and outstanding shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
provided in the Rights Offering, 7,029,604 rights were exercised pursuant to the basic
subscription privilege, resulting in the purchase of 21,088,812 shares at $0.25 per share
for gross proceeds to the Company of $5,272,203 resulting from the basic subscription
privilege. A total of 15,211,118 rights were exercised pursuant to the oversubscription
privilege resulting in additional gross proceeds to the Company of $3,802,797. Of the
shares
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27

---



| | purchased pursuant to the Rights Offering 14,966,344 shares were purchased by
Directors, Officers and owners of 10% or more of the Companys outstanding common
stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the time the Rights Offering closed on March 18, 2004, all 36.3 million shares offered had
been subscribed and, as a result, the Company raised approximately $9.1 million. The total
number of shares subscribed actually exceeded the 36.3 million shares available for
issuance under the offering. Consequently, all shares subscribed for under the basic
privilege were issued and the number of shares issued under the over-subscription
privilege was proportionately reduced to equal the number of remaining shares. The
allocation and issuance of the oversubscribed shares was made by Mellon Investor Services,
the Companys subscription agent who also returned payments for those over-subscribed
shares that were not available.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
net proceeds of the Rights Offering have been used to pay non-bank indebtedness in the
aggregate amount of approximately $6 million (including up to $3,850,000 in principal
amount plus accrued interest owed by the Company to Dolphin) and to pay $1,157,000 as a
portion of the Companys settlement with Bank One. The balance of the net
proceeds were used for working capital purposes, including the drilling of additional
wells. At December 31, 2003, the Company incurred costs in connection with the Rights
Offering of $223,003, which were reflected in the consolidated balance sheet in other
current assets. This asset was offset against gross proceeds in March 2004, when such
proceeds were received by the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 15. Litigation Settlement

| | On May 10, 2004 the Court entered its final order approving the fairness of the
          settlement to the class, dismissing the action pursuant to a
           Settlement Stipulation, and fully releasing the claims of the
          class members in Paul Miller v. M. E. Ratliff and Tengasco, Inc.,No. 3:02-CV-644 in the United States
          District Court for the Eastern District of Tennessee, Knoxville, Tennessee. This
          action sought certification of a class action to recover on behalf of a class of
          all persons who purchased shares of the Companys common stock between
          August 1, 2001 and April 23, 2002, unspecified damages allegedly caused by
          violations of the federal securities laws. In January, 2004 all parties reached
          a settlement subject to court approval. On April 29, 2004, a final hearing for
          approval of the settlement was held. The Court entered its order approving the
          settlement on May 10, 2004. Class members may file their claims against the
          settlement fund through July 15, 2004. The fund will be disbursed in accordance
          with the claims filed. Under the settlement, the Company paid into a settlement
          fund the amount of $37,500 to include all costs of administration, contributed
          150,000 shares of stock of Miller Petroleum, Inc. owned by the Company and will
          issue 300,000 warrants to purchase a share of the Companys common stock
          for a period of three years from date of issue at $1 per share subject to
          adjustments. These warrants were not issued as of
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-28

---



| | December 31, 2004. All
          expenses including attorneys fees are to be paid out of these settlement
          funds. The Miller Petroleum, Inc. investment had a net carrying value of $60,000
          and a cumulative other comprehensive loss of $90,000, which was reversed from
          cumulative other comprehensive loss and recognized as a realized loss during the
          third quarter of 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 16. Bank One Settlement

| | On November 8, 2001, the Company signed a credit facility with the Energy Finance  Division of Bank One, N.A. in Houston, Texas whereby
          Bank One extended to the  Company a revolving line of credit of up to $35 million. The initial borrowing base
under the facility was $10 million. The interest rate was the Bank One base rate plus
one-quarter percent.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 5, 2002, the Company received a notice from Bank One stating that it had
re-determined and reduced the borrowing base under the Credit Agreement by $6,000,000 to
$3,101,766. Bank One demanded that the Company pay the $6,000,000 within thirty days of
the notice. The Company filed a lawsuit in Federal Court to prevent Bank One from
exercising any rights under the Credit Agreement. The Company was paying $200,000 per
month toward the outstanding balance of the credit facility until the settlement. As of
May 1, 2004, the outstanding balance due to Bank One under the Credit Agreement was
$4,101,796. On May 13, 2004 the Company entered into an agreement, settling its lawsuit
with Bank One.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 13, 2004, the Company and Bank One executed a written agreement resolving all claims
against each other. Pursuant to that agreement, the Company agreed to pay the sum of
$3,657,000 to the Bank by May 18, 2004 in full satisfaction of its obligations to the Bank
and to immediately release all claims against the Bank and to dismiss the litigation. In
turn, Bank One agreed to immediately release all its claims against the Company, dismiss
the litigation and to execute releases of its liens on all of the Companys
properties securing the credit facility upon receipt of the agreed payment. Bank One
retained a right to seek specific performance of the May 13, 2004 agreement if payment
were not made by May 18, 2004 and to recover attorneys fees if such relief were
sought. The Company and the Bank each agreed to bear all of its own costs, expenses, and
attorneys fees incurred to date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 18, 2004, the Company paid Bank One the agreed upon settlement in the amount of
$3,657,000. The funds were obtained from proceeds of bridge loan from Dolphin Offshore
Partners, LP (Dolphin) (the managing partner of Dolphin is Peter E. Salas, the
now Chairman of the Board of Directors), in the principal amount of $2,500,000 bearing
interest at 12% per annum, payable interest only monthly beginning June 18, 2004, and with
the principal amount due May 20, 2005. The loan is secured by a first lien on the
Companys Tennessee and Kansas producing properties and the Tennessee pipeline. The
balance of the settlement amount of $1,157,000 was paid from
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-29

---



| | funds available to the
Company from the proceeds of the rights offering. Upon receipt of this payment, an agreed
order signed by the Company and the Bank dismissing all claims in litigation was filed
with the court on May 20, 2004 and entered by the court. The Company recorded a gain from
extinguishment of debt in the amount of $336,820 in the second quarter of 2004, which was
the difference between the carrying amount of the loan less the settlement amount.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 17. Quarterly Data and Share
Information (unaudited)

| | The following table sets forth, for the fiscal periods  indicated, selected
                     consolidated financial data.
| | -----------------------------------------------------------------------------------------------------------------------------

|                                        | Fiscal Year Ended 2004 | 
|--------------------------------------- | ---------------------- | 
|
|Revenues                                |                        | 
|Net loss/income                         |                        | 
|Net loss/income  attributable to common |                        | 
|stockholders                            |                        | 
|                                        |                       
|Income/loss per common share            |                        | 
|                                        |                        | 

|                        |  | Fiscal Year Ended 2003 |  
|----------------------- |  | ---------------------- | -
|
|Revenues                |  |                        | $
|Net loss                |  |                        |  
|Cumulative effects of   |  |                       
|changes in accounting   |  |                       
|principles              |  |                        |  
|Net income (loss)       |  |                       
|attributable to  common |  |                       
|stockholders            |  |                        |  
|                        |  |                        |  
|Earnings (loss) per     |  |                       
|common share            |  |                       
|Operations              |  |                        |  
|Cumulative effects      |  |                        |  
|                        |  |                        |  
|Total                   |  |                        | $
|                        |  |                        |  

|(a) | During the fourth quarter of 2003, the Company recognized an impairment loss on
          equipment totaling $495,000.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(b) | A gain on exchange of Preferred Stock was recorded in the amount of $458,310,
          in the fourth quarter of 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------

F-30

---



# 18. Supplemental Oiland Gas
Information

| | Information with respect to the Companys oil and
               gas producing activities is presented in the following tables.Estimates of reserve quantities, as well as future production and discounted cash flows before income taxes, were determined by Ryder
Scott Company, L.P. as of December 31, 2004, 2003 and 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Oil and Gas Related
Costs
| | -------------------------

| | The
following table sets forth information concerning costs related to the Companys oil
and gas property acquisition, exploration and development activities in the United States
during the years ended December 31, 2004, 2003 and 2002:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      | 2004 | 2003 | 2002
|--------------------- | ---- | ---- | ----
|Property acquisitions |      |      |     
|Proved                |      |      | $   
|Unproved              |      |      |     
|Less - proceeds from  |      |     
|sales of properties   |      |      |     
|Development costs     |      |      |     
|                      |     
|                      |      |      | $   
|                      |     

| | Results of Operations
from Oil and Gas Producing Activities
| | -----------------------------------------------------------

| | The
following table sets forth the Companys results of operations from oil and gas
producing activities for the years ended:
| | -----------------------------------------------------------------------------------------------------------------------------

|December 31,                | 2004 | 2003 | 2002
|--------------------------- | ---- | ---- | ----
|Revenues                    |      |      | $   
|Production costs and taxes  |      |      |     
|Depreciation, depletion and |      |      |     
|amortization                |      |      |     
|                            |     
|Income from oil and gas     |      |      |     
|producing activities        |      |      | $   
|                            |     

| | In the  presentation  above,  no  deduction  has been  made  for
indirect  costs  such as corporate  overhead or interest  expense.  No income taxes are reflected  above due to the Company's
operating tax loss carry-forwards.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-31

---



| | Oil and Gas Reserves
(unaudited)
| | --------------------------------

| | The
following table sets forth the Companys net proved oil and gas reserves at December
31, 2004, 2003 and 2002 and the changes in net proved oil and gas reserves for the years
then ended. Proved reserves represent the estimated quantities of crude oil and natural
gas which geological and engineering data demonstrate with reasonable certainty to be
recoverable in the future years from known reservoirs under existing economic and
operating conditions. The reserve information indicated below requires substantial
judgment on the part of the reserve engineers, resulting in estimates which are not
subject to precise determination. Accordingly, it is expected that the estimates of
reserves will change as future production and development information becomes available
and that revisions in these estimates could be significant. Reserves are measured in
barrels (bbls) in the case of oil, and units of one thousand cubic feet (MCF) in the case
of gas.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Oil (bbls) | Gas (Mcf)
|------------------------------------ | ---------- | ---------
|Proved reserves:                     |            |          
|Balance, January 1, 2002             |            |          
|Discoveries and extensions           |            |          
|Revisions of previous estimates      |            |          
|Production                           |            |          
|                                     |           
|Balance, December 31, 2002           |            |          
|Discoveries and extensions           |            |          
|Revisions of previous estimates      |            |          
|Production                           |            |          
|                                     |           
|Balance, December 31, 2003           |            |          
|Discoveries and extensions           |            |          
|Revisions of previous estimates      |            |          
|Production                           |            |          
|                                     |           
|Proved reserves at December 31, 2004 |            |          
|                                     |           
|                                     |           
|Proved developed producing           |            |          
|reserves at December 31, 2004        |            |          
|                                     |           
|                                     |           
|Proved developed producing           |            |          
|reserves at December 31, 2003        |            |          
|                                     |           
|                                     |           
|Proved developed producing           |            |          
|reserves at December 31, 2002        |            |          
|                                     |           
|                                     |           

| | Of
the Companys total proved reserves as of December 31, 2004, 2003 and 2002,
approximately 69%, 51% and 37% respectively, were classified as proved developed
producing, 17%, 14% and 19% respectively, were classified as proved developed
non-
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-32



| | producing and 14%, 35% and 44% respectively, were classified as proved undeveloped.
All of the Companys reserves are located in the continental United States.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Standardized Measure
of Discounted Future Net Cash Flows(unaudited)
| | -------------------------------------------------------------------

| | The
standardized measure of discounted future net cash flows from the Companys proved
oil and gas reserves is presented in the following table:
| | ------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | (amounts in thousands)
|------------------------------------- | ----------------------
|
|Future cash inflows                   |                       
|Future production                     |                       
|costs and taxes                       |                       
|Future development costs              |                       
|Future income tax expenses            |                       
|                                      |                       
|Net future cash flows                 |                       
|Discount at 10% for                   |                       
|timing of cash flows                  |                       
|                                      |                       
|Discounted future net cash flows from |                       
|proved reserves                       |                       
|                                      |                       

|                                    | (amounts in thousands)
|----------------------------------- | ----------------------
|
|Balance, beginning of year          |                       
|Sales, net of production costs      |                       
|and taxes                           |                       
|Discoveries and extensions          |                       
|Changes in prices and               |                       
|production costs                    |                       
|Revisions of quantity estimates     |                       
|Development costs incurred          |                       
|Interest factor - accretion         |                       
|of discount                         |                       
|Net change in income taxes          |                       
|Changes in future development costs |                       
|Changes in production rates         |                       
|and other                           |                       
|                                    |                       
|Balance, end of year                |                       
|                                    |                       

F-33

---



| | Estimated
future net cash flows represent an estimate of future net revenues from the production of
proved reserves using current sales prices, along with estimates of the operating costs,
production taxes and future development and abandonment costs (less salvage value)
necessary to produce such reserves. The average prices used at December 31, 2004, 2003 and
2002 were $40.92, $29.72 and $27.25 per barrel of oil and $7.04, $4.76 and $4.01 per MCF
of gas, respectively. No deduction has been made for depreciation, depletion or any
indirect costs such as general corporate overhead or interest expense.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Operating
costs and production taxes are estimated based on current costs with respect to producing
gas properties. Future development costs are based on the best estimate of such costs
assuming current economic and operating conditions. The estimates of reserve values
include estimated future development costs that the Company does not currently have the
ability to fund. If the Company is unable to obtain additional funds, it may not be able
to develop its oil and natural gas properties as estimated in its December 31, 2004
reserve report.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
tax expense is computed based on applying the appropriate statutory tax rate to the excess
of future cash inflows less future production and development costs over the current tax
basis of the properties involved, less applicable net operating loss carry-forwards, for
both regular and alternative minimum tax. For the years ended December 31, 2004, 2003 and
2002 the Companys available net operating loss carry forwards offset all tax effects
applicable to the discounted future net cash flows.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
future net revenue information assumes no escalation of costs or prices, except for gas
sales made under terms of contracts which include fixed and determinable escalation.
Future costs and prices could significantly vary from current amounts and, accordingly,
revisions in the future could be significant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 19. Subsequent Events

| | On March 4, 2005 the  Company  sold the  Kansas gas  wells,  oil and gas  leases and the  associated
              gathering  system in place in Rush County,  Kansas to Bear  Petroleum,  Inc.  for $2.4  million. The Companys
gas producing properties in Kansas were physically separated from the oil properties, and
were all located in Rush County, Kansas consisting of 51 producing wells and associated
gathering system. All proceeds of this sale, being the sales price less a sales commission
of $50,000, were immediately paid to Dolphin Offshore Partners. L.L.P. to reduce the
principal of the promissory note in amount of $2.5 million to $150,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-34