UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, 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, 2002 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                               (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                               IDENTIFICATION 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 stock held by non-affiliates
(based on the closing price on March 3, 2003 of $1.39): $8,378,799.

     Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes / / No /X/

     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 (based on the closing price on June 28, 2002 of $2.80): $18,994,161.

     State issuer's revenues for its most recent fiscal year: $5,700,478

     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 (March
3, 2003): 11,927,004

     Documents Incorporated By Reference: None.

<PAGE>

                                                 TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               Page
PART I

<S>                 <C>                                                                                         <C>
         Item 1.     Business.....................................................................................1

         Item 2.     Description Of Property.....................................................................22

         Item 3.     Legal Proceedings...........................................................................29

         Item 4.     Submission of Matters to a Vote of Security Holders.........................................32

PART II

         Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters.......................33

         Item 6.     Selected Financial Data.....................................................................34


         Item 7.     Management's Discussion and Analysis of Financial Condition and Results of
                         Operation...............................................................................35


         Item 7A.    Quantative and Qualitative Disclosures About Market Risk....................................46


         Item 8.     Financial Statements and Supplementary Data.................................................48


         Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial
                         Disclosure..............................................................................48

PART III

         Item 10.   Directors and Executive Officers of the Registrant...........................................49

         Item 11.   Executive Compensation.......................................................................55

         Item 12.   Security Ownership of Certain Beneficial Owners and Management...............................58

         Item 13.   Certain Relationships and Related Transactions...............................................61

         Item 14.    Controls and Procedures.....................................................................63

PART IV

         Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................64

SIGNATURES.......................................................................................................71
</TABLE>


                                                         i

<PAGE>

                           FORWARD LOOKING STATEMENTS

     The information  contained in this Report, in certain  instances,  includes
forward-looking  statements.  When  used in this  document,  the  words  budget,
budgeted,  anticipate,  expects,  estimates,  believes,  goals or  projects  and
similar expressions are intended to identify forward-looking  statements.  It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements. Important factors that could
cause  actual  results  to  differ   materially  from  those  projected  in  the
forward-looking  statements  include,  but are not  limited  to, the  following:
production  variances from  expectations,  volatility of oil and gas prices, the
need to develop and  replace  reserves,  the  substantial  capital  expenditures
required for construction of pipelines and the drilling of wells and the related
need to fund such capital  requirements  through  commercial banks and/or public
securities  markets,  environmental  risks,  drilling and operating risks, risks
related to exploration and  development  drilling,  the uncertainty  inherent in
estimating  future oil and gas production or reserves,  uncertainty  inherent in
litigation,  competition,  government regulation, and the ability of the Company
to implement its business  strategy,  including  risks  inherent in  integrating
acquisition operations into the Company's operations.

PART I

ITEM 1.BUSINESS.

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  state-of-the-art seismic
technology to maximize 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  41,088  acres.  See,  "Item 2,
Description of Properties."

     To date,  the  Company  has been  drilling  primarily  on a portion  of its
Tennessee  leases,  known as the Swan Creek  Field in Hancock  County (the "Swan
Creek Field or Leases")  focused within the Knox formation,  one of the geologic
formations in the Field. The Company  currently has 22 producing gas wells and 6
producing  oil wells in the Swan Creek which produce  approximately  1.4 MMcf of
natural gas per day and 2,200  barrels of oil per month.  Revenues from the Swan
Creek Field were approximately $200,000 per month during 2002.


                                        1

<PAGE>



     On March 8, 2001, the Company's wholly owned subsidiary,  Tengasco Pipeline
Corporation ("TPC"), completed a 65 mile intrastate pipeline from the Swan Creek
Field to Kingsport,  Tennessee at a cost of approximately  $15.3 million.  Until
the  Company's  pipeline  was  completed  in 2001,  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.
The Company  initially  believed that when actual production began from the Swan
Creek  wells that the  volumes of natural gas from the Swan Creek Field would be
significantly  higher  than the rates of actual  production  that have  occurred
since  production  began.  The reasons for the  occurrence  of lower  production
volumes include initial production problems caused by naturally occurring fluids
entering the well bore,  the slower than  anticipated  rate of production of the
wells due to underground  reservoir  characteristics  that became  apparent only
when the wells were placed  into actual  production,  and the  inability  of the
Company  to drill  additional  wells due to  capital  acquisition  problems  and
difficulties with the Company's primary lender, Bank One, N.A. of Houston, Texas
("Bank One"). The Company has taken steps to minimize fluid problems in existing
wells by mechanical  means,  and to prevent them in any future wells by drilling
and completion  techniques.  However,  management  believes that the only way to
increase  production volumes of gas from this field is to drill additional wells
to most  efficiently  drain the underground  reservoirs of the large reserves of
gas, and the Company's ability to do so is dependent upon raising the additional
capital  for  drilling.  Although  no  assurances  can  be  given,  the  current
management  of the  Company  believes  that  it will  be  able  to  resolve  the
difficulties   currently  preventing  it  from  drilling  additional  wells  and
increasing production volumes of natural gas from the Swan Creek Field.

     Effective  December 31, 1997,  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 the acquisition  which
closed on March 5, 1998 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, 3 compressors and 11 vehicles. The total purchase
price of these assets was  approximately  $5.5  million,  which  consisted of $3
million in cash and  seller  financing  of $2.5  million.  The seller  financing
portion of the purchase  price was  refinanced by Arvest United Bank of Oklahoma
City,  Oklahoma as evidenced by a note dated  November 23, 1999 in the amount of
$1,883,650 to be paid in monthly  installments  of principal and interest over a
three year period. This obligation was subsequently  satisfied from the proceeds
of a line of  credit  received  by the  Company  from Bank  One.  See,  "Item 7,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation."

     The Kansas Properties are currently producing  approximately  800,000 cubic
feet of natural gas and 336 barrels of oil per day. Net revenues from the Kansas
Properties were approximately $275,000 per month during 2002.


                                       2
<PAGE>


HISTORY OF THE COMPANY

     The Company was initially  organized under the laws of the State of Utah on
April 18, 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.  On
November 10, 1972, the Company conveyed to an unaffiliated entity  substantially
all of the Company's assets and the Company 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.

     At a special meeting of stockholders  held on April 28, 1995, the Company's
stockholders  voted: (i) to approve the execution of an agreement (the "Purchase
Agreement")  pursuant to which the  Company  would  acquire  certain oil and gas
leases,  equipment,  securities  and  vehicles  owned  by  Industrial  Resources
Corporation ("IRC")(1), a Kentucky corporation, in consideration of the issuance
of 4,000,000  post-split (as described  below)  "unregistered"  and "restricted"
shares of the Company's common stock and a $450,000,  8% promissory note payable
to IRC. The  promissory  note was converted  into 83,799 shares of the Company's
common stock in December 1995;  (ii) to amend the Articles of  Incorporation  of
the Company to effect a reverse  split of the Company's  outstanding  $0.001 par
value common stock on a basis of one share for two,  retaining  the par value at
$0.001 per share,  with  appropriate  adjustments  being made in the  additional
paid-in capital and stated capital accounts of the Company;  (iii) to change the
name of the Company from "Onasco Companies, Inc." to "Tengasco, Inc."; and, (iv)
to change the  domicile  of the  Company  from the State of Utah to the State of
Tennessee by merging the Company into Tengasco,  Inc., a Tennessee  corporation,
formed by the Company solely for this purpose.

     The Purchase  Agreement was duly executed by the Company and IRC, effective
May 2, 1995.  The  reverse  split,  name  change and change of  domicile  became
effective  on May 4, 1995,  the date on which duly  executed  Articles of Merger
effecting  these  changes were filed with the Secretary of State of the State of
Tennessee;  a  certified  copy of the  Articles  of  Merger  from  the  State of
Tennessee was filed with the  Department of Commerce of the State of Utah on May
5,  1995.   Unless   otherwise  noted,   all  subsequent   computations   herein
retroactively reflect this one for two reverse split.

     During  1996,  the  Company  formed  TPC to  manage  the  construction  and
operation of its pipeline, as well as other pipelines planned for the future.


----------------------
    (1) Malcolm E. Ratliff, the Company's former Chief Executive Officer, former
Chairman  of the  Board  of  Directors  and  former  Director,  is the the  sole
shareholder of IRC.


                                       3
<PAGE>

GENERAL

         1. THE SWAN CREEK FIELD

     Amoco Production Company ("AMOCO") during the late 1970's and early 1980's,
after extensive  geological and seismic studies,  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 significant  natural gas discovery
wells in the Swan Creek Field to the Knox Formation at approximately  5,000 feet
of total depth.  These wells,  once completed,  had a high pressure and apparent
volume  of  deliverability  of  natural  gas;  however,   in  the  mid-1980's  a
substantial  decline in worldwide oil and gas prices  occurred and the high cost
of constructing a necessary 23 mile pipeline across three rugged mountain ranges
and crossing the  environmentally  protected Clinch River from Sneedville to the
closest market in Rogersville, Tennessee was cost prohibitive.

     In 1987,  AMOCO farmed out its leases to Eastern  American  Energy  Company
which held the leases until July 1995. The Company became aware of a law adopted
by the Tennessee  legislature  which enabled the Company to lease all of AMOCO's
prior acreage.  The Company filed for a declaratory  judgment as to its right to
lease AMOCO's prior acreage.  The Company was  ultimately  successful in winning
all  right,   title  and   interest  in  all  of  AMOCO's   prior  leases  in  a
precedent-setting Supreme Court case.

     In July 1995 after  completion  of the  Purchase  Agreement  with IRC,  the
Company  acquired the Swan Creek  Leases.  These leases  provide for a landowner
royalty of 12.5%.

     A. SWAN CREEK PIPELINE FACILITIES

     In July 1998 the  Company  completed  the first  phase  ("Phase  I") of its
pipeline in the Swan Creek Field,  a 30 mile pipeline made of 6 and 8 inch steel
pipe running  from the Swan Creek Field into the main city gate of  Rogersville,
Tennessee.  With the assistance of the Tennessee Valley Authority  ("TVA"),  the
Company was successful in utilizing TVA's right-of-way along its main power line
grid 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 April 2000,  TPC  commenced  construction  of Phase II of the  Company's
pipeline.  This was an  additional 35 miles of 8 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 an existing  pipeline and meter
station at Eastman  Chemical  Company's  chemical plant. The pipeline system was
completed on March 8, 2001 at an overall cost of approximately $15.3 million and
extends 65 miles from the Company's Swan Creek Field to Kingsport, Tennessee.


                                       4
<PAGE>


     B. SWAN CREEK CONTRACTUAL ARRANGEMENTS

     On November 18, 1999,  the Company  entered into an agreement  with Eastman
Chemical Company  ("Eastman") which provides that the Company will deliver daily
to  Eastman's  plant in  Kingsport a minimum of the lesser of (i) 5,000  MMBtu's
(MMBtu  means one  million  British  thermal  units which is the  equivalent  of
approximately one thousand cubic feet of gas) or (ii) forty percent (40%) of the
natural gas  requirements of Eastman's plant and a maximum of 15,000 MMBtu's per
day.  Under the terms of the  agreement,  the  Company had the option to install
facilities to treat the delivered gas so that the total non-hydrocarbon  content
of the  delivered  gas is not  greater  than two percent  (2%).  This would have
allowed the gas to be used in certain  processes in the Eastman plant  requiring
low levels of non-hydrocarbons. If the Company elected to perform this option by
installing  additional  facilities,  the  minimum  daily  amount  of  gas  to be
purchased by Eastman from the Company would  increase to the lesser of (i)10,000
MMBtu's  or (ii)  eighty  percent  (80%)  of the  natural  gas  requirements  of
Eastman's chemical plant.

     On March 27,  2000,  the  Company and Eastman  signed an  amendment  to the
agreement  permitting the Company a further option with respect to the allowable
level of non-hydrocarbons in the delivered gas. This amendment gives the Company
the  further  option to tender gas  without  treatment,  at a minimum  volume of
10,000 MMBtu's per day, in consideration of which the Company agrees to accept a
price  reduction  of five cents per MMBtu for the volumes per day between  5,000
and  10,000  MMBtu's  per day under the  pricing  structure  in place  under the
original  agreement.  To date,  none of the gas sold by the  Company  to Eastman
exceeds the allowable  level of  non-hydrocarbons  permitted under the agreement
and does not require treatment.

     Under the  agreement as amended March 27, 2000,  Eastman  agreed to pay the
Company the index price plus $0.10 for all  natural gas  quantities  up to 5,000
MMBtu's  delivered  per day,  the index price plus $0.05 for all  quantities  in
excess of 5,000 MMBtu's per day and the index price for all quantities in excess
of 15,000  MMBtu's per day. The index price means the price per MMBtu  published
in  McGraw-Hill's  INSIDE F.E.R.C Gas Market Report equal to the Henry Hub price
index as shown in the table labeled Market Center Spot Gas Prices.

     The  agreement  with  Eastman  is for a term of  twenty  years  and will be
automatically  extended, if the parties agree, for successive terms of one year.
The initial term of the agreement  commenced  upon the  Company's  completion of
construction of Phase II of its pipeline and connection to Eastman's  facilities
and once  commercial  operation of that facility was approved which was in March
2001.

     On January  25,  2000,  TPC,  signed a franchise  agreement  to install and
operate  new  natural  gas  utility  services  to  residential,  commercial  and
industrial  users in Hancock  County,  Tennessee for the Powell  Valley  Utility
District.  The Powell Valley District had no existing natural gas facilities and
the system to be installed  by TPC was  intended to initially  extend to schools
and small customers, and gradually be expanded over time to


                                       5
<PAGE>

serve as many of the 6,900 residents of the County as is economically  feasible.
TPC  purchases  gas from the  Company on behalf of the  District  which is to be
resold at an  average  retail  price of about  $8.00  Mcf.  Under the  franchise
agreement,  which has an  initial  term of ten years and may be  renewed  for an
additional ten years,  TPC will receive 95% of the gross proceeds of the sale of
gas for its services under the agreement.  In June, 2000, TPC began installation
of the  necessary  facilities  to begin to  serve  up to 1,500  residential  and
industrial  consumers in the City of Sneedville,  county seat of Hancock County.
The  Company's  existing  eight inch main line from its Swan Creek Field  passes
through  the city  limits of  Sneedville.  A  one-half  mile of  interconnecting
pipeline  from the  Company's  existing  pipeline was  installed,  as well as an
additional  four miles of  pipeline  as the  initial  phase of the  distribution
system.  The  construction  was completed and delivery of initial volumes of gas
into the system from the Swan Creek field  occurred on December  27,  2000.  The
cost of  construction  of these  facilities  was  approximately  $133,000.  Upon
enactment  of initial  rate  schedules by the Powell  Valley  Utility  District,
initial sales began in January 2001 to a small number of  residential  and small
commercial  customers.  TPC  contracted  with the City of  Sneedville to conduct
billing and installation  activities in connection with the day to day operation
of this system.

     On March 11, 2002, the Company began delivering gas to its first commercial
customer in a new  industrial  park in  Sneedville,  Kiefer Built,  Inc, an Iowa
based manufacturer of livestock and industrial trailers. The Company hopes to be
able to supply gas to other customers who may move into that industrial park. At
this time,  however, no gas sales agreements for large volume or base load sales
have been signed and there can be no  assurances  that such  agreements  will be
signed and if signed, it is not possible to predict when such sales may begin or
what the overall volumes of gas sold may be. Due to the small number of existing
customers and relatively high operating costs, the Company experienced a loss of
approximately  $35,000 attributable to the operation of this system in 2002. The
Company  intends to either expand the operation of this system so as to increase
revenues  or to sell  these  assets  to  neighboring  utilities  or the  City of
Sneedville. In the event of such a sale, the Company could still sell gas to the
Powell Valley Utility District.

     On March 30, 2001,  the Company  signed a contract to supply natural gas to
BAE  SYSTEMS  Ordnance  Systems  Inc.  ("BAE"),  operator  of the  Holston  Army
Ammunition Plant in Kingsport,  Tennessee for a period of twenty years.  Natural
gas is used at the Holston Army ammunition facility to fire boilers and furnaces
for steam  production  and process  operations  utilized in the  manufacture  of
explosives by BAE for the United States  military.  Under the  agreement,  BAE's
daily  purchases  of natural gas may be between 1.8 million and 5 million  cubic
feet, and volume could increase  significantly over the life of the agreement as
BAE conducts additional  operations at the Holston facility.  The contract calls
for a price based on the monthly  published index price for spot sales of gas at
the  Henry Hub plus  five  cents  per  MMBtu in the same  manner as the price is
calculated in the contract between the Company and Eastman.

     The  Company  has the only  gas  pipeline  located  on the  grounds  of the
6,000-acre  Holston  facility.  A  portion  of the  Holston  facility  is  being
developed  by BAE as the new


                                       6
<PAGE>

Holston  Business  and  Technology  Park  which  will  serve as a  location  for
additional  commercial and industrial  customers.  The Company's presence at the
Holston  Business  and  Technology  Park will  provide the  availability  of gas
service to other customers and is considered by BAE to be an important factor in
the  development  of the Park,  as well as the source of potential new customers
for the Company.


     C. SWAN CREEK PRODUCTION AND DEVELOPMENT

     The Company  began  delivering  gas through its pipeline to BAE on April 4,
2001 and to Eastman on May 24, 2001.  Daily  production in June 2001 was 4,936.2
Mcf and in July 2001 daily production  averages  increased to 5,497 Mcf per day.
However,  the  Company was unable to maintain  these  production  levels for the
remainder of 2001 and for 2002. This was due primarily to three factors: initial
fluid problems in some wells;  natural and expected production declines from the
type of reservoir that exists in the Swan Creek field;  and the inability of the
Company to offset expected  natural declines in production by drilling new wells
because of funding  difficulties  caused in large part by the  dispute  with the
Company's primary lender Bank One. See, "Item 3 Legal  Proceedings" and "Item 7,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation - Liquidity and Capital  Resources" for a more detailed  discussion of
the Bank One matter.

     As to the first of these problems,  the Company  experienced the in-flow of
substantially more fluids in the existing wells than had been expected when they
were first brought into continuous  production in 2001. These fluids entered the
wells from the boreholes.  The fluids obstructed and  significantly  reduced the
flow of gas from the  existing  wells in the Swan Creek Field and  required  the
Company to perform  substantial  additional  work and  repairs to  increase  the
production from existing  wells.  First, it was necessary to install a drip tank
system to eliminate the fluids in the pipeline. Next, the Company had to install
mechanical  devices in many of the existing wells to reduce the fluid  problems.
As a result of this repair work,  many of the existing wells had to be shut down
while the  repairs  were  made.  Gas  lifts  have  been  installed  in 15 of the
Company's  existing  wells  and act as  mechanisms  to  remove  the  fluids  and
stabilize erratic behavior,  such as large swings in individual well production.
These  devices  have had a variety of effects on  production  totals of existing
wells.  On some  individual  wells  production  has more than doubled,  while on
others,  although  production  totals have not  increased,  the monthly  average
production volume has become constant and more predictable.  The techniques used
in  addressing  these  fluid  problems  will be applied in any future  wells the
Company  drills in the Swan  Creek  Field and it is  anticipated  that this will
minimize or prevent these problems.

     Second,  the Company  experienced an expected and normal decline in initial
production from existing wells in a  newly-producing  field, such as Swan Creek,
related to natural  fracture  production and the associated  decline to steadier
flow rates from such a two-part system.  The natural storage system for the Knox
formation  in the Swan Creek Field to which the  Company's  existing  wells have
been drilled and from which gas is currently being produced has both primary and
secondary porosity  distributed  throughout the


                                       7
<PAGE>

dolomite  rock  that  makes up this  complex  formation.  All types of gas wells
experience  some type of decline as  production  takes place.  While the natural
fractures enhance production cumulative overall and contribute to longevity, the
initial  production  declines can be  significant.  These natural  declines were
expected and do not diminish either the shut in pressure or the Company's actual
reserves in the Swan Creek Field. They do, however, suggest the production rates
from some of the smaller wells will be slower,  but production  will last longer
than expected.

     Third,  the declines in production  have not been addressed and replaced by
additional  drilling  as the Company had  expected.  In order for overall  field
production to remain steady or grow in a field such as the Swan Creek field, new
wells must be brought online.  Any of the new wells drilled by the Company would
also experience the same harmonic (i.e. a relatively steep initial decline curve
followed by longer periods of relatively flat or stable  production)  decline as
does every  natural gas well in a formation  similar to the Knox  formation,  so
continuous  drilling is vital to  maintaining  or increasing  earlier  levels of
production.  Only two gas wells  were  added by the  Company  in 2002 due to the
destabilized  lending arrangements caused by the actions of Bank One and ongoing
litigation  regarding  that  matter.  The Company  anticipates  that the natural
decline of production from existing wells is now predictable in Swan Creek, that
the total volume of the Company's  reserves  remains  largely  intact,  and that
these  reserves  can be  extracted  through  existing  wells  and also by steady
additional  drilling  brought  on by  reliable  financial  arrangements  to fund
drilling.  The Company is hopeful that it will be able to obtain  additional  or
replacement  financing which will allow it to satisfy any  indebtedness  owed to
Bank One and to drill additional wells;  however, no assurances can be made that
such  financing  will be obtained.  See,  "Item 7,  Management's  Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."

     Due to natural  and  expected  declines  that  continue to occur in ongoing
production from any oil and gas well,  some additional  declines are expected to
occur in production from the Company's existing wells in Swan Creek. The Company
expects these natural declines to be less than the decline  experienced to date,
and that ongoing  production from existing wells will tend to level off, in view
of two factors:  first,  additional work,  repairs,  and recompletions have been
performed  on many of the existing  wells;  and second,  the natural  production
decline from any well is greatest during the initial  producing  periods,  which
periods as to the  Company's  existing  wells are now coming to the point  where
future production is expected to remain relatively level. Declines in production
in the Swan Creek Field  experienced  in the last  quarter of 2001 and the first
quarter of 2002 began to  stabilize in March 2002 at  approximately  2.5 million
cubic feet per day as these  factors  came into play.  During the  remainder  of
2002, the Field continued to experience natural decline in production,  although
the rate of the  decline was slower as would  normally be expected  from a field
such as the Swan Creek Field.

     Natural gas production from the Swan Creek field during 2002 averaged 2.567
million  cubic feet per day in the first  quarter;  2.553 million cubic feet per
day in the  second  quarter;  2.224  million  cubic  feet  per day in the  third
quarter; and, 1.467 million cubic


                                       8
<PAGE>

feet  per  day in  the  fourth  quarter.  This  production  history  reflects  a
combination  of natural  and  expected  decline  from  initial  production  from
existing  wells,  partially  offset  in the  second  and third  quarters  by the
addition of production  from two new gas wells.  During the fourth  quarter,  no
wells  were  added to offset  the  natural  and  expected  declines  in  initial
production from existing wells.

     The Company also  experienced  reductions  or declines in its sales volumes
during certain times in 2002 for reasons unrelated to the production  capability
of its  wells or  fields.  These  declines  were  caused  by  reductions  in the
Company's customers' usage requirements or delivery  restrictions.  For example,
during the period from June 28, 2002 through July 29, 2002, Eastman  temporarily
ceased its purchases from the Company because the Company was delivering most of
its  then  available  volumes  to  supply  BAE's  newly  increased  requirements
resulting  from  BAE  connecting   additional  gas  burning  facilities  to  its
operations.  The Company was unable to sell all volumes of gas  exceeding  BAE's
increased  requirements  to  Eastman,  although  the Company was able to produce
these volumes,  because Eastman requires a minimum for its meters that available
volumes did not exceed,  and a uniform  rate of delivery  that taking short term
volumes would interrupt. During the time Eastman was not purchasing gas from the
Company,  BAE  purchased  additional  volumes  until BAE  experienced  a partial
equipment outage on July 15, 2002 and reduced its purchased volumes. As a result
of these  occurrences,  which were not within the  control of the  Company,  the
Company's sales volume to BAE and Eastman in July 2002 declined to 42,382 Mcf or
an average of 1,367 Mcf per day.  Eastman  recommenced its purchases of gas from
the Company on July 29, 2002.  Due to the  combination  of factors  listed above
affecting  the  deliverability  of gas from the Swan Creek  Field,  the  Company
remains  capable of delivering  gas to both BAE and Eastman such  deliverability
from the Swan Creek field of approximately  1.5 million cubic feet per day as of
March 31, 2003.  In order to increase  the volumes of gas for delivery  from the
Swan Creek Field,  the Company must drill  additional  wells.  However,  even if
additional wells are drilled,  the Company  anticipates based on all information
acquired to date that deliverability from the Swan Creek Field, once stabilized,
may not exceed approximately 3 million cubic feet per day.

     During 2002, the Company  deepened or drilled and completed  three wells in
the Swan Creek field, the Colson No. 2, Paul Reed No. 8 and the Paul Reed No. 9,
to offset in part the normal and expected natural decline in production from the
Company's existing wells, and to thereby increase overall oil and gas production
capability and deliverability to BAE and Eastman.

     In May, 2002, The Colson No. 2,  previously an oil well with low production
levels, was deepened from approximately 3000 feet to 4,500 feet and successfully
recompleted  as a gas well.  The Colson No. 2 produced 59 million  cubic feet of
gas in 2002 and is currently producing approximately 175,000 cubic feet per day.

     On July 1, 2002,  the Paul Reed No. 8 well was  drilled to a total depth of
4,600 feet and although gas was present,  based on information  acquired  during
drilling, the


                                       9
<PAGE>

Company  determined that it was  economically  more beneficial to the Company in
view of  current  oil  prices  and  the  anticipated  levels  of  potential  gas
production,  to complete this well as an oil well in the  Murfreesboro and Stone
River  formations  at a depth of  2500-3200  feet.  The Paul Reed No. 8 well was
successfully completed as an oil well and came in producing 100 barrels per day.
This well is currently producing approximately 65 barrels per day.

     The Company drilled the Paul Reed No. 9 well to a total depth of 4,860 feet
and completed it as a gas well. The well was connected to the Company's pipeline
in early August 2002 and is currently producing approximately 200,000 cubic feet
of gas per day.

     The completion stimulation techniques used on the Paul Reed No. 8 well were
also used on two existing oil wells with moderate  success.  The Paul Reed No. 5
which  had  stopped  production  in March  2002  due to  paraffin  build-up  was
re-stimulated  with a similar  technique to enhance  flow and limit  build-up of
paraffin.  Additional production was achieved, with 828 barrels produced in July
and 1,036 barrels in August 2002, and production continues to date.  Altogether,
in September 2002, Swan Creek oil production  achieved its highest monthly total
to date of 2,423 barrels, which increased again in October 2002 to 3,012 barrels
of oil. Despite these increases, oil production in the Swan Creek Field declined
from  30,323  barrels in 2001 to 20,122  barrels in 2002.  This  decline was due
primarily to the cessation of production  from one of the Company's  wells,  the
Paul Reed No. 2 for mechanical  reasons,  although production from the Paul Reed
No. 8 largely  offset the lost  volumes from the Paul Reed No. 2. which has been
abandoned and will be plugged.  The Company is presently reviewing key areas for
drilling  of new oil  wells in the  Swan  Creek  Field.  In  addition,  chemical
treatments to enhance production from existing wells are presently being studied
and may be  undertaken  if the Company  believes the results of such  treatments
will be cost effective.

     During 2002, the Company had 30 producing gas wells and seven producing oil
wells  in the  Swan  Creek  Field.  Miller  Petroleum,  Inc.  and  others  had a
participating  interest in twelve of these wells.  See, "Item 2 - Description of
Property - Property  Location,  Facilities,  Size and Nature of  Ownership."  In
total,  the Company has completed 45 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,  twelve are shut-in or currently  not  producing  because these wells are
either not presently  producing  commercial  quantities of hydrocarbons,  or are
awaiting workover or tie-in to the Company's pipeline. However, certain of these
wells  may not be  tied-in  to the  Company's  pipeline  since  the  expense  of
connection  over rough  terrain  may not be  justified  in view of the  expected
volumes to be produced.

     The Company has not been able to drill a  substantial  number of additional
gas or oil wells at Swan Creek in 2002 because it has not had  sufficient  funds
to do so.  Although  the Company  had  expected to  commence  and  continue  its
drilling  program in 2002,  the Company has been forced to postpone  any further
drilling until  additional  funds become  available and the dispute  between the
Company and its primary lender


                                       10
<PAGE>

Bank One are  resolved.  Because  the Knox  formation  has been  defined  by the
accumulation  of data from  previously  drilled  wells  and  seismic  data,  new
locations and new wells when drilled are expected to contribute significantly to
achieving  increases to production  totals.  The Company believes that new wells
can be  strategically  located  due to the high  degree  of  information  it has
developed from its existing wells as to the shape and key producing  horizons of
the Knox  formation.  The  Company  has  obtained  approval  from the  Tennessee
regulatory  authorities  with  jurisdiction  over  spacing  of  wells  to  drill
additional  wells on smaller  spacing units in the field,  effectively  allowing
more wells to be drilled and the  reservoir  to produce more quickly but with no
decrease in the long term  efficiency  of  production  of the maximum  amount of
reserves from the reservoir.  The Company is hopeful that  production from these
new wells will be in line with its more  productive  existing  wells in the Swan
Creek Field and will have a noticeable effect on increasing the total production
from the Field.  Although no assurances can be made, the Company  believes that,
once this work is completed and the new wells are drilled,  production  from the
Swan Creek Field will increase.  However,  even if such production increase does
occur,  the  deliverability  from the Swan Creek Field will not be sufficient to
meet the Company's daily requirements under the contracts with BAE and Eastman.

     The Company also intends to commence  drilling in other  formations  in its
Swan Creek  Field.  To date,  drilling  in the Swan Creek  Field has  focused on
production of gas primarily from the Knox formation.  This is a lower Ordovician
Dolomite,  and the heart of the  anticline  structure  at Swan  Creek.  However,
immediately  adjacent to this formation and shallower over these  formations are
other formations which the Company believes have a potential for gas production.
The Stones River and Trenton  formations  hold the  possibility for both oil and
gas and have produced some gas to date. These Upper  Ordovician  formations have
not been a primary target for gas  production,  but the shallower  depths needed
for drilling and the moderate gas production  might make a potential  subsequent
source for  additional gas  production.  With the completion of only one well in
the Trenton formation which is producing approximately 50Mcf per day, the impact
of these  targets  is  proportional  both to an area and an  extent  that is yet
undefined.  However,  the Company can not proceed with such drilling  until such
time that it has the funds to so.

     D. RELATIONSHIP WITH THE UNIVERSITY OF TENNESSEE

     On March 17,  2000,  the  Company  announced  that it had  entered  into an
agreement  with the  University of  Tennessee-Knoxville  ("UTK")  related to its
hydrocarbon  exploration  activities in eastern  Tennessee.  Two UTK  geological
scientists,  Professor  Robert D. Hatcher,  Jr., a University  of  Tennessee/Oak
Ridge National Laboratory  Distinguished Scientist in structural and Appalachian
geology  who served as a Director  of the  Company in 2002,  and Dr.  Richard T.
Williams,  Ph. D.,  Associate  Professor in  geophysics,  who is  currently  the
Company's  Chief  Executive  Officer and a Director of the Company,  provide the
Company with  assistance in  interpreting  the structure of the Swan


                                       11
<PAGE>

Creek Field and geophysical  data from that field.  New seismic data will permit
better subsurface  imaging and more exact  determination of the size of the Swan
Creek Field.

     A major outgrowth of the Company's  relationship with UTK is a new graduate
fellowship, called the Tengasco Fellowship, to be awarded in UTK's Department of
Geological Sciences to an outstanding  graduate student interested in pursuing a
career in the petroleum industry. The fellowship will provide a living allowance
and  tuition  for the  student.  A number  of UTK  graduate  students  receiving
financial support from the Company have already provided computer  generated 3-D
images of the Swan Creek Field.  These images have helped outline the subsurface
shape  of the  hydrocarbon  producing  zone  to  allow  the  Company  to  better
understand where additional production might be located.

     The  Agreement  between the Company and the  University  of Tennessee  also
provides for cooperation between them in the use of vibreosis seismic equipment,
primarily a large vibrator truck,  owned by the University that is to be used in
the Company's exploration program. Under the agreement,  the Company is entitled
to use  the  equipment  in  exchange  for  performing  required  routine  expert
maintenance and upkeep on the University's equipment,  the cost of which exceeds
the University's available resources. The University-owned truck is identical to
two trucks owned by the Company and used in its seismic exploration program.

     2. THE KANSAS PROPERTIES

     The Company,  as of December 31, 1997 acquired the Kansas  Properties which
presently  includes 134  producing  oil wells and 51 producing  gas wells in the
vicinity of Hays,  Kansas and a gathering system including 50 miles of pipeline.
The Company also  acquired 37 other wells which now serve as saltwater  disposal
wells  in the  vicinity  of  Hays,  Kansas.  Saltwater  wells  are used to store
saltwater  encountered in the drilling  process that would  otherwise have to be
transported  out of the area.  These saltwater  disposal wells reduce  operating
costs by eliminating  the need for transport.  The aggregate  production for the
Kansas Properties at present is approximately 800 Mcf and 336 barrels of oil per
day. Revenue for the Kansas Properties was  approximately  $275,000 per month in
2002.

     The Company  employs a full time geologist in Kansas to oversee  operations
of the  Kansas  Properties.  Recent  well  workovers  in  Kansas  have  improved
production  with an estimated  $1.80 increase in revenue for every $1.00 in work
expense.  The Company has  identified  five new locations for drilling  wells in
Ellis and Rush Counties,  Kansas on its existing  leases in response to drilling
activity in the area  establishing new areas of production.  In 2001 the Company
successfully  drilled the Dick No. 7 well in Kansas and completed the well as an
oil well.  The Company did not drill any new wells in Kansas in 2002 due to lack
of funds  available for such drilling.  The Company is also engaged in gathering
for a fee the gas produced from wells owned by


                                       12
<PAGE>

others located in Kansas  adjacent to the Company's wells and near the Company's
gathering  lines.  The  Company's  plans  for  its  Kansas  properties   include
maintaining the current productive capacity of its existing wells through normal
workovers and maintenance of the wells,  performing  gathering or sales services
for adjacent  producers,  and expanding the  Company's  own  production  through
drilling these additional  wells.  Such plans are subject to the availability of
funds to perform the work.

     In  addition,  there are  several  capital  development  projects  that are
available with respect to the Kansas  Properties  which include  recompletion of
wells and major workovers to increase  current  production.  These projects when
completed may increase production in Kansas.  Management,  however, has made the
decision not to perform this work at the present  time,  as the Company does not
presently have the funds necessary to perform these  projects.  It will however,
reconsider  its decision if such funds become  available  through the  Company's
operations or other sources of financing.

     3. OTHER AREAS OF DEVELOPMENT

     The Company is presently exploring other geological  structures in the East
Tennessee  area  that are  similar  to the Swan  Creek  structure  and which the
Company believes have a high probability of producing hydrocarbons.  The Company
has either acquired seismic data on these  structures from third-party  sources,
or is conducting its own seismic studies with its own trucks and  equipment. The
seismic  analysis is continuing and related leasing  activities have begun based
on initial analysis of seismic results. The Company plans to conduct exploration
activities  in these areas.  The first of these  locations  was in Cocke County,
Tennessee which is  approximately 40 miles southeast of the Swan Creek Field. In
2002,  the Company,  in  conjunction  with Southeast Gas & Oil Corp. of Newport,
Tennessee,  drilled an  approximately  6,000-foot  exploratory  well to the Knox
formation.   This  well  did  not  result  in  any   commercial   quantities  of
hydrocarbons.

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 Company will conduct  exploration and production  activities to produce
crude oil and natural gas. The principal markets for these commodities are local
refining  companies,  local  utilities  and private  industry  end users,  which
purchase the crude oil, and local  utilities,  private  industry end users,  and
natural gas marketing companies, which purchase the natural gas.


                                       13
<PAGE>

     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 100% of  necessary  property  rights for the pipeline
system. The Company's pipeline will not only provide  transportation service for
gas produced from the Company's  wells, but will provide  transportation  of gas
for small  independent  producers in the local area as well.  Direct sales could
also be made to some local towns, industries and utility districts.

     Natural gas from the Kansas  Properties  is  delivered  to  Kansas-Nebraska
Energy, 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.  There is a limited  market in the area
and the only other purchaser of crude oil is EOTT Energy Operations Ltd.

DRILLING EQUIPMENT

     In addition to the drilling  equipment and vehicles  which it acquired from
IRC, on November 1, 2000, the Company  purchased an Ingersoll Rand RD20 drilling
rig and related  equipment from Ratliff Farms,  Inc., an affiliate of Malcolm E.
Ratliff, the Company's former Chief Executive Officer and former Chairman of the
Board of Directors and a former  Director of the Company.  All of this equipment
is in  satisfactory  operating  condition.  The Company also  receives  contract
drilling  services from Miller  Petroleum,  Inc. and Union  Drilling in the Swan
Creek Field.

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 INDUSTRY
AND 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.

     Its principal  competitors  in the State of Tennessee  are Nami  Resources,


                                       14
<PAGE>

LLC,  Miller  Petroleum,   Inc.,  Knox  Energy  Development  and  Penn  Virginia
Corporation.  The  Company is in a  favorable  position in the area in which its
pipeline is located.  Within that area, the Company owns leases on approximately
41,088 acres.

     There are numerous producers in the area of the Kansas Properties. Some are
larger and some smaller than the Company.  However,  management  expects that it
will be able to sell all of the gas and oil that the Kansas Properties produce.

     Management does not foresee any difficulties in procuring  drilling rigs or
the  manpower  to run  them in the area of its  operations.  The  experience  of
management has been that in most instances, drilling rigs have only a one or two
day waiting period; however, several factors, including increased competition in
the area, may limit the availability of drilling rigs, rig operators and related
personnel and/or equipment;  such an event may have a significant adverse impact
on the profitability of the Company's operations.

     The Company  anticipates no difficulty in procuring  well drilling  permits
which are obtained from the Tennessee Oil and Gas Board. 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.
Management  believes that the Company is  well-positioned in these areas because
of the transmission lines that run through and adjacent to the properties leased
by the Company and because the Company holds  relatively large acreage blocks in
what management believes are promising areas.

SOURCES AND AVAILABILITY OF RAW MATERIALS
AND NAMES OF PRINCIPAL SUPPLIERS

     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.  See, "Competitive  Business Conditions,  Competitive Position in
the Industry and Methods of Competition" set forth above.

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


                                       15
<PAGE>

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. There is a limited market in the area and
the only  other  purchaser  of crude  oil is EOTT  Energy  Operations  Ltd.  The
Company,  however,  anticipates  that it will be able to sell all of the oil and
gas produced from the Kansas Properties.

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;  however,  permits are required  for  drilling oil or gas wells.  See,
"Effect of Existing or Probable  Governmental  Regulations on Business" below in
this section.

     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 utilities.  TPC has
been granted a certificate of public  convenience  and necessity to operate as a
pipeline utility in Hancock,  Hawkins,  and Claiborne  counties,  Tennessee.  In
addition, TPC was authorized to construct and operate the portion of Phase II of
the pipeline to Eastman by  resolution  of the City of  Kingsport in May,  2000.
This resolution was approved by the Tennessee  Regulatory  Authority as required
by state law. All approvals for the Company's pipeline have been granted.

     The City of Kingsport,  Tennessee has also enacted an ordinance  dated June
6, 2000 granting to Tengasco Pipeline 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 will be granted,  there can be no assurances  that it
will be granted,  or that such  approval may be granted


                                       16
<PAGE>

in a timely  manner,  or that such approval may not be limited in some manner by
the Tennessee Regulatory Authority as is expressly permitted under state law.

     TPC presently has all required tariffs and approvals necessary to transport
natural  gas to all  customers  of the  Company.  See,  "Effect of  Existing  or
Probable Governmental Regulations on Business" below in this section.

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 with the State of Tennessee.

     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- 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 are in
compliance with the laws of the State of Kansas.

     The Company's operations are also subject to laws and regulations requiring
removal and cleanup of environmental damages under certain  circumstances.  Laws
and regulations  protecting the environment have generally become more stringent
in recent years,  and may in certain  circumstances  impose "strict  liability,"
rendering a  corporation  liable for  environmental  damages  without  regard to
negligence or fault on the part of such  corporation.  Such laws and regulations
may expose the Company to liability  for the conduct of operations or conditions
caused by others,  or for acts of the Company which were in compliance  with all
applicable  laws at the time such  acts  were  performed.  The  modification  of
existing laws or regulations or the adoption of new laws or regulations relating
to  environmental  matters could have a material adverse effect on the Company's
operations.  In addition,  the Company's existing and proposed  operations could
result in  liability  for fires,  blowouts,  oil spills,  discharge of hazardous
materials into surface and subsurface aquifers and other  environmental  damage,
any one of which could result in personal injury,  loss of life, property damage
or destruction or suspension of operations.

     The Company  believes it is presently  in  compliance  with all  applicable
federal,  state or local  environmental  laws,  rules or  regulations;  however,
continued  compliance (or failure


                                       17
<PAGE>

to comply) and future  legislation  may have an adverse  impact on the Company's
present and contemplated business operations.

     The  Company's   Board  of  Directors   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. See, "Risk Factors", below.

RESEARCH AND DEVELOPMENT

     The  Company  has  not  expended  any  material   amount  in  research  and
development  activities  during  the last two  fiscal  years.  Research  done in
conjunction with its exploration activities will consist primarily of conducting
seismic  surveys  on the  lease  blocks.  This  work  will be  performed  by the
Company's  geology and  engineering  personnel and other  employees and will not
have a material cost of anything more than standard salaries.

COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS

     See, "Effect of Existing or Probable Governmental  Regulations on Business"
set forth above in this section.

NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES

     The Company  presently has twenty-one  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:


                                       18
<PAGE>

     SIGNIFICANT  CAPITAL  REQUIREMENTS.  The  Company  must make a  substantial
amount of 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 and
complete  its  drilling  program in the Swan Creek Field is  dependent  upon its
ability to fund these costs.  Although the Company anticipated that by this time
it would be able to fund the  completion  of its  drilling  program  in the Swan
Creek Field from revenues from the sales of gas, it is unable to do so. Further,
the  Company's  credit  facility  with  Bank One has been  reduced  by Bank One,
although the Company vigorously disputes the Bank's actions. As a result of Bank
One's reduction of the credit facility and the corresponding demand for payment,
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 $27,776,726  and a working capital
deficit of  $7,998,835  as of  December  31,  2002,  the  Company's  independent
certified  public  accountants  have  indicated in their report on the Company's
Consolidated  Financial  Statements for the year ended  December 31, 2002,  that
these  circumstances  contribute to  uncertainty  over the Company's  ability to
continue as a going concern  which depends upon its ability to obtain  long-term
debt or raise capital to satisfy its cash flow requirements. At the present time
and until the Company is able to increase its production and sales of gas and to
resolve  its  dispute  with Bank One,  it must  obtain  the  necessary  funds to
complete its drilling program from other sources such as equity investment, bank
loan or a joint  venture  with  another  company.  In  addition,  the  Company's
revenues or cash flows  could be reduced  because of lower oil and gas prices or
for some other reason. If the Company's  revenues or cash flows decrease and the
Company is unable to procure  alternative  financing,  this  would  require  the
Company to reduce  production over time and this would have an adverse impact on
the Company's ability to continue in business.  Although  management believes it
will be able to  obtain  the  long-term  debt or raise  capital  to enable it to
continue  drilling and remain in business,  there can be no  assurances  that it
will be able to obtain such funding. Where the Company is not the majority owner
or operator of an oil and gas project, it may have no control over the timing or
amount of capital  expenditures  associated with the particular  project. If the
Company cannot fund its capital expenditures, its interests in some projects may
be reduced or forfeited.

     VOLATILE  OIL AND  GAS  PRICES  CAN  MATERIALLY  AFFECT  THE  COMPANY.  The
Company's future financial  condition and results of operations will depend upon
the prices  received for the  Company's oil and natural gas  production  and the
costs of acquiring,  finding,  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 control of the Company. 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


                                       19
<PAGE>

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.

     UNCERTAINTY  IN  CALCULATING  RESERVES;  RATES OF  PRODUCTION;  DEVELOPMENT
EXPENDITURES;   CASH  FLOWS.  There  are  numerous   uncertainties  inherent  in
estimating  quantities  of oil and natural gas  reserves of any  category and in
projecting  future rates of production and timing of  development  expenditures,
which  underlie  the  reserve  estimates,  including  many  factors  beyond  the
Company's  control.  Reserve data represent  only  estimates.  In addition,  the
estimates of future 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 the  assumptions  could  result  in the  actual  quantity  of the
Company's  reserves  and future net cash flows from being  materially  different
from the estimates. In addition, the Company's estimated reserves may be subject
to downward or upward revision based upon production history,  results of future
exploration  and  development,  prevailing  oil and gas  prices,  operating  and
development costs and other factors.

     OIL AND GAS OPERATIONS INVOLVE SUBSTANTIAL COSTS AND ARE SUBJECT TO VARIOUS
ECONOMIC  RISKS.  The oil and gas  operations  of the Company 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.

     COSTS  INCURRED  TO CONFORM  TO  GOVERNMENT  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  the Company may
produce and sell. In addition,  at the U.S.  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.

     COSTS INCURRED RELATED TO ENVIRONMENTAL  MATTERS.  The Company, as an owner
or lessee and operator of oil and gas properties, is subject to various federal,
state and local laws and  regulations  relating to discharge of materials  into,
and protection of, the environment.  These laws and regulations may, among other
things,  impose  liability on the lessee under an oil and gas lease for the cost
of pollution clean-up resulting from operations, subject the lessee to liability
for  pollution  damages,  and require  suspension  or cessation of operations in
affected areas.

     The Company maintains insurance coverage, which it believes is


                                       20
<PAGE>

customary  in  the  industry,  although  it is not  fully  insured  against  all
environmental  risks.  The  Company  is not  aware of any  environmental  claims
existing as of December  31, 2002,  which would have a material  impact upon the
Company's financial position or results of operations.

     The Company has made and will continue to make  expenditures in its efforts
to comply with these  requirements,  which it believes  are  necessary  business
costs in the oil and gas  industry.  The Company has  established  policies  for
continuing  compliance  with  environmental  laws  and  regulations.  The  costs
incurred by these policies and procedures are  inextricably  connected to normal
operating  expenses  such that the  Company is unable to separate  the  expenses
related to environmental matters; however, the Company does not believe any such
additional  expenses  are  material  to its  financial  position  or  results of
operations.

     The Company does not believe that compliance  with federal,  state or local
provisions  regulating  the  discharge of  materials  into the  environment,  or
otherwise  relating to the protection of the  environment,  will have a material
adverse effect upon the capital  expenditures,  earnings or competitive position
of the Company or its subsidiaries;  however, there is no assurance that changes
in or  additions  to  laws  or  regulations  regarding  the  protection  of  the
environment will not have such an impact.

     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.  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;  however,  insurance  is not  available  to  the  Company  against  all
operational risks.

     HEDGING  MAY  PREVENT  THE  COMPANY  FROM  FULLY   BENEFITTING  FROM  PRICE
INCREASES.  The Company does not presently have any hedging  agreements or plans
to enter into any hedging  activities.  However,  to the extent that the Company
does  enter  into  such  agreements  or  undertake  such  activities,  it may be
prevented from realizing the benefits of price increases above the levels of the
hedges.  In  addition,  the  Company is subject to basis risk when it engages in
hedging transactions, particularly where transportation constraints restrict the
Company's  ability to deliver oil and gas volumes at the delivery point to which
the hedging transaction is indexed.

     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.


                                       21
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

PROPERTY LOCATION, FACILITIES, SIZE AND NATURE OF OWNERSHIP

     The  Company's  Swan Creek  Leases  are on  approximately  41,088  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 Company has commenced drilling.  However,  the Company does
not anticipate any difficulty in continuing the Swan Creek Leases.  In 2002, the
Company reduced the acreage  comprising the Swan Creek Field from  approximately
50,500 acres to the present 41,088 acres. This reduction in acreage was 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.  The  reduction  of this  acreage  does not affect the reserves of the Swan
Creek Field or diminish its potential.  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% working  interest in nine of the Company's
existing wells, and a 50% working interest and 6% working interest 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  and are  presently
producing wells.

     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  proportionate  share of drilling
costs.  This well is also  located  in the Swan Creek  Field and is a  presently
producing well.

     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 are to be 81.25% to
Miller and 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


                                       22
<PAGE>

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.

     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.

     Working  interest  owners in oil and gas wells 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 does agree to market gas for working  interest  owners to the  Company's
customers,  the Company will 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 customers may be correspondingly  reduced.  If
the working  interest owners make their own arrangements to market their natural
gas to other  end users  along  the  pipeline  which  have  been  served by East
Tennessee  Natural Gas, an interstate  pipeline,  such gas would be  transported
through the Company's wholly owned subsidiary TPC at published tariff rates. The
current  published tariff rate is for firm  transportation at a demand 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.

     The Kansas  Properties  contain  138 leases  totaling  32,158  acres in the
vicinity of Hays,  Kansas.  The  original  term on these leases was from 1 to 10
years and in most cases has  expired,  however,  most leases 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%.

     The Company pays ad valorem taxes on its Kansas Properties. It does not pay
any taxes on its Swan Creek Leases. 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  and an  office  in Hays,  Kansas  at a rental of $500 per
month.  During 2002 and the first  quarter of 2003,  the Company  closed a field
office in Sneedville, Tennessee and an office in New York City it had previously
leased at an aggregate rental of $3,100 per month.

RESERVE ANALYSES

     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
or IRC, and performed  these services at their standard  rates.  The net reserve
values used  hereafter  were obtained from a


                                       23
<PAGE>

reserve report dated February 10, 2003 (the "Report") prepared by Ryder Scott as
of December 31, 2002.  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 judgment.  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 Report provides that the net proved reserves for wells in
the Swan Creek Field are 30,360 MMcf of natural gas and 226,456  barrels of oil.
According to the Report, the value of the future gross revenues of the Company's
interest in the Swan Creek Field as of December 31, 2002 is $103,667,886  before
production  taxes and $100,557,852  after  production  taxes. The Report further
provides  that as of December 31, 2002 the value of the future net income before
income taxes of the  Company's  interest in the Swan Creek Field is  $80,798,842
and,  discounting  the future net  income by 10%  results in a present  value of
$36,230,728.

     The Report  reflects that the amount of proved  natural gas reserves in the
Swan Creek Field of 30,360MMcf remained  essentially  unchanged from reserves of
30,366 MMcf  reported in the Ryder Scott  report dated March  28,2002  reporting
values as of  December  31,  2001.  The Report  also  reflects a decrease in the
amount of proved oil reserves to 224,456  barrels in 2002 from  319,650  barrels
reported in the earlier  Ryder Scott  report for values as of December 31, 2001.
This  decrease was  primarily  due to estimates for the Colson #1 well which was
included in the earlier Ryder Scott report as of December 31, 2001,  but was not
included in the current Report as that well was subsequently  taken off-line and
reclassified  as unproved.  The Report reflects an increase from the Ryder Scott
Report for the year ended  December  31,  2001 in the value of the future  gross
revenues of the Company's  interest in the Swan Creek Field from  $57,832,005 to
$103,667,886  before  production taxes and $56,097,044 after production taxes to
$100,557,852.  The Report also  indicates an increase in the  discounted (at 10%
per annum  compounded  monthly)  present value of the reserves of the Swan Creek
Field from $19,302,590 as of December 31, 2001 to $36,230,728 as of December 31,
2002. These increases in values reported by Ryder Scott in the Report are due to
an  increase  in oil and gas  prices  for 2002  making a larger  portion  of the
Field's undeveloped reserves more economical for future development.  Gas prices
for the year-end  2001 Ryder Scott  report  utilized gas prices of $2.35 per Mcf
and oil  prices of $16.25  per  barrel as opposed to the $4.22 per Mcf price and
$26.90  per  barrel  price  utilized  in the  current  Report for the year ended
December  31,  2002.  In addition,  the Company  drilled two wells in 2002,  the
Colson  #2 and the Paul  Reed #9,  which  added  936 MMcf to the  Company's  gas
reserves in the Swan Creek Field.

     Ryder Scott also performed a reserve analysis of the Kansas Properties. The
Report  provides  that as of December  31, 2002 the net proved  reserves for the
Kansas  Properties  are 4,005 MMcf of natural gas and 1,586,258  barrels of oil.
According to the Report, the value of the future gross revenues of the Company's
interest in the Kansas Properties as of December 31, 2002 is $48,511,771  before
production  taxes and $48,066,045  after  production  taxes.  The Report further
provides  that as of December 31, 2002 the value of the future net income before
income taxes of the Company's  interest in the Kansas  Properties is $18,163,162
and,  discounting  the future net  income by 10%  results in a present  value of
$10,417,292.

     The current  Report  reflects a  substantial  increase from the Ryder Scott
Report


                                       24
<PAGE>

analyzing  the reserves of the Kansas  Properties as of December 31, 2001 in (i)
the number of barrels of oil  attributed  to the  Company's  net interest in the
Kansas  Properties  from 831,930  barrels to 1,308,467 and (ii) the value of the
future gross revenues of the Company's  interest in the Kansas  Properties  from
$20,463,797  to  $48,511,771  before  production  taxes  and  $19,586,607  after
production  taxes to $48,066,045.  The current Report also indicates an increase
in the discounted (at 10% per annum compounded monthly) net present value of the
Company's oil and gas reserves in the Kansas  Properties  from  $2,431,317 as of
December 31, 2001 to  $10,417,292 as of December 31, 2002.  These  increases are
due primarily to two factors.  First, the increased price and future speculative
market for energy  prices have driven both oil and gas prices  higher.  The 2001
Ryder Scott Report used a gas price of $2.13 per Mcf in determining the value of
reserves in  contrast to the $4.13 per Mcf price used in the current  Report and
an oil price of $17.24  per barrel in 2001  contrasted  to the $27.29 per barrel
price used in 2002.  Second,  an  increase  in the  number of  barrels  occurred
because the current  Report for December 31, 2002  included the  production  and
reserves  from  approximately  thirty  producing  oil  wells  that  had not been
included in the prior Ryder Scott Report for  December 31, 2001.  At the time of
the earlier Report, the calculated  operating expenses for those producing wells
matched or exceeded the oil price utilized in that Report and  therefore,  those
wells were not  considered  commercially  viable for  purposes  of that  earlier
Report.  As a result  of the  increase  in the  price of oil,  those  wells  and
associated  reserves are included in the current Report. The Company anticipates
that future  reports of the net present  value of the Kansas  Properties  should
remain  stable,  and  may  even  increase  and  will  continue  to  include  the
consideration of reserves  attributable to all of the Company's wells in Kansas,
which are still producing in accordance with their extended  production history,
provided that the market price of oil and gas remains constant or increases.

     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.  Reserve  analyses,
however, are at best speculative, especially when based upon limited production;
no assurance can be given that the reserves  attributed to these leases exist or
will  be  economically  recoverable.  The  result  of any  reserve  analysis  is
dependent upon the forecast of product prices utilized in the analysis which may
be more or less  than the  actual  price  received  during  the  period in which
production occurs.

     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 Securities and Exchange Commission. 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.


                                       25
<PAGE>

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.

<TABLE>
<CAPTION>
TENNESSEE
--------------------------------------------------------------------------------------------------------------
        YEAR                 PRODUCTION               COST OF                    AVERAGE SALES PRICE
       ENDED                                         PRODUCTION
      DECEMBER                                      (PER BOE)(2)
         31
--------------------------------------------------------------------------------------------------------------
                      OIL                GAS                                     OIL               GAS
                     (BBL)              (MCF)                                   (BBL)           (PER MCF)
--------------------------------------------------------------------------------------------------------------
<S>                <C>               <C>                <C>                     <C>               <C>
2002               15,111.54         521,834.35          $4.10(3)               $21.85            $3.22
--------------------------------------------------------------------------------------------------------------
2001               22,776.21         703,073.56          $0.31                  $16.05            $2.55
--------------------------------------------------------------------------------------------------------------
2000               37,210.67           2,411.00          $0.69                  $20.32            $2.86
--------------------------------------------------------------------------------------------------------------
</TABLE>

Gas  volumes and prices for 2000  reflect  only the  nominal  purchases  made by
Hawkins  County Gas  Utility  District  upon  completion  of Phase I of Tengasco
Pipeline Company's pipeline system.


---------------------------
     (2) 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.

     (3) The increase in cost of  production  in 2002 was a result of this being
the first full year of production in the Swan Creek Field.


                                       26
<PAGE>

<TABLE>
<CAPTION>
KANSAS
--------------------------------------------------------------------------------------------------------------
          YEAR               PRODUCTION                COST OF                   AVERAGE SALES PRICE
         ENDED                                       PRODUCTION
        DECEMBER                                      (PER BOE)
          31
--------------------------------------------------------------------------------------------------------------
                       OIL               GAS                                    OIL               GAS
                      (BBL)             (MCF)                                  (BBL)           (PER MCF)
--------------------------------------------------------------------------------------------------------------
<S>                <C>               <C>                <C>                     <C>               <C>
2002               105,473.54        246,510.98         $ 8.71                 $23.89            $2.96
--------------------------------------------------------------------------------------------------------------
2001               112,495.88        278,884.66         $10.72                 $23.50            $4.12
--------------------------------------------------------------------------------------------------------------
2000               111,734.81        291,096.22         $ 9.68                 $28.06            $3.75
--------------------------------------------------------------------------------------------------------------
</TABLE>

OIL AND GAS DRILLING ACTIVITIES

     The Company's oil and gas developmental  drilling for the past three fiscal
years are as set forth in the following  tables.  During the fiscal years ending
December 31, 2000 and 2001 the Company did not drill any  exploratory  wells. In
2002, the Company drilled one exploratory well in Cocke County,  Tennessee which
did not result in finding commercial quantities of hydrocarbons. The information
should not be  considered  indicative  of future  performance,  nor should it be
assumed that there is necessarily  any  correlation  between the number of wells
drilled, quantities of reserves found or economic value.

     GROSS AND NET WELLS

     The  following  tables set forth for the fiscal years  ending  December 31,
2000,  2001, and 2002 the number of gross and net  development  wells drilled by
the Company.  The dry hole set forth in the table below is the Cocke County well
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.


                                       27
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                 YEAR ENDED DECEMBER 31
                                          2002                          2001                           2000
-------------------------------------------------------------------------------------------------------------------
                                  GROSS           NET           GROSS            NET           GROSS           NET
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>               <C>           <C>              <C>         <C>
TENNESSEE
-------------------------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS                    3           2.625             19            11.42            9           4.0515
-------------------------------------------------------------------------------------------------------------------
DRY HOLES                           1             .50              0                0            0                0
-------------------------------------------------------------------------------------------------------------------
KANSAS
-------------------------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS                    0               0              3            2.594            0                0
-------------------------------------------------------------------------------------------------------------------
DRY HOLES                           0               0              0                0            0                0
-------------------------------------------------------------------------------------------------------------------
</TABLE>

     PRODUCTIVE WELLS

     The  following  table sets  information  regarding the number of productive
wells in which the Company  held a working  interest as of  December  31,  2002.
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.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                    GAS                                         OIL
-------------------------------------------------------------------------------------------------------------------
                                         GROSS                    NET                GROSS                NET
-------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                   <C>                   <C>               <C>
TENNESSEE                                  31                    18.9                  12                6.18
-------------------------------------------------------------------------------------------------------------------
KANSAS                                     52                   43.45                 128               110.5
-------------------------------------------------------------------------------------------------------------------
</TABLE>

DEVELOPED AND UNDEVELOPED OIL AND GAS ACREAGE

     As of  December  31,  2002,  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.


                                       28
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                 DEVELOPED                                  UNDEVELOPED
-------------------------------------------------------------------------------------------------------------------
                                      GROSS ACRES              NET ACRES          GROSS ACRES          NET ACRES
-------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                     <C>                 <C>                 <C>
TENNESSEE                               1,840.00                1,065.38            41,088              35,952
-------------------------------------------------------------------------------------------------------------------
KANSAS                                  9,666.00                8,080.44            22,711              18,995.48
-------------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 3. - LEGAL PROCEEDINGS

     Except as  described  hereafter,  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.

     1. On November 8, 2001, the Company signed a credit facility with 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.

     On April 5, 2002, the Company  received a notice from Bank One stating that
it had  redetermined  and reduced  the  then-existing  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. On May 2, 2002, the Company filed suit in
federal  court in the Eastern  District of Tennessee,  Northeastern  Division at
Greeneville  to restrain  Bank One from taking any steps  pursuant to its Credit
Agreement to enforce its demand that the Company  reduce its loan  obligation or
else be deemed in default and for damages  resulting  from the wrongful  demand.
TENGASCO,  INC.,  TENGASCO LAND AND MINERAL  CORPORATION  AND TENGASCO  PIPELINE
CORPORATION V. BANK ONE, NA, DOCKET NO.  2:02-CV-118.  It is the position of the
Company  that  Bank  One's  demand  that  the  Company   reduce  its  loan  from
$9,101,776.66 to $3,101,776.66 within thirty days, coming only four months after
the loan was made, in the absence of any change in the  Company's  production of
oil and gas from the time the loan was closed or the  condition of the Company's
assets,  without  warning  and prior to the receipt of a December  2002  reserve
report, without any basis or explanation, is a violation of the Credit Agreement
and an act of bad faith.  The  Company  sought a jury  trial and actual  damages
sustained by it as a result of the wrongful demand, in the amount of $51,000,000
plus punitive damages in the amount of $100 million.


                                       29
<PAGE>

     On July 1, 2002, Bank One filed its answer and counterclaim,  alleging that
its actions  were  proper  under the terms of the Credit  Agreement,  and in the
counterclaim,  seeking  to recover  all  amounts it alleges to be owed under the
Credit Agreement, including principal, accrued interest, expenses and attorney's
fees in the approximate amount of $9 million.  No hearings have occurred or been
scheduled  in the  court  proceeding.  The  Company  has filed  initial  written
discovery  requests from Bank One. On November 5, 2002, the Company and the Bank
reached  preliminary  agreement  on  terms  of a  potential  settlement  of  the
litigation, subject to execution of formal settlement documents. The Company has
continued  to pay the sum of  $200,000  per  month of  principal  due  under the
original  terms of the Credit  Agreement,  plus  interest,  and has  reduced the
principal now outstanding to  approximately  $7.1 million.  Although the parties
continue to attempt to reach  settlement  of all  outstanding  issues  under the
preliminary  agreement,  the settlement has not been concluded.  At a scheduling
conference  held by the Court on February 21,  2003,  a procedural  schedule has
been set as requested by the Company leading toward a trial date of November 18,
2003 in the event settlement is not concluded.

     2. On November 22, 2002, the Company and its then Chief Executive  Officer,
Malcolm E.  Ratliff,  were  served  with  complaint  filed in the United  States
District Court for the Eastern District of Tennessee,  Knoxville,  entitled PAUL
MILLER V. M. E. RATLIFF AND  TENGASCO,  INC.,  DOCKET  NUMBER  3:02-CV-644.  The
complaint  seeks  certification  of a class  action to  recover on behalf of the
class of all persons who purchased  shares of the Company's common stock between
August 1, 2001 and April 23, 2002, damages in an amount not specified which were
allegedly caused by violations of the federal securities laws, specifically Rule
10b-5 issued under the Securities Exchange Act of 1934 as to the Company and Mr.
Ratliff,  and  Section  20(a)  the  Securities  Exchange  Act of  1934 as to Mr.
Ratliff.  The  complaint  alleges  that  documents  and  statements  made to the
investing  public by the Company and Mr. Ratliff  misrepresented  material facts
regarding the business and finances of the Company. The Company's initial review
of the  allegations  of the  complaint  against the Company  discloses  that the
allegations do not appear to be well founded and are without merit.  The Company
intends to vigorously  defend  against all  allegations  of the  complaint.  The
Company  has filed a motion to dismiss  the action  based on the  failure of the
complaint to meet the  requirements of the Securities  Litigation  Reform Act of
1995.  If that  motion is not  granted,  the  Company  will file its  responsive
pleading and will  contest the class  certification  issues and the  substantive
allegations of the complaint.

     3. The Company and its subsidiary,  Tengasco Pipeline  Corporation ("TPC"),
were  named  as  defendants  in an  action  commenced  on June  4,  2001 by C.H.
Fenstermaker & Associates,  Inc.  ("Fenstermaker") in the United States District
Court for the  Eastern  District  of  Tennessee  entitled  C.H.  FENSTERMAKER  &
ASSOCIATES, INC. V. TENGASCO, INC., NO. 3:01-CV-283. The action seeks to recover
approximately  $365,000  in charges  billed to TPC for  engineering  services in
connection  with the  planning  and  construction  of Phase II of the  Company's
pipeline, which runs from Rogersville to Kingsport, TN to serve Eastman Chemical
Company and Holston  Ordnance.  On June 25,  2001,  the Company and TPC filed an
answer  to the  complaint  denying  liability  for  the  billings  claimed,  and
counterclaiming against Caddum, Inc. ("Caddum"), a division of Fenstermaker. The
counterclaim  seeks  damages for breach of contract  and breach of


                                       30
<PAGE>

professional  engineering  standards  caused by Caddum,  including  unauthorized
deviations  from  the  pipeline  route,   which  caused  the  Company  to  incur
significant  additional costs. These costs included fees for concrete capping of
the pipeline as a result of the pipeline  being placed to close to the adjoining
highway right of way. The  counterclaim  further alleges that Caddum damaged the
Company:  by causing  delays in  completing  the  pipeline  by failing to submit
engineering drawings and failing to timely obtain certain x-rays of the pipeline
welds;  its  unauthorized  actions in  ordering  supplies  and  materials;  and,
overbilling from the agreed contract rate for engineering services. The District
Court  rescheduled the case for a non-jury trial on May 8, 2003. On February 27,
2003,  the parties  reached an agreement in principle for the settlement of this
action, and settlement  documents are being prepared for review by both parties.
In general,  the proposed settlement  framework  contemplates a reduction in the
amount owed by the Company from that  claimed in the  complaint,  and  favorable
extended payment terms.

     4.  TENGASCO  PIPELINE  CORPORATION  V.  JAMES E.  LARKIN AND  KATHLEEN  A.
O'CONNOR, No. 4929J in the Circuit Court for Hawkins County,  Tennessee. This is
a condemnation  proceeding brought by Tengasco Pipeline Corporation to acquire a
temporary  construction  easement  and  permanent  right of way to maintain  and
operate  a portion  of Phase I of the  Company's  pipeline  in  Hawkins  County,
Tennessee.  The court  granted an order of possession to the Company in January,
1998 and the pipeline has been constructed  across  approximately  3,000 feet of
the property concerned in a rural and very steep locale. The Company has had the
right of way appraised at $4,000.  The landowners,  Mr. Larkin and Kathleen A. O
Connor  who  both  live on the  property,  contest  the  appraised  value of the
property and claim  incidental  damages to certain  fish ponds  located on their
property.  The  landowners,  despite a lack of evidence  of any fish  raising or
aquaculture  business  actually being or having been operated on the premises or
of any actual  losses to such  business,  have  counterclaimed  for  $867,585 in
compensatory  damages and $2.6 million in punitive damages arising from trespass
and other legal  theories.  The Court required the parties to attempt to mediate
this  dispute and the  mediation  occurred in December,  2000.  The parties were
unable to reach a mediated  settlement  and the matter  has most  recently  been
scheduled  for trial on January  29,  2003.  The January 29, 2003 trial date has
been continued by the Court to an unspecified future date. The Court has ordered
the parties to a second  mediation  session  which will occur in March or April,
2003.  If  settlement  is not  reached  at  mediation,  the  Company  intends to
vigorously defend the allegations of the counterclaim because trial preparations
have not  disclosed  any fact that  reasonably  suggests a  substantial  adverse
result in this  matter  and the  allegations  of the  counterclaim  appear to be
without any credible basis.

     5. The Company,  its former Chief Executive  Officer and former Director of
the Company,  Malcolm E. Ratliff, and one of the Company's attorneys,  Morton S.
Robson,  were named as defendants in an action commenced in the Supreme Court of
the State of New York, New York County entitled MAUREEN COLEMAN, JOHN O. KOHLER,
CHARLES MASSOUD,  JONATHAN SARLIN, VON GRAFFENRIED A.G. AND VPM VERWATUNGS A.G.,
PLAINTIFFS  V.  TENGASCO,  INC.,  MORTON  S.  ROBSON  AND  MALCOLM  E.  RATLIFF,
DEFENDANTS, INDEX NO. 603009/98. In that action, the plaintiffs, shareholders of
the Company each of which purchased  restricted  shares of the Company's  Common
Stock,  allege that although they were entitled to sell their shares pursuant to
SEC  Rule


                                       31
<PAGE>

144 in the open market,  they were  precluded  from doing so by the  defendants'
purported  wrongful refusal to remove the restrictive  legend from their shares.
The plaintiffs own in the aggregate 35,000 shares of the Company's common stock.
The plaintiffs are seeking damages in an amount equal to the difference  between
the amount  for which  they  would  have been able to sell  their  shares if the
defendants  had acted to remove the  restrictive  legends when requested and the
amount they will receive on the sale of their shares.  The  plaintiffs  are also
seeking  punitive  damages in an amount  they claim to be in excess of  $500,000
together  with  interest,  costs  and  disbursements  of  bringing  the  action,
including  reasonable  attorneys fees. This action has been partially settled by
the Company agreeing to remove the restrictive legends on the plaintiffs' stock.

     As for the  balance of the  action,  the  Company  believes  that there are
several  substantial  factual  and  legal  issues  as to the date on  which  the
shareholders were entitled to sell their stock pursuant to Rule 144.  Management
further  believes that the Company did not  wrongfully  withhold its approval of
the removal of the  restrictive  legends at the times such removal was requested
by the  shareholders.  However,  in the  event  the  Company  is  found  to have
improperly  withheld its permission to remove the  restrictive  legends from the
shares owned by the shareholders,  the Company may be held liable for damages to
the  shareholders  in an amount equal to the difference  between the actual sale
price of such  shares and the sales  price they would have  realized on the date
such restrictive  legends should have been permitted to be removed. At this time
it is not possible to ascertain  with any certainty  what such damages would be.
The plaintiffs have not taken any action in this matter for several years.

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

         None during the fourth quarter of 2002.


                                       32
<PAGE>

PART II

ITEM 5   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

MARKET INFORMATION

     The Company's common stock was listed on the OTC Bulletin Board of the NASD
from March 31, 1994 through December 20, 1999 under the symbol TNGO. On December
10, 1999, the American Stock Exchange  ("AMEX")  approved the application of the
Company to have its common  stock listed on the AMEX.  Trading of the  Company's
common stock on the AMEX commenced on December 21, 1999 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, 2001 and December 31, 2002
are set forth below.  The prices for the first three  quarters of 2001 have been
retroactively  adjusted  by a 5%  reduction  to take into  account  the 5% stock
dividend  declared by the Company payable on October 1, 2001 to all shareholders
of record as of September 4, 2001.


                                                          HIGH               LOW
For the Quarters Ending

March 31, 2002                                            8.19              5.80

June 30, 2002                                             6.49              2.71

September 30, 2002                                        3.45              2.20

December 31, 2002                                         2.90              1.05



March 31, 2001                                           14.20              9.69

June 30, 2001                                            15.01             11.16

September 30, 2001                                       13.69              7.60

December 31, 2001                                        10.54              7.39


                                       33
<PAGE>

HOLDERS

     As of March 3, 2003 the number of  shareholders  of record of the Company's
common stock was 205 and management  believes that there are approximately 2,387
beneficial owners of the Company's common stock.

DIVIDENDS

     The  Company  under  its  credit  agreement  with  Bank  One  is  presently
restricted from paying dividends without Bank One's consent. The Company did not
pay any dividends with respect to the Company's  common stock in 2002 and has no
present plans to declare any further dividends with respect to its common stock.

RECENT SALES OF UNREGISTERED SECURITIES

     Except as  previously  reported in Quarterly  Reports on Form 10-Q filed by
the  Company,  no other equity  securities  that were not  registered  under the
Securities  Act of 1933, as amended,  were sold or issued by the Company  during
2002.

     Management  believes that all of the persons who were sold or issued common
stock  or  preferred  stock  during  2002  that  was not  registered  under  the
Securities Act of 1933, as amended,  were either "accredited  investors" as that
term is defined under  applicable  federal and state  securities laws, rules and
regulations,  or  were  persons  who by  virtue  of  background,  education  and
experience who could  accurately  evaluate the risks and merits  attendant to an
investment  in the  securities  of the Company.  Further,  all such persons were
provided with access to all material information regarding the Company, prior to
the offer or sale of these securities, and each had an opportunity to ask of and
receive answers from directors,  executive  officers,  attorneys and accountants
for the  Company.  The  offers  and  sales of such  securities  during  2002 are
believed to have been exempt from the registration  requirements of Section 5 of
the 1933 Act, as amended,  pursuant to Section  4(2)  thereof,  and from similar
state  securities  laws,  rules and  regulations  covering the offer and sale of
securities by available state exemptions from such registration.

ITEM 6.  SELECTED FINANCIAL DATA

     The following  selected financial data have 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 31(4),

--------------------------
(4) 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.




                                       34
<PAGE>

<TABLE>
<CAPTION>
                                  2002              2001             2000              1999            1998
---------------------------------------------------------------------------------------------------------------------
<S>                            <C>               <C>              <C>               <C>             <C>
INCOME STATEMENT DATA:
---------------------------------------------------------------------------------------------------------------------
Oil and Gas Revenues           $5,437,723        $6,656,758       $5,241,076        $3,017,252      $2,078,101
---------------------------------------------------------------------------------------------------------------------
Production Costs and Taxes     $3,094,731        $2,951,746       $2,614,414        $2,564,932      $1,943,944
---------------------------------------------------------------------------------------------------------------------
General and Administrative     $1,868,141        $2,957,871       $2,602,311        $1,961,348      $1,372,132
---------------------------------------------------------------------------------------------------------------------
Interest Expense               $578,039          $850,965         $415,376          $417,497        $574,906
---------------------------------------------------------------------------------------------------------------------
Net Loss                       $(3,154,555)      $(2,262,787)     $(1,541,884)      $(2,671,923)    $(3,083,638)
---------------------------------------------------------------------------------------------------------------------
Net Loss Attributable to
Common Stockholders            $(3,661,334)      $(2,653,970)     $(1,799,441)      $(2,791,270)    $(3,083,638)
---------------------------------------------------------------------------------------------------------------------
Net Loss Attributable to       $(0.33)           $(0.26)          $(0.19)           $(0.33)         $(0.42)
Common Stockholders Per
Share
---------------------------------------------------------------------------------------------------------------------
</TABLE>

  As of December 31(5 6),


<TABLE>
<CAPTION>
                                        2002               2001             2000             1999             1998
---------------------------------------------------------------------------------------------------------------------
<S>                            <C>               <C>              <C>               <C>             <C>
BALANCE SHEET DATA:
---------------------------------------------------------------------------------------------------------------------
Working Capital Deficit          $(7,998,835)        $(6,326,204)     $(708,317)       $(1,406,263)     $(1,929,215)
---------------------------------------------------------------------------------------------------------------------
Oil and Gas Properties, Net      $13,864,321         $13,269,930      $9,790,047       $8,444,036       $7,747,655
---------------------------------------------------------------------------------------------------------------------
Pipeline Facilities, Net         $15,372,843         $15,039,762      $11,047,038      $4,212,842       $4,019,209
---------------------------------------------------------------------------------------------------------------------
Total Assets                     $32,584,391         $32,128,245      $25,224,724      $15,182,712      $13,525,777
---------------------------------------------------------------------------------------------------------------------
Long-Term Debt                   $2,006,209          $3,902,757       $7,108,599       $3,119,293       $3,190,930
---------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock       $6,762,218          $5,459,050       $3,938,900       $1,988,900       $800,000
---------------------------------------------------------------------------------------------------------------------
Stockholders Equity              $14,210,623         $14,991,847      $10,864,202      $7,453,930       $7,245,090
---------------------------------------------------------------------------------------------------------------------
</TABLE>

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

RESULTS OF OPERATIONS

     The Company  incurred a net loss to holders of common  stock of  $3,661,344
($0.33 per share) in 2002 compared to a net loss of $2,653,970 ($0.26 per share)
in 2001 and $1,799,441 ($0.19 per share) of common stock in 2000.

--------------------------
(5) With respect to the pipeline facilities, during the years ended December 31,
2000, 1999, and 1998, this included portions which were under construction.

(6) No cash  dividends have been declared or paid by the Company for the periods
presented.



                                       35
<PAGE>

     The Company realized oil and gas revenues of $5,437,723 in 2002 as compared
to $6,656,758 in 2001 and  $5,241,076 in 2000.  The decrease in revenues in 2002
from 2001 was due to a decrease  in volumes  produced  in 2002 from the  volumes
produced in 2001. Gas produced from the Swan Creek Field was 717,701 MCF in 2002
as compared  to 966,967  MCF in 2001,  resulting  in  approximately  $800,000 in
reduced revenues. Oil production from the Swan Creek Field was 20,122 barrels in
2002, down from 30,323 barrels in 2001,  resulting in approximately  $200,000 in
reduced  revenues.  Gas production from the Kansas Properties was 287,198 MCF in
2002  compared to 324,915 MCF in 2001,  resulting in  approximately  $100,000 in
reduced revenues.  Oil production from the Kansas Properties was 137,851 barrels
in 2002 compared to 147,029 barrels in 2001, resulting in approximately $200,000
in reduced revenues. The reason for the decrease in volumes produced in 2002 was
the Company's  dispute with Bank One which  significantly  limited the Company's
ability to drill new wells and to work over under producing wells in Kansas. The
increased  revenues in 2001 of  $6,656,758  compared to  $5,241,076  in 2000 was
primarily  due to gas sales from the Swan Creek field of  $2,563,935  being made
for the first time during 2001.  However,  oil sales decreased by  approximately
$951,000  in 2001 from 2000  levels  due to price  decreases,  as the  number of
barrels produced remained constant.

     The  Company's  subsidiary,  TPC, had pipeline  transportation  revenues of
$259,677 in 2002, a decrease  compared to of $296,331 in 2001, the first year of
transportation revenues.

     The Company's production costs and taxes have increased each year from 2000
to 2002 as additional costs have been incurred to maintain the Kansas Properties
and to begin  production from the Swan Creek Field in 2001 and to maintain it in
2002.  The  production  costs and taxes  increased  from  $2,951,746  in 2001 to
$3,094,731  in 2002.  An increase in 2001 of  $337,332 in  production  costs and
taxes as compared to 2000 was due  primarily to the  commencement  of production
from the Swan Creek Field.

     Depletion,  depreciation,  and amortization increased significantly in 2002
to  $2,413,597   over  2001  and  2000  levels  of   $1,849,963   and  $371,249,
respectively. The primary reason for the increase from 2002 over 2001 was due to
depreciation  being  taken for the first  time for a full year on the  Company's
pipeline  facilities in 2002, whereas only a half year of depreciation was taken
in  2001  after  the  pipeline   was  placed  in  service  in  mid-year.   Also,
approximately $186,000 of loan fees were amortized in 2002. The primary increase
in 2001 from 2000 was due to significant  increases in depletion  expense during
2001  ($1,142,000) as a result of the following:  decreases in reserve estimates
on oil and gas properties  arising from declining  commodity prices;  certain of
the  Company's  gas wells had  decreased  production  levels at year-end  due to
problems  encountered with liquids in the wells. This decreased production level
at year-end was factored into the estimated  future proved reserves  calculation
performed as of December 31, 2001,  resulting in a lower future proved  reserves
estimate.  Additionally,  in 2001 the Company took  depreciation on the pipeline
for the first time ($220,371).

     The Company has significantly  reduced its general  administrative costs to
$1,868,141 in 2002 from  $2,957,871 in 2001.  Management  has made a significant


                                       36
<PAGE>

effort to control  costs in every aspect of its  operations.  Some of these cost
reductions  include  the  closing  of the New York  office  and a  reduction  in
personnel from 2001 levels. General and administrative expenses had increased to
$2,957,871 in 2001 from $2,602,311 in 2000. The increases in 2001 from 2000 were
attributable  to an increase in insurance of  approximately  $400,000 in 2001 to
expand coverage including blowout insurance and the addition of Company provided
medical insurance for employees.

     Interest expense for 2002 decreased  significantly  over 2001 levels due to
the reduced  interest rate on the Bank One loan over the rate  applicable  under
previous financing arrangements.  Interest expense in 2002 was $578,039 compared
to  $850,965  in  2001.   Interest  expense  for  2001  had  in  turn  increased
significantly  from  $415,376  in  2000.  This  increase  was due to  additional
interest cost  associated  with  financing for the completion of Phase II of the
Company's 65 mile pipeline. The increase in 2001 was reduced by interest cost of
approximately  $148,000  which  was  capitalized  in the  first 3 months of 2001
during  construction  of the pipeline.  Interest of $128,000 was  capitalized in
2000.

     Public relations costs were significantly  reduced in 2002 to $193,229 from
$293,448 in 2001 as the Company  applied cost saving methods in the  preparation
of the Annual Report and in publishing of press releases. Public relations costs
increased to $293,448 in 2001 as compared to 2000 costs of $106,195 due to costs
associated  with producing the annual  report,  the proxy  statement,  and press
releases.

     Professional  fees  increased to $707,296 in 2002 from $355,480 in 2001 due
to legal and accounting  services  primarily  related to the Bank One litigation
and new accounting regulations. Professional fees had decreased substantially in
2001 from 2000 fees of $719,320  which included a charge in 2000 of $242,000 for
stock options issued in 2000 to non-employees.

     Dividends on preferred stock increased to $506,789 in 2002 from $391,183 in
2001 and from  $257,557,  in 2000 as a result in the  increase  in the amount of
preferred stock outstanding.

LIQUIDITY AND CAPITAL RESOURCES

     On November 8, 2001,  the Company signed a credit  facility  agreement (the
"Credit  Agreement")  with the Energy  Finance  Division  of Bank One,  N.A.  in
Houston  Texas ("Bank One") whereby Bank One extended to the Company a revolving
line of credit of up to $35 million. The initial borrowing base under the Credit
Agreement was $10 million.  On November 9, 2001,  funds from the Bank One credit
line were used to (1) satisfy  existing  indebtedness  on the  Company's  Kansas
Properties ($1,427,309); (2) payoff the internal financing provided by Directors
and  shareholders  of the Company for the  completion  of the  Company's 65 mile
intrastate pipeline ($3,895,490);  (3) payoff a


                                       37
<PAGE>

note due to  Spoonbill,  Inc.  for funds  borrowed  by the  Company  for working
capital ($1,080,833); (4) payoff a note due to Malcolm E. Ratliff, the Company's
Chief  Executive  Officer,  for  purchase by the  Company of a drilling  rig and
related equipment ($1,003,844);  and, (5) payoff the remaining balance of a loan
made to the  Company  for  working  capital  by Edward  W.T.Gray  III,  a former
Director of the  Company,  due on December  31,  2001  ($304,444).  All of these
obligations  incurred  interest at a rate  substantially  greater  than the rate
being charged by Bank One under the Credit  Agreement.  Together with  attorneys
fees,  mortgage  taxes in Tennessee  and Kansas and related fees the total drawn
down on November 9, 2001 from the credit facility was $7,901,776.

     On or about  April 5, 2002,  the  Company  received a notice  from Bank One
stating that it had redetermined and reduced the borrowing base under the Credit
Agreement to $3,101,776.66  and the Bank required a $6 million  reduction of the
outstanding loan.

     The schedule of reserve reports required by the Credit Agreement upon which
such  redeterminations  were to be based  specifically  established  a procedure
involving an automatic monthly principal payment of $200,000 commencing February
1, 2002. The Company has remained current in payments of this monthly  principal
reduction through March 1, 2003. As of the date of this Report,  the outstanding
principal balance under the Credit Agreement was $6,901,776.66.

     As a result of Bank One's  unexpected  reduction of the borrowing  base and
the corresponding demand for payment of $6 million,  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 had a history  of losses  from  operations  and has an
accumulated  deficit of $27,776,726  and a working capital deficit of $7,998,835
as of December 31, 2002, the Company's  independent  auditors indicated in their
report on the audit of the Company's  consolidated  financial statements for the
year ended  December 31, 2002 that the Company's  ability to continue as a going
concern is  uncertain.  The  Company's  ability to continue  as a going  concern
depends upon its ability to obtain  long-term  debt or raise capital and satisfy
its cash flow requirements.

     On May 2, 2002, the Company filed suit against Bank One in Federal Court in
the  Eastern  District  of  Tennessee,  Northeastern  Division  at  Greeneville,
Tennessee  to  restrain  Bank One from  taking any steps  pursuant to its Credit
Agreement  with the Company to enforce  its demand  that the Company  reduce its
loan obligation or else be deemed in default and for actual and punitive damages
resulting from the wrongful demand in the amount of $150 million.

     On July 1, 2002, Bank One filed its answer and counterclaim,  alleging that
its actions  were  proper  under the terms of the Credit  Agreement,  and in the
counterclaim,  seeking  to recover  all  amounts it alleges to be owed under the
Credit


                                       38
<PAGE>

Agreement,  including principal,  accrued interest, expenses and attorney's fees
in the approximate amount of $9 million.

     On  November  5,  2002,  the  Company  and Bank One  concluded  a series of
meetings and  correspondence  by reaching  preliminary  agreement upon the basic
terms of a potential settlement. Any settlement is conditioned upon execution of
final  settlement  documents,  and the  parties  agreed to  attempt to close the
settlement  by  November  29,  2002.  The  principal  element of the  settlement
proposal is for the Bank and the  Company to enter into an amended and  restated
agreement for a new term loan to replace the prior  revolving  credit  facility.
The proposed  settlement  agreement  would place specific limits and requirement
upon any ability of Bank One to require a reduction of the loan balance.  Such a
reduction could only occur in the event the value of the oil and gas reserves of
the Company falls below an  agreed-upon  figure in relation to the loan balance,
pursuant to a formula which  management is satisfied  provides ample  protection
against any future  reasonable  likelihood of a similar  problem  arising in the
manner causing initiation of the litigation between the Company and Bank One. As
of the date of this report,  the Company and Bank One continue to negotiate  the
terms of a mutually satisfactory settlement agreement.

     Even if the Company  concludes a settlement with Bank One, the Company does
not anticipate  that it will be able to either increase its borrowing base under
the Bank One Credit Agreement or to borrow any additional sums from Bank One. To
fund additional drilling and to provide additional working capital,  the Company
would be required to pursue  other  options.  Such  options  would  include debt
financing, sale of equity interests in the Company, a joint venture arrangement,
the sale of oil and gas  interests,  etc. The inability of the Company to obtain
the necessary cash funding on a timely basis would have an unfavorable effect on
the  Company's  financial  condition and would require the Company to materially
reduce the scope of its operating activities.

     The harmful effects upon operations of the Company caused by the actions of
Bank One and the ongoing  litigation  with Bank One in 2002 have been  dramatic.
First, the action of Bank One in April, 2002 (less than five months after it had
entered  into the  credit  facility  agreement  with the  Company  and  received
substantial  fees  for the  providing  the  credit  facility)  of  reducing  the
Company's credit line to a point $6 million below its then-existing indebtedness
and then  calling  for  payment of that $6 million  within  thirty  days had the
effect of totally  cutting  off any  additional  funds to the Company to support
Company  operations.  Further,  the funds  loaned to the Company by Bank One had
been  used to  refinance  the  Company's  indebtedness  and no funds  were  then
available  to pay this  large  repayment  obligation  to Bank One,  even if such
action by the Bank was proper,  which the Company has vigorously and continually
denied.  The  principal  reason the Company had entered into the Bank One credit
agreement  was to provide  for  additional  funds to  promote  the growth of the
Company.  Consequently,  as a  result  of  Bank  One's  unwarranted  actions  no
additional funds under the credit facility  agreement were available in 2002 for
additional  drilling  that the Company had  anticipated  performing  in the Swan
Creek Field and which were critical to the


                                       39
<PAGE>

development  of that Field.  In order for  overall  field  production  to remain
steady  or grow in a field  such as the Swan  Creek  Field,  new  wells  must be
brought  online.  Any  of the  new  wells  drilled  by the  Company  would  also
experience a relatively  steep initial  decline curve followed by longer periods
of relatively flat or stable production  decline, as does every natural gas well
in a formation similar to the Knox formation, so continuous drilling is vital to
maintaining or increasing earlier levels of production.  Only two gas wells were
added by the Company in 2002 due to the destabilized lending arrangements caused
by the actions of Bank One and ongoing litigation.

     Second, the existence of the dispute with Bank One,  compounded by the fact
that an effect of Bank  One's  action  was to cause the  Company's  auditors  to
indicate that their was an uncertainty over the Company's ability to continue as
a going concern, has significantly  discouraged other institutional lenders from
considering  a variety  of  additional  or  replacement  financing  options  for
drilling  and other  purposes  that may have  ordinarily  been  available to the
Company.  Third,  the dispute  has caused  Bank One to fail to grant  permission
under the  existing  loan  agreements  with the Company to permit the Company to
formulate drilling programs  involving  potential third party investors that may
have permitted additional drilling to occur. Finally, the dispute has caused the
Company to incur significant legal fees to protect the Company's rights.

     The Company believes that the total volume of the Company's reserves in the
Swan  Creek  Field  remains  largely  intact,  and that  these  reserves  can be
extracted through existing wells and by steady additional drilling brought on by
reliable  financial  arrangements.  The Company plans to drill as many as twenty
additional  wells in the heart of this Field and has obtained  approval from the
Tennessee  regulatory  authorities  with  jurisdiction  over spacing of wells to
drill on smaller spacing units in the Field,  effectively allowing more wells to
be drilled and the reservoir to produce more quickly but with no decrease in the
long term  efficiency of  production of the maximum  amount of reserves from the
reservoir.  The Company is hopeful that  production from these new wells will be
in line with the production from its more productive  existing wells in the Swan
Creek Field and will have a noticeable effect on increasing the total production
from the Field. Although no assurances can be made, the Company believes that it
will  either be able to resolve  the Bank One  dispute or obtain  additional  or
replacement financing to allow drilling to increase, and that once new wells are
drilled,  production  from the Swan  Creek  Field  will  increase.  However,  no
assurances  can be made that such  financing  will be obtained  or that  overall
produced volumes will increase.

     Similarly,  when funding for additional  drilling  becomes  available,  the
Company  plans to drill wells in five new  locations it has  identified in Ellis
and Rush  Counties,  Kansas on its  existing  leases  in  response  to  drilling
activity in the area  establishing  new areas of oil  production.  Although  the
Company successfully drilled the Dick No. 7 well in Kansas in 2001 and completed
the well as an oil  well,  it was not able to drill  any new  wells in Kansas in
2002 due to lack of funds  available  for such  drilling  caused by the Bank One
situation.  As with  Tennessee,  the  Company is hopeful  that


                                       40
<PAGE>

once the Bank One matter is resolved it will be able to resume drilling and well
workovers in Kansas to maximize production from the Kansas Properties.

     As of December  31,  2002,  the Company had total  stockholders'  equity of
$14,210,623  on total  assets of  $32,584,391.  The  Company  has a net  working
capital  deficiency  at  December  31, 2002 of  $7,998,835  as compared to a net
deficiency of $6,326,204 at December 31, 2001. This working  capital  deficiency
arises  primarily  from the  acceleration  of  $6,000,000 of the Bank One credit
facility debt discussed above.

     Net cash used in operating  activities  increased  from $221,176 in 2001 to
$566,017 in 2002.  The Company's net loss in 2002  increased to $3,154,555  from
$2,262,787  in 2001.  The  impact  on cash used due to the net loss for 2001 was
offset by non-cash depletion,  depreciation and amortization of $2,413,597. Cash
flow from working  capital items in 2002 was $126,321 as compared to $232,338 in
2001.  This  resulted  from  increases in accounts  payable of $188,597,  and an
increase in accrued  liabilities  of $31,805  and an  increase in other  current
assets of $58,000,  partially  offset by an increase in accounts  receivable  of
$69,192 and an increase in inventory of $103,384.

     Net cash used in operating  activities  decreased  from $820,615 in 2000 to
$221,176 in 2001.  The Company's net loss in 2001  increased to $2,262,787  from
$1,541,884  in 2000.  The  impact  on cash used due to the net loss for 2001 was
primarily  offset  by  non-cash  depletion,  depreciation  and  amortization  of
$1,849,963  and non-cash  compensation  and services  paid by issuance of equity
instruments  of  $92,253.  Cash  flow  from  working  capital  items in 2001 was
$232,338  as  compared  to $66,020 in 2000.  This  resulted  from  increases  in
accounts payable of $191,702, and decreases in inventory of $91,981 and accounts
receivable of $3,814, partially offset by a decrease in accrued interest payable
of $2,519 and a decrease in accrued liabilities of $52,640.

     Net cash used in  investing  activities  amounted  to  $2,889,937  for 2002
compared to net cash used in the amount of $9,408,684  for 2001. The decrease in
net cash used for investing activities during 2002 is primarily  attributable to
the  construction  of Phase II of the pipeline of $4,213,095 in 2001 as compared
to $841,750 in 2002,  additions to oil and gas  properties of $4,821,883 in 2001
as compared to $1,982,529 in 2002.

     Net cash used in investing  activities  amounted to $9,408,684  for 2001 as
compared to  $8,936,863  for 2000.  The increase in net cash used for  investing
activities  during 2001 was primarily  attributable  to additions to oil and gas
properties of  $4,821,883  in 2001 as compared to  $1,456,996 in 2000.  This was
offset by a reduction in expenditures  used for the  construction of Phase II of
the pipeline of $4,213,095  due to its completion in 2001 compared to $6,834,196
in 2000 and a reduction of expenditures used for additions to other property and
equipment of $285,722 in 2001 as compared to $1,276,783 in 2000.


     Net cash provided by financing  activities  decreased to $3,246,633 in 2002
from $8,419,336 in 2001.  This was due to the Company's  inability to enter into
new financing


                                       41
<PAGE>

     arrangements  in 2002 as a result of its dispute with Bank One as discussed
above.  In  2001  the  primary  sources  of  financing  includes  proceeds  from
borrowings of $10,442,068 as compared to $2,063,139 in 2002,  private placements
of common  stock of  $3,900,000  in 2001 as compared to  $2,677,000  in 2002 and
convertible  redeemable  preferred  stock of  $l,591,150  in 2001 as compared to
$1,303,168  in 2002 and proceeds  from exercise of options of $2,341,000 in 2001
as  compared  to zero in 2002 as the market  price of the  Company's  stock fell
below the exercise price of the earlier granted options. The primary use of cash
in financing  activities in 2001 was the use of the funds received from Bank One
to repay the Company's  prior  borrowings of $8,833,325 as compared to 2002 when
cash from financing activities of $2,378,273 was used primarily to make payments
to Bank One in 2002 and for working capital.

     Net cash provided by financing activities amounted to $8,419,336 in 2001 as
compared to  $10,940,863  in 2000.  The  primary  sources of  financing  include
proceeds  from  borrowings of  $10,442,068  in 2001 as compared to $6,493,563 in
2000,  private  placements  of common stock of $3,900,000 in 2001 as compared to
$4,245,700 in 2000, convertible redeemable preferred stock of $1,591,150 in 2001
as compared  to  $2,000,000  in 2000 and  proceeds  from  exercise of options of
$2,341,000  in 2001 as compared to $180,013 in 2000.  The primary use of cash in
financing  activities  was the  repayment of borrowings of $8,833,325 in 2001 as
compared to $1,720,856 in 2000.

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.

     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  $1,982,529,
$4,821,883 and $1,456,996 of these costs in 2002,  2001 and 2000,  respectively.
Costs, however, associated with


                                       42
<PAGE>

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.

     OIL AND GAS RESERVES/DEPLETION DEPRECIATION
     AND 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, 2002 were
estimated by Ryder Scott, L.P., Petroleum Consultants.  The Company's discounted
present value of its proved oil and gas reserves requires subjective  judgments.
Estimates of the Company's  reserves are in part forecasts  based on engineering
data,  projected  future rates of production and timing of future  expenditures.
The process of estimating oil and gas reserves  requires  substantial  judgment,
resulting  in  imprecise  determinations,   particularly  for  new  discoveries.
Different reserve engineers may make different  estimates of reserve  quantities
based  on  the  same  data.  The  passage  of  time  provides  more  qualitative
information  regarding  estimates  of reserves and  revisions  are made to prior
estimates to reflect  updated  information.  Given the volatility of oil and gas
prices, it is also reasonably possible that the Company's estimate of discounted
net cash flows from proved oil and gas  reserves  could change in the near term.
If oil and gas prices decline  significantly  this will result in a reduction of
the valuation of the Company's  reserves.  This past year,  Ryder Scott based on
production  results  and  the  increase  of oil and gas  prices,  increased  the
Company's  estimated  value of  reserves of gas in the Swan Creek Field from its
reserve report for the year ended December 31, 2001.  See, "Item 2 - Description
of Property - Reserve Analysis".

     CONTINGENCIES

     The  Company  accounts  for  contingencies  in  accordance  with  Financial
Accounting  Standards Board Statement of Financial Accounting Standards ("SFAS")
No.  5,  "Accounting  Contingencies."  SFAS No. 5  requires  that we  record  an
estimated loss from a loss contingency  when information  available prior to the
issuance of the Company's  financial  statements indicate that it is probable an
asset has been  impaired  or a  liability  has been  incurred at the date of the
financial  statements  and the amount of the loss can be  reasonably  estimated.
Accounting for contingencies such as environmental, legal and income tax matters
requires management of the Company to use its judgment.  While management of the
Company believes that the Company's  accrual for these matters are adequate,  if
the actual loss from a loss  contingency  is  significantly


                                       43
<PAGE>

different from the estimated  loss,  the Company's  results of operations may be
over or  understated.  The  primary  area in which the  Company  has to estimate
contingent  liabilities  is with respect to legal  actions  brought  against the
Company. See. Item 3 - Legal Proceedings."

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No.142, "Goodwill and Other Intangible
Assets".  SFAS No. 141  addresses the initial  recognition  and  measurement  of
goodwill and other intangible assets acquired in a business combination and SFAS
No. 142 addresses the initial  recognition and measurement of intangible  assets
acquired outside of a business combination whether acquired individually or with
a  group  of  other  assets.   These  standards   require  all  future  business
combinations  to be  accounted  for using  the  purchase  method of  accounting.
Goodwill  will no longer be amortized  but instead will be subject to impairment
tests at least annually.  The Company was required to adopt SFAS No. 141 on July
1, 2001, and to adopt SFAS 142 on a prospective basis as of January 1, 2002. The
Company has not effected a business  combination  and carries no goodwill on its
balance  sheet;  accordingly,  the adoption of these  standards  did not have an
effect on the Company's financial position or results of operations.

     In 2001,  the FASB issued SFAS  No.143,  "Accounting  for Asset  Retirement
Obligations."  SFAS No. 143  addresses  financial  accounting  and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement  requires  companies to record
the present  value of  obligations  associated  with the  retirement of tangible
long-lived  assets  in the  period in which it is  incurred.  The  liability  is
capitalized as part of the related  long-lived  asset's  carrying  amount.  Over
time,  accretion of the liability is recognized as an operating  expense and the
capitalized  cost is  depreciated  over the expected  useful life of the related
asset.  The  Company's  asset  retirement  obligations  relate  primarily to the
plugging dismantlement,  removal, site reclamation and similar activities of its
oil and gas properties.  Prior to adoption of this statement,  such  obligations
were  accrued  ratably  over the  productive  lives of the  assets  through  its
depreciation,  depletion and  amortization  for oil and gas  properties  without
recording a separate  liability for such  amounts.  The Company has adopted SFAS
143  beginning  on January  1, 2003;  however,  the effect of  adoption  of this
statement on future results of operations or financial position has not yet been
determined by management.

     SFAS No. 144,  Accounting  for the  Impairment  or  Disposal of  Long-Lived
Assets,  addresses  accounting  and reporting for the  impairment or disposal of
long-lived  assets.  SFAS No. 144  supersedes  SFAS No. 121,  Accounting for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of.
SFAS No. 144 establishes a single  accounting model for long-lived  assets to be
disposed  of by sale and expands on the  guidance  provided by SFAS No. 121 with
respect  to cash  flow  estimations.  SFAS  No.  144  became  effective  for the
Company's fiscal year beginning January 1, 2003. Management does not expect that
adoption of this standard will have a material impact on the Company's financial
position or results of operations.


                                       44
<PAGE>

     The FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections,  on April
30, 2002. SFAS No.145 will be effective for fiscal years beginning after May 15,
2002.  This  statement  rescinds  SFAS No. 4,  Reporting  Gains and Losses  From
Extinguishment   of  Debt,   and  requires   that  all  gains  and  losses  from
extinguishment of debt should be classified as extraordinary  items only if they
meet  the  criteria  in APB  No.  30.  Applying  APB  No.  30  will  distinguish
transactions that are part of an entity's  recurring  operations from those that
are unusual or  infrequent  or that meet the criteria for  classification  as an
extraordinary  item.  Any  gain or  loss on  extinguishment  of  debt  that  was
classified as an  extraordinary  item in prior periods  presented  that does not
meet the criteria in APB No. 30 for classification as an extraordinary item must
be  reclassified.  There is no  current  impact  of  adoption  on the  Company's
financial position or results of operation.

     The FASB issued  Statement No. 146,  Accounting for Costs  Associated  with
Exit or Disposal  Activities,  in June 2002.  SFAS No. 146  addresses  financial
accounting and reporting for costs  associated with exit or disposal  activities
and nullifies Emerging Issues Task Force Issue No. 94-3,  Liability  Recognition
for Certain  Employee  Termination  Benefits and Other Costs to Exit an Activity
(including  Certain Costs incurred in a Restructuring).  SFAS No. 146 applies to
costs incurred in an "exit  activity",  which  includes,  but is not limited to,
re-structuring, or a "disposal activity" covered by SFAS No. 144.

     SFAS No. 146 requires that a liability for a cost  associated  with an exit
or disposal  activity be recognized when the liability is incurred.  Previously,
under Issue 94-3, a liability for an exit cost was  recognized at the date of an
entity's  commitment to an exit plan.  Statement No. 146 also  establishes  that
fair value is the  objective  for  initial  measurement  of the  liability.  The
provisions of SFAS No. 146 are effective  for exit or disposal  activities  that
are initiated after December 31, 2002.  Management does not expect that adoption
of this standard will have a material effect on the Company's financial position
or results of operation.

     In  November  2002,  the FASB  issued  Interpretation  No. 45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.5,
57 and 107 and a rescission of FASB  Interpretation No. 34. This  Interpretation
elaborates  on the  disclosures  to be made by a  guarantor  in its  interim and
annual financial  statements about its obligations under guarantees  issued. The
Interpretation  also  clarifies  that a guarantor is required to  recognize,  at
inception  of a  guarantee,  a  liability  for the fair value of the  obligation
undertaken.   The  initial   recognition  and  measurement   provisions  of  the
Interpretation  are  applicable to guarantees  issued or modified after December
31, 2002. The Company has not guaranteed  the debts of others,  therefore,  this
interpretation  is not  expected  to have a  material  effect  on the  Company's
financial statements.

     In December 2002, the FASB issued SFAS No. 148,  Accounting for Stock-Based
Compensation  --  Transition  and  Disclosure,  an amendment  of FASB  Statement
No.123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation,  to provide  alternative  methods of  transition  for a  voluntary
change  to  the  fair  value  method


                                       45
<PAGE>

of accounting for stock-based employee compensation. In addition, this Statement
amends the  disclosure  requirements  of Statement No. 123 to require  prominent
disclosures  in both annual and interim  financial  statements.  Management  has
adopted  certain of the disclosure  modifications  are required for fiscal years
ending after December 15, 2002 and are included in the notes to the accompanying
consolidated financial statements.

     In January 2003, the FASB issued  Interpretation  No. 46,  Consolidation of
Variable Interest  Entities,  an Interpretation of Accounting  Research Bulletin
No. 51.  Interpretation  No. 46  requires a company  to  consolidate  a variable
interest  entity if the  company  has a variable  interest  (or  combination  of
variable  interests) that will absorb a majority of the entity's expected losses
if they occur,  receive a majority of the entity's  expected residual returns if
they  occur,  or both.  A direct or  indirect  ability  to make  decisions  that
significantly affect the results of the activities of a variable interest entity
is a strong  indication  that a company  has one or both of the  characteristics
that would require consolidation of the variable interest entity. Interpretation
No.  46  also  requires  additional   disclosures  regarding  variable  interest
entities.  The new interpretation is effective immediately for variable interest
entities  created after January 31, 2003,  and is effective in the first interim
or annual period beginning after June 15, 2003, for variable  interest  entities
in which a company holds a variable interest that it acquired before February 1,
2003.  Management does not expect that adoption of this interpretation will have
a material effect on the Company's financial position or results of operation.

ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
         RISKS

COMMODITY RISK

     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 $18.56 per barrel to a high
of $27.49 per barrel during 2002. Gas price  realizations  ranged from a monthly
low of $1.91 per Mcf to a monthly high of $4.01 per Mcf during the same period.

     As required by its Credit Agreement with Bank One, the Company entered into
hedge agreements on December 28, 2001 on notional volumes of oil and natural gas
production  for the first six months of 2002 in order to manage some exposure to
oil and gas price  fluctuations.  Realized  gains or losses  from the  Company's
price risk  management  activities  will be recognized in oil and gas production
revenues when the associated production occurs. Notional volumes associated with
the Company's  derivative  contracts are 27,000 barrels and 630,000  MMBTU's for
oil and natural gas, respectively.  The Company does not generally hold or issue
derivative  instruments for trading purposes.  These hedge agreements expired in
June 2002


                                       46
<PAGE>

and have not been renewed.  Hedging activities resulted in a loss to the Company
of approximately $118,000 for the year ended December 31, 2002.

INTEREST RATE RISK

     At December 31, 2002,  the Company had debt  outstanding  of  approximately
$9.9 million. The interest rate on the revolving credit facility of $7.5 million
is variable  based on the  financial  institution's  prime rate plus 0.25%.  The
remaining  debt of $2.4  million has fixed  interest  rates  ranging  from 6% to
11.95%.  As a result,  the Company's  annual  interest costs in 2002  fluctuated
based on  short-term  interest  rates on  approximately  78% of its  total  debt
outstanding  at  December  31,  2002.  The impact on  interest  expense  and the
Company's  cash flows of a 10 percent  increase in the  financial  institution's
prime rate  (approximately  0.5 basis  points) would be  approximately  $32,000,
assuming borrowed amounts under the credit facility remain at $7.5 million.  The
Company did not have any open derivative contracts relating to interest rates at
December 31, 2002.

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  estimating  quantities  of
proved oil and gas reserves and 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 reserves and production  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.


                                       47
<PAGE>

ITEM 8  FINANCIAL STATEMENTS

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


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

     Not Applicable


                                       48
<PAGE>

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.

                                                                 Date of Initial
                                      Positions                  Election or
Name                                  Held                       Designation
----                                  ----                       -----------
Stephen W. Akos                       Director                   2/28/03
8000 Maryland Avenue
St. Louis, MO 63105

Joseph E. Armstrong                   Director                   3/13/97
4708 Hilldale Drive
Knoxville, TN 37914

Jeffrey R. Bailey                     Director;                  2/28/03
2306 West Gallaher Ferry              President                  6/17/02
Knoxville, TN 37932

John A. Clendening                    Director                   2/28/03
1031 Saint Johns Drive
Maryville, TN 37801

Robert L. Devereux                    Director                   2/28/03
10 South Brentwood Blvd.
St. Louis, MO 63105

Bill L. Harbert      .                Director                   4/2/02
820 Shaders Creek Pkway
Birmingham, AL 35209

Peter E. Salas                        Director                   10/8/02
129 East 17th Street
New York, NY 10003


                                       49
<PAGE>

Charles M. Stivers                    Director                   9/28/01
420 Richmond Road
Manchester, KY 40962

Richard T. Williams                   Director;                  6/28/02
4472 Deer Run Drive                   Chief Executive             2/3/03
Louisville, TN 37777                  Officer

Mark A. Ruth                          Chief Financial           12/14/98
9400 Hickory Knoll Lane               Officer
Knoxville, TN 37922

Robert M. Carter                      President Tengasco          6/1/98
760 Prince George Parish Drive        Pipeline Corporation
Knoxville, TN 37931

Cary V. Sorensen                      General Counsel;           07/9/99
509 Bretton Woods Dr.                 Secretary
Knoxville, TN 37919

Sheila F. Sloan                       Treasurer                  12/4/96
121 Oostanali Way
Loudon, TN 37774

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     In fiscal 2002, Malcolm E. Ratliff,  formerly a Director of the Company and
its Chief  Executive  Officer in 2002,  failed to timely  file one Form 4 Report
involving two  transactions.  Mr. Ratliff also recently filed an untimely Form 5
Report which  indicated  he failed to file Form 4 Reports for two  transactions,
one in October 2002 and the other in December 2002. Benton L. Becker,  who was a
Director  of the  Company in 2002,  also failed to timely file one Form 4 Report
involving three transactions.

BUSINESS EXPERIENCE

     DIRECTORS

     Stephen W. Akos is 49 years old. He has over twenty years experience in the
financial services industry with an expertise in fixed income securities.  Since
August of 2000,  he has been First Vice  President,  Institutional  Fixed Income
Sales,  Robert W.  Baird & Co.,  St.  Louis,  Missouri.  Prior to 2000,  he held
executive  positions with Mercantile Bank and Mark Twain Bank since 1993. Before
1993 he was a broker and


                                       50
<PAGE>

held a series of executive  positions at brokerage  firms Dean Witter,  Shearson
Lehman Hutton,  Drexel  Burnham  Lambert,  and Kidder  Peabody in St. Louis.  He
received an MBA in Finance from  Washington  University  in 1979,  and a B.S. in
Business Administration,  Accounting, from Washington University in 1976. He has
been a shareholder of the Company for approximately six years. He was elected as
a Director of the Company on February 28, 2003.

     Joseph  Earl  Armstrong  is 46  years  old  and a  resident  of  Knoxville,
Tennessee.  He is a graduate  of the  University  of  Tennessee  and  Morristown
College   where  he   received  a  Bachelor   of  Science   Degree  in  Business
Administration.  From  1988  to  the  present,  he has  been  an  elected  State
Representative  for  Legislative  District  15 in  Tennessee.  From  1994 to the
present  he has been in charge of  government  relations  for the  Atlanta  Life
Insurance  Co. From 1981 to 1994 he was a District  Manager for the Atlanta Life
Insurance Co. He has served as Director of the Company since 1997.

     Jeffrey R.  Bailey is 45 years old.  He  graduated  in 1980 from New Mexico
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.

     Dr.  John A.  Clendening  is 70 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 1972. 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


                                       51
<PAGE>

Company from  September  1998 to August 2000. He was again elected as a Director
of the Company on February 28, 2003.

     Robert L.  Devereux is 42 years old. He  graduated  in 1982 from St.  Louis
University with a Bachelor's Degree in Business  Administration  with a major in
finance.  He received his law degree from St. Louis  University in 1985. For the
past eighteen years,  Mr. Devereux has been actively  engaged in the practice of
law, specializing in commercial litigation.  Since 1994, he has been a principal
in the law firm of Devereux Murphy LLC located in St. Louis,  Missouri.  For the
past eight years Mr. Devereux has also been a principal of and has served as the
Chief  Executive  Officer of Gateway  Title  Company,  Inc.  He was elected as a
Director of the Company on February 28, 2003.

     Bill L.  Harbert  is 79  years  old.  He  earned  a B.S.  degree  in  civil
engineering  from Auburn  University in 1948. In 1949 he was one of the founders
of  Harbert  Construction  Company.  He  managed  that  company's   construction
operations,   both   domestic   and  foreign,   and  served  as  its   Executive
Vice-President until 1979. From 1979 until July, 1990 he served as President and
Chief  Operating  Officer and from July 1990 through  December 1991 he served as
Vice Chairman of the Board of Harbert  International,  Inc. He then  purchased a
majority of the  international  operations  of Harbert  International,  Inc. and
formed Bill Harbert International  Construction,  Inc. He served as Chairman and
Chief Executive  Officer of that corporation  until retiring from the company in
2000. Mr. Harbert's  companies built pipeline  projects in the United States and
throughout  the world.  They also built many other projects  including  bridges,
commercial buildings,  waste water treatment plants, airports,  including an air
base in Negev,  Israel and embassies for the United States  government in, among
other places,  Tel Aviv,  Hong Kong,  and Baku.  Mr.  Harbert has also served as
president (1979) and Director (1980) of the Pipe Line  Contractors  Association,
USA  and  for  seven  years  as  Director,   Second   Vice-President  and  First
Vice-President   (2001-2002)  of  the   International   Pipe  Line   Contractors
Association.  Mr.  Harbert  has been  active in service to a variety of business
associations,  charities and the arts in the Birmingham  area for many years. He
was elected as a Director of the Company on April 2, 2002.

     Peter E.  Salas is 48 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.

     Charles M.  Stivers is 40 years old.  He is a Certified  Public  Accountant
with 18 years  accounting  experience.  In 1984 he  received  a B.S.  degree  in
accounting  from  Eastern  Kentucky  University.  From 1983 through July 1986 he
served as Treasurer and CEO for Clay Resource Company.  From August 1986 through
August  1989 he served as a senior tax and audit  specialist  for  Gallaher  and
Company.  From  September  1989 to date he has owned  and  operated  Charles  M.
Stivers,  C.P.A.,  a regional  accounting firm. Mr. Stiver's firm specializes in
the oil and gas industry and has clients in eight  states.  The oil and gas work
performed  by his firm  includes


                                       52
<PAGE>

all forms of SEC audit work, SEC quarterly financial statement filings,  oil and
gas  consulting  work  and  income  tax  services.  Mr.  Stiver's  firm has also
represented  oil and gas companies  with respect to Federal and State income tax
disputes in 15 states over the past 12 years.  In September 2001, he was elected
as a  director  of the  Company  and  is the  chairman  of the  Company's  audit
committee.

     Dr.  Richard  T.  Williams  is 52 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.

     OFFICERS

     Mark A. Ruth is 44 years old. He is a certified  public  accountant with 21
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 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 66 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 54 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


                                       53
<PAGE>

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.

     Sheila F. Sloan is 47 years old. She graduated  from South Lake High School
located in St. Clair Shores, Michigan in 1972. From 1981 to 1985 she worked as a
purchasing agent for Sequoyah Land Company located in  Madisonville,  Tennessee.
From 1990 to 1995 she  managed the Form U-3 Weight  Loss  Centers in  Knoxville,
Tennessee. She has been with the Company since January 1996. On December 4, 1996
she was elected as the Company's Treasurer.

COMMITTEES

     The Company's Board has operating audit, stock option, compensation,  field
safety and frontier exploration committees.  Charles M. Stivers, Stephen W. Akos
and John A.  Clendening are the members of the Company's  Audit  Committee.  Mr.
Stivers is the Chairman of this  Committee  and has also been  designated by the
Company as the financial expert of the Audit Committee. Robert L. Devereux, John
A. Clendening and Mr. Akos comprise the stock option committee with Mr. Devereux
acting  as  Chairman;   Messrs.   Akos,  Stivers  and  Clendening  comprise  the
compensation  committee  with Mr.  Clendening  acting as  Chairman;  Richard  T.
Williams,  Jeffrey R. Bailey and Joseph Earl Armstrong comprise the field safety
committee;  and Messrs.  Williams,  Bailey and Clendening  comprise the frontier
exploration committee.

FAMILY RELATIONSHIPS

     There are no family  relationships  between any of the present directors or
executive officers of the Company.

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:


                                       54
<PAGE>

     (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 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,  securities  or  banking
     activities;

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


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, 2002,  December 31, 2001 and December 31, 2000.  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.


                                       55
<PAGE>

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                     -----------LONG TERM AWARDS-----
                                  ANNUAL COMPENSATION                           -----------AWARDS----PAYOUTS
------------------------------------------------------------------------------------------------------------------------------------
Name and                      YEAR    SALARY ($)   BONUS ($)   OTHER ANNUAL    RESTRICTED     SECURITIES     PAYOUTS       ALL OTHER
Principal Position                                             COMPENSATION    STOCK          UNDERLYING                   COMPEN-
                                                               ($)             AWARDS($)      OPTIONS                      SATION
                                                                                              /SARS(#)
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>     <C>           <C>        <C>               <C>           <C>              <C>           <C>
Malcolm E. Ratliff,           2002    $80,000       $-0-       $ -0-            -0-            59,0628         -0-           -0-
Chief Executive Officer(7)    2001    $80,000       $-0-       $1,000           -0-             52,500         -0-           -0-
                              2000    $70,000       $-0-       $  500           -0-             52,500         -0-           -0-
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

--------------------------
(7)  Malcolm  E.  Ratliff  served  as  the  Company's  Chief  Executive  Officer
throughout  2002.  Richard T. Williams,  the Company's  current Chief  Executive
Officer replaced Mr. Ratliff on February 3, 2003.

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


                                       56

<PAGE>
OPTION GRANTS FOR FISCAL 2002

     During fiscal year ended December 31, 2002 the Company granted an option to
the Chief  Executive  Officer to purchase  6,562 shares of the Company's  common
stock at a price of $2.86 per share.  The option was for a period of three years
commencing on August 5, 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 the fiscal year ended December 31, 2002.

AGGREGATE OPTION EXERCISES FOR FISCAL 2002
AND YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                            --------------------------------------------------------
                                                            NUMBER OF SECURITIES(9)     VALUE(10) of Unexercised
                                                            Underlying Unexercised      In-the-Money
                                                            Options/SARs at             Options/SARs at
                                                            December 31, 2002           December 31, 2002
--------------------------------------------------------------------------------------------------------------------
         NAME              SHARES ACQUIRED   VALUE ($)      EXERCISABLE/                       EXERCISABLE/
                             ON EXERCISE     REALIZED(11)   UNEXERCISABLE                      UNEXERCISABLE
--------------------------------------------------------------------------------------------------------------------
<S>                               <C>              <C>              <C>                       <C>
MALCOLM E. RATLIFF               -0-              -0-               59,062/-0-                 $-0-/-0-
--------------------------------------------------------------------------------------------------------------------
</TABLE>

     No options were exercised during fiscal year ended December 31, 2002 by 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.

     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 is  considering  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

     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.

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

(10)  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 $1.10 per share on December 31, 2002,  as reported
by The American Stock Exchange.  The exercise price of the  unexercised  options
granted to Malcolm E. Ratliff, the Chief Executive Officer of the Company,  were
$8.69 and $2.86 per share. As a result, the unexercised  options have a negative
value.

(11) 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.


                                       57
<PAGE>

     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  and Stock Option
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.  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  has  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.  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 INTERLOCKING
AND INSIDER PARTICIPATION

     There are no interlocking  relationship 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  formerly  an  officer  or an
employee of the Company.

ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

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


                                       58
<PAGE>

of March 3, 2003 with these  computations  being based upon 11,927,004 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
convertible  debt or preferred  stock granted or held by such  shareholder as of
March 3, 2003.

                           FIVE PERCENT STOCKHOLDERS(12)

<TABLE>
<CAPTION>
                                                     NUMBER OF SHARES                PERCENT OF
NAME AND ADDRESS                    TITLE            BENEFICIALLY OWNED                CLASS
----------------                    -----            ------------------                -----
<S>                               <C>                   <C>                         <C>
Malcolm E. Ratliff                Stockholder           2,736,549(13)                  22.8%
1200 Scott Lane
Knoxville, TN 37922



Dolphin Offshore                  Stockholder           2,036,613(14)                  16.7%
Partners, L.P.
129 East 17th Street
New York, NY 10003


Bill L. Harbert                   Stockholder/          1,489,496(15)                  12.4%
820 Shaders Creek Pkwy.           Director
Birmingham, AL 35209
</TABLE>

                           DIRECTORS AND OFFICERS(16)

<TABLE>
<CAPTION>
                                                     NUMBER OF SHARES                PERCENT OF
NAME AND ADDRESS                    TITLE            BENEFICIALLY OWNED                CLASS
----------------                    -----            ------------------                -----
<S>                               <C>                    <C>                                  <C>
Stephen W. Akos                   Director               23,439(17)                 Less than 1%
8000 Maryland Avenue
St. Louis, MO 63105

Joseph Earl Armstrong             Director               57,450(18)                 Less than 1%
4708 Hilldale Drive
Knoxville, TN 37914
</TABLE>

--------------------------
(12) 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 the
5% stock  dividend  declared  by the Company  for  shareholders  of record as of
September 4, 2001.

(13) Malcolm E. Ratliff,  formerly the  Company's  Chief  Executive  Officer and
Chairman of the Board of Directors and a former Director of the Company,  is the
sole  shareholder  and President of Industrial  Resources  Corporation (" IRC").
Malcolm E. Ratliff's wife, Linda Ratliff, is the Secretary of IRC.  Accordingly,
IRC may be deemed to be an affiliate of the Company.  James Ratliff,  who is the
father of Malcolm E. Ratliff,  is the sole  shareholder and President of Ratliff
Farms, Inc. Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff Farms.
Malcolm E.  Ratliff  has voting  control of the shares of the  Company  owned by
Ratliff Farms, Inc. Accordingly, Ratliff Farms, Inc. may also be deemed to be an
affiliate of the Company.  The shares  listed here include  80,171  shares owned
directly  and an option to purchase  59,062  shares held by Malcolm E.  Ratliff,
1,849,744  shares owned by IRC,  716,072 shares owned directly by Ratliff Farms,
Inc.  and 31,500  shares  owned  directly by a trust of which  Linda  Ratliff is
trustee and the children of Malcolm E. Ratliff are the beneficiaries. The shares
listed here do not include shares of the Company owned directly by James Ratliff
or any entity of which he is the controlling  person.  The shares listed also do
not include 373,900 shares  directly owned by Dolphin  Offshore  Partners,  L.P.
("Dolphin") which Dolphin granted IRC an option to purchase commencing April 11,
2003 and  expiring on May 21,  2003 at a price of $2.386 per share.  The general
partner  and  controlling  person of Dolphin is Peter  Salas,  a Director of the
Company. In the event IRC does not exercise the option, Dolphin has the right to
require IRC to  purchase  from it the same number of shares that are the subject
of the option (373,900) at a price of $2.495 per share.


(14)  Consists of  1,739,720  shares  held by Dolphin  Offshore  Partners,  L.P.
("Dolphin") of which Peter E. Salas,  a Director of the Company,  is the general
partner and  controlling  person;  a warrant held by Dolphin to purchase  10,500
shares at $7.98 per share;  173,611 shares  underlying a promissory  convertible
note  held by  Dolphin;  and,  112,782  shares  underlying  9,000  shares of the
Company's Series B 8% Cumulative Convertible Preferred Stock held directly which
is  convertible  into the  Company's  Common  Stock  at the  rate of  $7.98  per
share.The  shares listed  include  373,900 shares held directly by Dolphin as to
which Dolphin granted an option to Industrial  Resources  Corporation ("IRC") to
purchase commencing on April 11, 2003 and expiring on May 21, 2003 at a price of
$2.386 per share. Malcolm E. Ratliff, a Director of the Company and formerly the
Company's  Chief  Executive  Officer  and  Chairman  of the  Board,  is the sole
shareholder  and President of IRC. If the option is not  exercised,  Dolphin has
the right to require IRC to purchase  from it the same number of shares that are
the subject of the option (373,900) at a price of $2.495 per share.

(15) Consists of 1,404,942 shares held directly,  71,429 shares underlying 5,000
shares of the Company's Series A 8% Cumulative  Convertible Preferred Stock held
directly which is convertible  into the Company's  Common Stock and an option to
purchase 13,125 shares.

(16) 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 the
5% stock  dividend  declared  by the Company  for  shareholders  of record as of
September 4, 2001.

(17) Consists of 14,081 shares held directly (certain of which are jointly owned
with spouse) and 9,358 shares underlying convertible promissory notes owned with
his spouse and by a limited partnership.  Shares underlying note held by limited
partnership  has been adjusted to reflect his ownership  interest in the limited
partnership.


(18)  Consists of 4,950  shares  held  directly  and options to purchase  52,500
shares.



                                       59
<PAGE>

<TABLE>

<S>                               <C>                   <C>                         <C>
Jeffrey R. Bailey                 Director;              18,125(19)                 Less than 1%
2306 West Gallaher Ferry          President
Knoxville, TN 37932

John A. Clendening                Director                  -0-                         -0-
1031 Saint Johns Drive
Maryville, TN 37801

Robert L. Devereux                Director               56,882(20)                 Less than 1%
10 South Brentwood Blvd.
St. Louis, MO 63105

Bill L. Harbert                   Director             1,489,496(21)                    12.4%
820 Shaders Creek Pkwy.
Birmingham, AL 35209

Peter E. Salas                    Director              2,036,613(22)                   16.7%
129 East 17th Street
New York, NY 10003

Charles M. Stivers                Director                13,125(23)                Less than 1%
420 Richmond Road
Manchester, KY 40962

Richard T. Williams               Director;               13,125(24)                Less than 1%
4477 Deer Run Drive               Chief Executive
Louisville, TN                    Officer

Robert M. Carter                  President               68,071(25)                Less than 1%
760 Prince Georges Parish         Tengasco Pipeline
Knoxville, TN 37922               Corporation
</TABLE>

--------------------------
(19)  Consists of 5,000 shares held  directly  and an option to purchase  13,125
shares.

(20)  Consists of 34,562  shares held  directly  with his spouse;  12,448 shares
underlying  a  convertible  note held with his spouse;  6,753  shares owned by a
limited liability company; and, 3119 shares underlying a convertible  promissory
note held by a limited liability company.  Shares owned by the limited liability
company and  underlying  note held by the limited  liability  company  have been
adjusted to reflect his ownership interest in the limited liability company.

(21) Consists of 1,404,942 shares held directly,  71,429 shares underlying 5,000
shares of the Company's Series A 8% Cumulative  Convertible Preferred Stock held
directly  which is  convertible  into the Company's  Common Stock at the rate of
$7.00 per share and an option to purchase 13,125 shares.

(22)  Consists of  1,739,720  shares  held by Dolphin  Offshore  Partners,  L.P.
("Dolphin")  of which  Peter E. Salas is the  general  partner  and  controlling
person; a warrant held by Dolphin to purchase 10, 500 shares at $7.98 per share;
173,611 shares  underlying a promissory  convertible note held by Dolphin;  and,
112,782 shares  underlying  9,000 shares of the Company's Series B 8% Cumulative
Convertible  Preferred  Stock  held  directly  which  is  convertible  into  the
Company's Common Stock at the rate of $7.98 per share. The shares listed include
373,900 shares held directly by Dolphin as to which Dolphin granted an option to
Industrial  Resources  Corporation  ("IRC") to purchase  commencing on April 11,
2003 and  expiring  on May 21,  2003 at a price of $2.386 per share.  Malcolm E.
Ratliff,  a Director of the Company and formerly the Company's  Chief  Executive
Officer and Chairman of the Board, is the sole shareholder and President of IRC.
If the option is not exercised, Dolphin has the right to require IRC to purchase
from it the same number of shares  that are the subject of the option  (373,900)
at a price of $2.495 per share.

(23) Consists of shares underlying an option.

(24) Consists of shares underlying an option.


(25)  Consists of 7,696  shares  held  directly  and options to purchase  60,375
shares.


                                       60
<PAGE>


<TABLE>
<S>                               <C>                   <C>                         <C>
Mark A. Ruth                      Chief Financial         45,937(26)                Less than 1%
9400 Hickory Knoll Lane           Officer
Knoxville, TN 37931

Cary V. Sorensen                  General Counsel;        39,375(27)                Less than 1%
509 Bretton Woods Dr.             Secretary
Knoxville, TN 37919


Sheila F. Sloan                   Treasurer               21,787(28)                Less than 1%
121 Oostanali Way
Loudon, TN 37774

All Officers and                                       3,883,425(29)                   30.8%
Directors as a group
</TABLE>

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.

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 2002,
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.


--------------------------
(26) Consists of shares underlying options.

(27) Consists of shares underlying options.

(28) Consists  of 2,100  shares  held  directly  and options to purchase  19,687
shares.

(29) Consists of shares held directly and indirectly by management,  shares held
by  Dolphin,  270,374,  shares  underlying  options,  10,500  shares  underlying
warrants,  198,536 shares  underlying  convertible  promissory notes and 182,411
shares underlying convertible preferred stock.

                                       61

<PAGE>
     On January 21, 2002 and April 9, 2002, Bill Harbert, who owns more than ten
percent of the Company's  outstanding  Common Stock and is now a Director of the
Company,  but was not at that time, in two private placements  purchased 100,000
shares of the Company's  common stock on each of those dates, at prices of $6.32
and $4.80 per share,  respectively.  The proceeds from these private  placements
were used as working capital to fund the Company's day to day operations.

     On October 7, 2002, 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, in consideration
of a loan to the Company was issued an unsecured convertible  promissory note by
the  Company in the  principal  amount of  $500,000  bearing 8%  interest,  with
payments of interest only payable quarterly and the principal payable January 4,
2004. The principal  amount of the note is convertible  into Common Stock of the
Company at the rate of $2.88 per share. The proceeds from this note were used to
provide working capital for the Company's operations.

     In August 2002,  Dolphin  purchased  650,000 shares of the Company's Common
Stock in an open market transaction.  In connection with that purchase,  Dolphin
entered into an  agreement  on which was later  amended on October 11, 2002 with
Industrial Resources  Corporation  ("IRC"),  which owns more than ten percent of
the Company's outstanding Common Stock and whose sole shareholder and President,
Malcolm E. Ratliff,  was at the time of this  transaction  the  Company's  Chief
Executive  Officer and a Director of the  Company.  Pursuant to that  agreement,
Dolphin  granted IRC an option  commencing on April 11, 2003 and expiring on May
12, 2003 to purchase up to 373,900 shares of the Company's Common Stock that had
been  purchased by Dolphin at a price of $2.386 per share,  and if the option is
not  exercised  during the option  period IRC is then  required to purchase from
Dolphin the same number  shares that had been the subject of the option at price
of $2.495 per share. The Company is not a party to the agreement between IRC and
Dolphin  concerning  shares of the  Company  owned by  Dolphin,  and there is no
effect upon the Company based in any way upon the performance or  nonperformance
of that agreement.

     On December 4, 2002 , Dolphin  loaned the Company the sum of $250,000 which
funds  were used to pay the  principal  and  interest  due that  month  from the
Company to Bank One and to provide working capital for the Company.  The Company
issued a  promissory  note to Dolphin  bearing  interest  at the rate of 12% per
annum,  with  payments of interest  only  payable  quarterly  and the  principal
balance payable on January 4, 2004.

     On January 8, 2003, Bill Harbert  purchased 227,275 shares of the Company's
Common  Stock from the  Company in a private  placement  at a price of $1.10 per
share. The proceeds from this sale were used by the Company to pay the principal
and interest due to Bank One for January,  2003 and to provide  working  capital
for the Company's operations.


                                       62
<PAGE>

     On February 3, 2003 and February 28, 2003,  Dolphin  loaned the Company the
sum of $250,000 on each such date which the  Company  used to pay the  principal
and  interest  due to Bank One for  February  and  March  2003  and for  working
capital.  Each of these loans is  evidenced by a separate  promissory  note each
bearing  interest at the rate of 12% per annum,  with  payments of interest only
payable quarterly and the principal balance payable on January 4, 2004.

     Each of the three  loans made by Dolphin  set forth above are secured by an
undivided 10% interest in the Company's Tennessee and Kansas pipelines.

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

     Unless IRC may be deemed to be a parent of the Company,  the Company has no
parent.

ITEM 14  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     Within the past 90 days,  the  Company's  management,  including  its Chief
Executive  Officer and Chief Financial  Officer,  has conducted an 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. Based on that evaluation,  the Company's Chief
Executive Officer and Chief Financial Officer believe:

     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; and

     The Company's  disclosure  controls and procedures were effective to ensure
that material  information  was  accumulated  and  communicated  to  management,
including the



                                       63
<PAGE>

Company's Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROLS

     There have been no significant changes in internal controls,  or in factors
that could  significantly  affect internal controls,  subsequent to the date the
Company's Chief executive  Officer and Chief Financial  Officer  completed their
evaluation,  nor were there any significant  deficiencies or material weaknesses
in the Company's  internal  controls.  As a result,  no corrective  actions were
required or taken.


PART IV

ITEM 15  EXHIBITS AND REPORTS

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. Exhibits.

(a) -  The  following  documents  heretofore  filed  by  the  Company  with  the
commission are hereby incorporated by reference herein from:

(i)  Registration  Statement on Form 10-SB filed with the  Commission  August 7,
1997 (Registration No. 0-29386)

Exhibit Number and Description

     3.1     Initial Articles of Incorporation
     3.2     Bylaws
     3.3     Articles of Amendment dated April 12, 1966
     3.4     Articles of Amendment dated July 12, 1984
     3.5     Articles of Amendment dated December 18, 1991
     3.6     Articles of Amendment dated September 11, 1992
     3.7     Articles of Incorporation of the Tennessee of  wholly-owned
               subsidiary



                                       64

<PAGE>
     3.8     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)
     5.1     Opinion of Robson & Miller, LLP
     10.1(a) Purchase Agreement with IRC
     10.1(b) Amendment to Purchase Agreement with IRC
     10.1(c)  General Bill of Sale and Promissory Note
     10.2(a)  Compensation Agreement - M. E. Ratliff
     10.2(b)  Compensation Agreement - Jeffrey D. Jenson
     10.2(c)  Compensation Agreement - Leonard W. Burningham
     10.3     Agreement with The Natural Gas Utility District of
                 Hawkins County, Tennessee
     10.4     Agreement with Powell Valley Electric  Cooperative, Inc.
     10.5     Agreement with Enserch Energy Services, Inc.
     16.1     Letter of David T. Thomson, CPA, Regarding Change in Certifying
                 Accountant
     16.2     Letter of Charles M. Stivers, CPA, Regarding Change  in Certifying
                 Accountant
     16.3     Letter of Price-Bednar, LLP, CPA, Regarding Change in Certifying
                 Accountant
     23.1     Consent of Charles M. Stivers, CPA
     23.2     Consent of David T. Thomson, CPA
     23.3     Consent of BDO Seidman, LLP
     23.4     Consent of Robson & Miller, LLP
     99.1     Beech Creek Lease Schedule
     99.2     Wildcat Lease Schedule
     99.3     Burning Springs Lease Schedule
     99.4     Fentress County Lease Schedule
     99.5     Swan Creek Lease Schedule
     99.6     Alabama Lease Schedule
     99.7     Coburn Engineering Report dated June 18, 1997.

(ii) Amendment No. 1 to the Registration  Statement on Form 10-SB filed with the
Commission December 11, 1997 (Registration No. 0-29386)

Exhibit Number and Description

     5.1      Opinion of Robson & Miller, LLP
     23.1     Consent of Charles M. Stivers, CPA
     23.3     Consent of BDO Seidman, LLP
     23.4     Consent of Robson & Miller, LLP
     23.5     Consent of Coburn Petroleum Engineering Co.


                                       65
<PAGE>

(iii) Current Report on Form 8-K, Date of Report, February 27, 1998:
Exhibit Number and Description

     2.1  Plan of Acquisition. Agreement dated December 18, 1997 between AFG
          Energy, Inc. and Tengasco, Inc. regarding sale of assets of AFG
          Energy, Inc.

(iii) Current Report on Form 8-KA, Date of Report, February 27, 1998:

Exhibit Number and Description

               Financial  Statements  of Business  Acquired  (AFG Energy,  Inc.)
               Independent  auditor's  report,  statement of revenues and direct
               operating  expenses  and  notes to  financial  statements  of the
               properties  acquired by Tengasco,  Inc. from AFG Energy, Inc. Pro
               Forma Financial Information Pro forma combined statements of loss
               for year ended  December  31, 1997 for  Tengasco,  Inc.  from AFG
               Energy, Inc.

     2.1(a)    Exhibit A to  Agreement  dated  December  18,  1997  between  AFG
               Energy,  Inc. and Tengasco,  Inc. regarding sale of assets of AFG
               Energy, Inc.

     2.1(a)    Exhibit A to  Agreement  dated  December  18,  1997  between  AFG
               Energy,  Inc. and Tengasco,  Inc. regarding sale of assets of AFG
               Energy, Inc.

(iv) Annual Report on Form 10-KSB, Date of Report, April 10, 1998

Exhibit Number and Description

     10.6      Teaming Agreement between  Operations  Management  International,
               Inc. and Tengasco, Inc. dated March 12, 1997

     10.7      Agreement for Transition  Services between Operations  Management
               International, Inc. and Tengasco, Inc. regarding thEast Tennessee
               Technology Park

     99.8      Coburn  Engineering  Report  dated  February 18, 1997 (Paper copy
               filed on Form SE  pursuant  to  continuing  hardship  granted  by
               Office of EDGAR Policy)

     99.9      Columbia Engineering Report dated March 2, 1997 (Paper copy filed
               on Form SE pursuant to continuing  hardship  granted by Office of
               EDGAR Policy)


                                       66
<PAGE>

(v) Annual Report on Form 10-KSB, Date of Report, April 14, 1999

Exhibit Number and Description

     3.9       Amendment to the Corporate Charter dated June 24, 1998

     3.10      Amendment to the Corporate Charter dated October 30, 1998

     99.10     Coburn  Engineering  Report  dated  February  9, 1999 (Paper copy
               filed on Form SE  pursuant  to  continuing  hardship  granted  by
               Office of EDGAR Policy)

     99.11     Columbia  Engineering  Report dated February 20, 1999 (Paper copy
               filed on Form SE  pursuant  to  continuing  hardship  granted  by
               Office of EDGAR Policy)

(vi) Current Report on Form 8-K, Date of Report, October 18, 1999:

Exhibit Number and Description

     10.9      Amendment Agreement dated October 19, 1999 between Tengasco, Inc.
               and The Natural Gas Utility District of Hawkins County, Tennessee

(vii) Current Report on Form 8-KA, Date of Report, November 18, 1999:

Exhibit Number and Description

     10.10     Natural Gas Sales  Agreement  dated  November  18,  1999  between
               Tengasco, Inc. and Eastman Chemical Company

(viii) Annual Report on Form 10-KSB, Date of Report, April 12, 2000

Exhibit Number and Description

     3.11      Amendment to the Corporate Charter filed March 17 , 2000

     10.11     Agreement between A.M.  Partners L.L.C. and Tengasco,  Inc. dated
               October 6, 1999

     10.12     Agreement between  Southcoast  Capital L.L.C. and Tengasco,  Inc.
               dated February 25, 2000

     10.13     Franchise  Agreement  between Powell Valley Utility  District and
               Tengasco, Inc. dated January 25, 2000

     10.14     Amendment   Agreement   between  Eastman   Chemical  Company  and
               Tengasco, Inc. dated March 27, 2000

     99.12     Coburn  Engineering Report dated March 30, 2000 (Paper copy filed
               on Form SE pursuant to continuing  hardship  granted by Office of
               EDGAR Policy)


                                       67
<PAGE>

     99.13     Columbia  Engineering  Report dated  January 31, 2000 (Paper copy
               filed on Form SE  pursuant  to  continuing  hardship  granted  by
               Office of EDGAR Policy)

(ix) Current Report on Form 8-K, Date of Report, August 16, 2000:

Exhibit Number and Description


     10.15     Loan Agreement between Tengasco  Pipeline  Corporation and Morita
               Properties, Inc. dated August 16, 2000.

     10.15(a)  Promissory note made by Tengasco  Pipeline  Corporation to Morita
               Properties, Inc. dated August 16, 2000.

     10.15(b)  Throughput  Agreement between Tengasco  Pipeline  Corporation and
               Morita Properties, Inc. dated August 16, 2000.

     10.16     Loan Agreement between Tengasco  Pipeline  Corporation and Edward
               W.T. Gray III dated August 16, 2000.

     10.16(a)  Promissory note made by Tengasco  Pipeline  Corporation to Edward
               W.T. Gray III dated August 16, 2000.

     10.16(b)  Throughput  Agreement between Tengasco  Pipeline  Corporation and
               Edward W.T. Gray III dated August 16, 2000.

     10.17     Loan Agreement between Tengasco Pipeline  Corporation and Malcolm
               E. Ratliff dated August 16, 2000.

     10.17(a)  Promissory note made by Tengasco Pipeline  Corporation to Malcolm
               E. Ratliff dated August 16, 2000.

     10.17(b)  Throughput  Agreement between Tengasco  Pipeline  Corporation and
               Malcolm E. Ratliff dated August 16, 2000.

     10.18     Loan Agreement between Tengasco Pipeline  Corporation and Charles
               F. Smithers, Jr. dated August 16, 2000.

     10.18(a)  Promissory note made by Tengasco Pipeline  Corporation to Charles
               F. Smithers, Jr.

     10.18(b)  Throughput  Agreement between Tengasco  Pipeline  Corporation and
               Charles F. Smithers dated August 16, 2000.


                                       68
<PAGE>

     10.19     Loan Agreement  between  Tengasco  Pipeline  Corporation and Nick
               Nishiwaki dated August 16, 2000.

     10.19(a)  Promissory  note made by Tengasco  Pipeline  Corporation  to Nick
               Nishiwaki dated August 16, 2000.

     10.19(b)  Throughput  Agreement between Tengasco  Pipeline  Corporation and
               Nick Nishiwaki dated August 16, 2000.

(x) S-8  Registration  Statement for shares to be purchased  pursuant to options
granted  pursuant to the Tengasco,  Inc. Stock  Incentive Plan dated October 25,
2000:

Exhibit Number and Description

     4.1       Tengasco, Inc. Incentive Stock Plan

     5.1       Opinion of Robson Ferber Frost Chan & Essner, LLP

     23.1      Consent of BDO Seidman, LLP

     23.2      Consent of Robson  Ferber Frost Chan & Essner,  LLP  contained in
               Exhibit No. 5.1

(xi) Annual Report on Form 10-KSB, Date of Report, April 10, 2001

Exhibit Number and Description

     10.19     Memorandum Agreement between Tengasco, Inc. and The University of
               Tennessee dated February 13, 2001

     10.20     Natural  Gas  Sales  Agreement  between  Tengasco,  Inc.  and BAE
               SYSTEMS Ordnance Systems Inc. dated March 30, 2001

     99.14     Ryder Scott Report

     99.14(a)  Consent of Ryder Scott Company

(xii) Quarterly Report on Form 10-Q, Date of Report, April 10, 2001


                                       69
<PAGE>

Exhibit Number and Description

     10.21     Reducing  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

(xiii) Annual Report on Form 10-K, Date of Report, April 10, 2002

Exhibit Number and Description

     99.15     Ryder Scott Report dated March 28, 2002

     99.15(a)  Consent of Ryder Scott Company

The following exhibits are filed herewith:

     21        List of Subsidiaries

     99.16     Certifications  of  Annual  Report  on Form  10-K for year  ended
               December 31, 2002 by Richard T. Williams Chief Executive  Officer
               and Mark A. Ruth Chief Financial Officer

     99.17     Ryder Scott Report dated February 10, 2003

     99.17(a)  Consent of Ryder Scott Company

     99.18     Consent of BDO Seidman, LLP


                                       70
<PAGE>

                                   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, 2003

                                      TENGASCO, INC.
                                      (Registrant)

                                      By: /s/ RICHARD T. WILLIAMS
                                         ------------------------
                                      Richard T. Williams,
                                      Chief Executive Officer



                                      By: /s/ MARK A. RUTH
                                         ---------------
                                      Mark 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.

SIGNATURE                      TITLE                                   DATE

/s/ STEPHEN W. AKOS            Director                           March 31, 2003
-------------------
Stephen W. Akos

/s/ JOSEPH EARL ARMSTRONG      Director; Chairman of              March 31, 2003
-------------------------
Joseph Earl Armstrong          the Board of Directors

/s/ /JEFFREY R. BAILEY         Director;                          March 31, 2003
----------------------
Jeffrey R. Bailey              President

/s/ JOHN A. CLENDENING         Director                           March 31, 2003
----------------------
John A. Clendening

/s/ ROBERT L. DEVEREUX         Director                           March 28, 2003
----------------------
Robert L. Devereux



                                       71
<PAGE>

/s/ BILL L. HARBERT            Director                           March 28, 2003
-------------------
Bill L. Harbert

/s/ PETER E. SALAS             Director                           March 28, 2003
-------------------
Peter E. Salas

/s/ CHARLES M. STIVERS         Director                           March 31, 2003
----------------------
Charles M. Stivers

/s/ RICHARD T. WILLIAMS        Director;                          March 31, 2003
-----------------------        Chief Executive Officer
Richard T. Williams

/s/ MARK A. RUTH               Principal Financial                March 31, 2003
----------------------         and Accounting Officer
Mark A. Ruth


                                       72

<PAGE>

         I, Richard T. Williams, certify that:

         1. I have reviewed this annual report on Form 10-K of Tengasco, Inc.

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3.  Based  on  my  knowledge,  the  financial  statements,   and  other
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

         4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

                  (a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

                  (b) evaluated the effectiveness of the Registrant's disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date'); and

                  (c) presented in this annual report our conclusions  about the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  Registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the Registrant's auditors and the audit
committee of the  Registrant's  board of directors  (or persons  performing  the
equivalent function);

                  (a) all significant deficiencies in the design or operation of
internal  controls  which could  adversely  affect the  Registrant's  ability to
record, process, summarize and report financial data and have identified for the
Registrant's auditors any material weakness in internal controls; and

                  (b) any  fraud,  whether or not  material  that  involves  the
management or other  employees who have a significant  role in the  Registrant's
internal controls; and

         6. The Registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003

                                                     /s/ RICHARD T. WILLIAMS
                                                     --------------------------
                                                     Richard T. Williams,
                                                     Chief Executive Officer


                                       73
<PAGE>

         I, Mark A. Ruth, certify that:

         1. I have reviewed this annual report on Form 10-K of Tengasco, Inc.

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3.  Based  on  my  knowledge,  the  financial  statements,   and  other
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

         4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

                  (a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

                  (b) evaluated the effectiveness of the Registrant's disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date'); and

                  (c) presented in this annual report our conclusions  about the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  Registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the Registrant's auditors and the audit
committee of the  Registrant's  board of directors  (or persons  performing  the
equivalent function);

                  (a) all significant deficiencies in the design or operation of
internal  controls  which could  adversely  affect the  Registrant's  ability to
record, process, summarize and report financial data and have identified for the
Registrant's auditors any material weakness in internal controls; and

                  (b) any  fraud,  whether or not  material  that  involves  the
management or other  employees who have a significant  role in the  Registrant's
internal controls; and

         6. The Registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003

                                   /s/ MARK A. RUTH
                                   ---------------------------------------------
                                   Mark A. Ruth,
                                   Principal Financial and Accounting Officer


                                       74

<PAGE>







                                         TENGASCO, INC.
                                       AND SUBSIDIARIES









                                 CONSOLIDATED FINANCIAL STATEMENTS
                      YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000




<PAGE>


                                         TENGASCO, INC.
                                       AND SUBSIDIARIES







                    ============================================================


                                               CONSOLIDATED FINANCIAL STATEMENTS
                                    YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000










                                                                             F-1

<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                                                        CONTENTS

================================================================================



         INDEPENDENT AUDITORS' REPORT                                       F-3


         CONSOLIDATED FINANCIAL STATEMENTS

             Consolidated Balance sheets                                  F-4-5

             Consolidated Statements of loss                                F-6

             Consolidated Statements of stockholders' equity                F-7

             Consolidated Statements of cash flows                        F-8-9

             Notes to consolidated financial statements                 F-10-37







                                                                             F-2

<PAGE>


INDEPENDENT AUDITORS' REPORT



Board of Directors
  Tengasco, Inc. and Subsidiaries
Knoxville, Tennessee

We have audited the accompanying  consolidated balance sheets of Tengasco,  Inc.
and Subsidiaries as of December 31, 2002 and 2001, and the related  consolidated
statements  of loss,  stockholders'  equity and cash flows for each of the three
years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits to obtain  reasonable  assurance  about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes 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,  2002  and  2001,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2002 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
financial statements,  the Company has suffered recurring losses from operations
and has an accumulated  deficit of $27,776,726.  Additionally,  during 2002, the
Company's  primary lender has  classified the remaining  amount of $7,501,777 as
immediately  due  and  payable,  resulting  in  a  significant  working  capital
deficiency.  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.


                                                             /s/ BDO Seidman LLP

Atlanta, Georgia
February 27, 2003


                                                                             F-3
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS


================================================================================

<TABLE>
<CAPTION>
DECEMBER 31,                                                                  2002                2001
-------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                 <C>
ASSETS (Note 1)

CURRENT
   Cash and cash equivalents                                           $   184,130         $   393,451
   Investments                                                              34,500             150,000
   Accounts receivable                                                     730,667             661,475
   Participant receivables                                                  70,605              84,097
   Inventory                                                               262,748             159,364
   Current portion of loan fees, net of accumulated
     amortization of $194,312 (Note 7)                                     323,856                   -
-------------------------------------------------------------------------------------------------------

TOTAL CURRENT ASSETS                                                     1,606,506           1,448,387

OIL AND GAS PROPERTIES, net (on the basis
   of full cost accounting) (Notes 4, 7 and 15)                         13,864,321          13,269,930

COMPLETED PIPELINE FACILITIES, net of accumulated
   depreciation of $729,043 and $220,374, respectively
   (Notes 5 and 7)                                                      15,372,843          15,039,762

OTHER PROPERTY AND EQUIPMENT, net (Notes 6 and 7)                        1,685,950           1,680,104

RESTRICTED CASH                                                                  -             120,872

LOAN FEES, net of accumulated amortization of
   $13,384 and $21,590, respectively                                        40,158             496,577

OTHER ASSETS                                                                14,613              72,613
-------------------------------------------------------------------------------------------------------







                                                                       $32,584,391         $32,128,245
======================================================================================================
                    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                                                             F-4
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS



================================================================================


<TABLE>
<CAPTION>
DECEMBER 31,                                                                                  2002                2001
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Current maturities of long-term debt (Notes 1 and 7)                              $   7,861,245      $    6,399,831
   Accounts payable - trade                                                              1,396,761           1,208,164
   Accrued interest payable                                                                 61,141              54,138
   Accrued dividends payable (Note 9)                                                      254,389             112,458
   Other accrued liabilities                                                                31,805                   -
-----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                9,605,341           7,774,591

LONG TERM DEBT TO RELATED PARTIES (Note 7)                                                 750,000                   -

LONG TERM DEBT, less current maturities (Note 7)                                         1,256,209           3,902,757
-----------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES                                                                       11,611,550          11,677,348
-----------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (Notes 1 and 8)

PREFERRED STOCK, $.0001 par value; authorized 25,000,000
   shares (Note 9):
   Series A 8% cumulative, convertible, mandatorily redeemable;
     28,679 and shares outstanding; redemption value $2,867,900                          2,867,900           2,867,900
   Series B 8% cumulative, convertible, mandatorily redeemable;
     27,550 shares outstanding; redemption value $2,755,000,
     net of related commissions                                                          2,591,150           2,591,150
   Series C 6% cumulative, convertible, mandatorily redeemable;
     14,491 shares outstanding, redemption value $1,449,100
     net of related commissions                                                          1,303,168                   -
-----------------------------------------------------------------------------------------------------------------------

TOTAL PREFERRED STOCK                                                                    6,762,218           5,459,050
-----------------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY (Notes 10 and 11)
   Common stock, $.001 par value; authorized 50,000,000 shares;
     11,459,279 and 10,560,605 shares issued, respectively                                  11,460              10,561
   Additional paid-in capital                                                           42,237,276          39,242,555
   Accumulated deficit                                                                 (27,776,726)        (24,115,382)
   Accumulated other comprehensive loss                                                   (115,500)                  -
   Treasury Stock, at cost, 14,500 shares                                                 (145,887)           (145,887)
-----------------------------------------------------------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY                                                              14,210,623          14,991,847
-----------------------------------------------------------------------------------------------------------------------

                                                                                      $ 32,584,391        $ 32,128,245
=======================================================================================================================
                                                          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                                                                             F-5
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                                 CONSOLIDATED STATEMENTS OF LOSS



================================================================================


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                                        2002              2001              2000
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>               <C>               <C>
REVENUES AND OTHER INCOME
   Oil and gas revenues                                                  $ 5,437,723       $ 6,656,758       $ 5,241,076
   Pipeline transportation revenues                                          259,677           296,331                 -
   Interest Income                                                             3,078            43,597            45,905
-------------------------------------------------------------------------------------------------------------------------

Total revenues and other income                                            5,700,478         6,996,686         5,286,981
-------------------------------------------------------------------------------------------------------------------------

COSTS AND EXPENSES
   Production costs and taxes                                              3,094,731         2,951,746         2,614,414
   Depreciation, depletion and amortization
     (Notes 4, 5 and 6)                                                    2,413,597         1,849,963           371,249
   General and administrative                                              1,868,141         2,957,871         2,602,311
   Interest expense                                                          578,039           850,965           415,376
   Public relations                                                          193,229           293,448           106,195
   Professional fees                                                         707,296           355,480           719,320
-------------------------------------------------------------------------------------------------------------------------

Total costs and expenses                                                   8,855,033         9,259,473         6,828,865
-------------------------------------------------------------------------------------------------------------------------

NET LOSS                                                                  (3,154,555)       (2,262,787)       (1,541,884)

Dividends on preferred stock                                                (506,789)         (391,183)         (257,557)
-------------------------------------------------------------------------------------------------------------------------

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                             $(3,661,344)      $(2,653,970)      $(1,799,441)
-------------------------------------------------------------------------------------------------------------------------

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE
   Basic and diluted                                                     $     (0.33)      $     (0.26)      $     (0.19)
-------------------------------------------------------------------------------------------------------------------------

Weighted average shares outstanding                                       11,062,436        10,235,253         9,253,622
========================================================================================================================
                                                            SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                                                                             F-6
<PAGE>







================================================================================
<TABLE>
<CAPTION>
                                                                                COMMON STOCK                    ADDITIONAL
                                                                         -------------------------------           PAID-IN
                                                                                 SHARE           AMOUNT            CAPITAL
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>            <C>
BALANCE, January 1, 2000                                                     8,532,882          $ 8,533        $20,732,759
   Net loss                                                                          -                -                  -
   Common stock issued on conversion of debt                                    73,669               74            449,920
   Common stock issued for exercised options                                    20,715               21            179,992
   Common stock issued on conversion of preferred stock                          8,818                9             49,991
   Stock option awards for professional services                                     -                -            242,000
   Common stock issued in private placements, net of
     related expense                                                           654,098              654          4,245,054
   Stock issued for services                                                     5,376                5             41,993
   Dividends on convertible redeemable preferred stock                               -                -                  -
--------------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2000                                                   9,295,558            9,296         25,941,709
   Net loss                                                                          -                -                  -
   Common stock issued with 5% stock dividend (Note 10)                        498,016              498          6,374,111
   Common stock issued on conversion of debt                                    93,069               93            523,157
   Common stock issued for exercised options                                   274,932              275          2,340,725
   Common stock issued on conversion of preferred stock                         12,347               13             70,988
   Common stock issued for services                                             10,000               10             69,990
   Common stock issued in private placements, net of
     related expense                                                           374,733              374          3,899,624
   Common stock issued as a charitable donation                                  1,950                2             22,251
   Treasury stock purchased                                                          -                -                  -
   Dividends on convertible redeemable preferred stock                               -                -                  -
--------------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2001                                                  10,560,605           10,561         39,242,555
   Net loss                                                                          -                -                  -
   Comprehensive loss
     Net loss                                                                        -                -                  -
     Other comprehensive loss                                                        -                -                  -
     Comprehensive loss                                                              -                -                  -
   Common stock issued in private placements, net of                                                             2,676,150
     related expenses                                                          850,000              850
   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                               -                -                  -
--------------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2002                                                  11,459,279          $11,460        $42,237,276
==========================================================================================================================
</TABLE>



<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                                    YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000


================================================================================

<TABLE>
<CAPTION>

ACCUMULATED OTHER                                                       TREASURY STOCK
  COMPREHENSIVE        ACCUMULATED         COMPREHENSIVE       -------------------------------
  INCOME (LOSS)            DEFICIT                  LOSS           SHARES           AMOUNT                  TOTAL
-------------------------------------------------------------------------------------------------------------------
<S>                    <C>                                                        <C>                  <C>
     $       -         $(13,287,362)                                     -        $       -            $ 7,453,930
             -           (1,541,884)                                     -                -             (1,541,884)
             -                    -                                      -                -                449,994
             -                    -                                      -                -                180,013
             -                    -                                      -                -                 50,000
             -                    -                                      -                -                242,000

             -                    -                                      -                -              4,245,708
             -                    -                                      -                -                 41,998
             -             (257,557)                                     -                -               (257,557)
-------------------------------------------------------------------------------------------------------------------

             -          (15,086,803)                                     -                -             10,864,202
                         (2,262,787)                                     -                -             (2,262,787)
             -           (6,374,609)                                     -                -                      -
             -                    -                                      -                -                523,250
             -                    -                                      -                -              2,341,000
             -                    -                                      -                -                 71,001
                                  -                                      -                -                 70,000

             -                    -                                      -                -              3,899,998
             -                    -                                      -                -                 22,253
             -                    -                                 14,500         (145,887)              (145,887)
             -             (391,183)                                     -                -               (391,183)
-------------------------------------------------------------------------------------------------------------------

                        (24,115,382)                                14,500         (145,887)            14,991,847
                         (3,154,555)                                     -                -             (3,154,555)

             -                    -            (3,154,555)               -                -                      -
      (115,500)                   -              (115,500)               -                -               (115,500)
                                          ----------------
             -                    -            (3,270,055)               -                -                      -
                                  -                                      -                -              2,677,000
                                  -                                      -                -                120,000
                                  -                                      -                -                150,000
                                  -                                      -                -                 48,620
             -                    -                                      -                -                      -
             -             (506,789)                                     -                -               (506,789)
-------------------------------------------------------------------------------------------------------------------

     $(115,500)        $(27,776,726)                                14,500        $(145,887)           $14,210,623
===================================================================================================================
                                                      SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                                                                             F-7
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS



================================================================================


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                                          2002              2001              2000
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>               <C>
OPERATING ACTIVITIES
   Net loss                                                                $(3,154,555)      $(2,262,787)      $(1,541,884)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
       Depreciation, depletion and amortization                              2,413,597         1,849,963           371,249
       Compensation and services paid in stock options, stock
         warrants, and common stock                                             48,620            92,253           284,000
       Gain on sale of equipment                                                     -          (132,943)                -
       Changes in assets and liabilities:
         Accounts receivable                                                   (69,192)            3,814          (301,421)
         Participant receivables                                                13,492                 -                 -
         Inventory                                                            (103,384)           91,981             8,408
         Other assets                                                           58,000                 -                 -
         Accounts payable - trade                                              188,597           191,702           364,553
         Accrued interest payable                                                7,003            (2,519)          135,435
         Other accrued liabilities                                              31,805           (52,640)         (140,955)
---------------------------------------------------------------------------------------------------------------------------

Net cash used in operating activities                                         (566,017)         (221,176)         (820,615)
---------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
   Additions to other property and equipment                                  (214,897)         (285,722)       (1,276,783)
   Net additions to oil and gas properties                                  (1,982,529)       (4,821,883)       (1,456,996)
   Additions to pipeline facilities                                           (841,750)       (4,213,095)       (6,834,196)
   Decrease (increase) in restricted cash                                      120,872          (120,872)          625,000
   Other                                                                        28,367            32,888             6,112
---------------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities                                       (2,889,937)       (9,408,684)       (8,936,863)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                             F-8
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS



================================================================================


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                                         2002              2001              2000
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>               <C>               <C>
FINANCING ACTIVITIES
   Proceeds from exercise of options                                      $         -       $ 2,341,000       $   180,013
   Proceeds from borrowings                                                 2,063,139        10,442,068         6,493,563
   Repayments of borrowings                                                (2,378,273)       (8,833,325)       (1,720,856)
   Net proceeds from issuance of common stock                               2,677,000         3,900,000         4,245,700
   Proceeds from private placements of convertible
     redeemable preferred stock, net                                        1,303,168         1,591,150         2,000,000
   Dividends on convertible redeemable preferred stock                       (364,858)         (357,503)         (257,557)
   Purchase of treasury stock                                                       -          (145,887)                -
   Payment of loan fees                                                       (53,543)         (518,167)                -
--------------------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                                   3,246,633         8,419,336        10,940,863
--------------------------------------------------------------------------------------------------------------------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                      (209,321)       (1,210,524)        1,183,385

CASH AND CASH EQUIVALENTS, beginning of year                                  393,451         1,603,975           420,590
--------------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of year                                    $   184,130       $   393,451       $ 1,603,975
==========================================================================================================================

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
   FINANCING ACTIVITIES:
     During 2001, the Company issued a 5%
       stock dividend of 498,016 shares                                   $         -       $ 6,374,609       $         -
     During 2001 and 2000, the Company converted
       preferred stock to common stock.                                   $         -       $    71,000       $    50,000
     During 2002, 2001 and 2000, respectively,
       the Company issued common stock on
       conversion of debt.                                                $   120,000       $   523,250       $   450,000
     During 2002, 2001 and 2000, respectively, the
       Company issued common stock and stock options
       for services received and charitable contributions
       made.                                                              $    48,620       $    92,253       $   284,000
     During 2001, the Company sold equipment
       for equity investments.                                            $         -       $   150,000       $         -
     During 2002, the Company purchased equipment
       by issuing common stock                                            $   150,000       $         -       $         -
==========================================================================================================================
                                                             SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                                                                             F-9
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

1.  GOING CONCERN                The   accompanying    consolidated    financial
    UNCERTAINTY                  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
                                 continues  to be in the early stages of its oil
                                 and  gas  related   operating   history  as  it
                                 endeavors to expand its operations  through the
                                 continuation  of its  drilling  program  in the
                                 Tennessee  Swan Creek Field.  Accordingly,  the
                                 Company has incurred  continuous losses through
                                 these  operating  stages and has an accumulated
                                 deficit of  $27,776,726  and a working  capital
                                 deficit of  $7,998,835 as of December 31, 2002.
                                 During  2002,  the Company was  informed by its
                                 primary  lender  that the entire  amount of its
                                 outstanding credit facility was immediately due
                                 and  payable,  as  provided  for in the  Credit
                                 Agreement  (see  Note 7).  These  circumstances
                                 raise  substantial  doubt  about the  Company's
                                 ability to continue as a going concern.

                                 The Company has disputed its obligation to make
                                 this payment and is  attempting  to resolve the
                                 dispute  or to obtain  alternative  refinancing
                                 arrangements to repay this current  obligation.
                                 There can be no assurance that the Company will
                                 be  successful  in  its  plans  to  obtain  the
                                 financing  necessary to satisfy  their  current
                                 obligations.

2.  SUMMARY OF                   ORGANIZATION
    SIGNIFICANT ACCOUNTING
    POLICIES                     Tengasco, Inc. (the "Company"), a publicly held
                                 corporation,  was  organized  under the laws of
                                 the  State of Utah on April 18,  1916,  as Gold
                                 Deposit Mining and Milling Company. The Company
                                 subsequently   changed   its  name  to   Onasco
                                 Companies, Inc.

                                 Effective  May 2,  1995,  Industrial  Resources
                                 Corporation,  a Kentucky  corporation  ("IRC"),
                                 acquired  voting  control  of  the  Company  in
                                 exchange for approximately 60% of the assets of
                                 IRC.  Accordingly,  the assets acquired,  which
                                 included certain oil and gas leases, equipment,
                                 marketable   securities   and  vehicles,   were
                                 recorded   at  IRC's   historical   cost.   The
                                 transaction   was   accomplished   through  the
                                 Company's  issuance of 4,000,000  shares of its
                                 common stock and a $450,000, 8% promissory note
                                 payable  to  IRC.  The   promissory   note  was
                                 converted into 83,799 shares of Tengasco,  Inc.
                                 common stock in December 1995.


                                                                            F-10
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 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 recognizes  revenues at the time of
                                 exchange of goods and services.

                                 CASH AND CASH EQUIVALENTS

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

                                                                            F-11
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 INVESTMENT SECURITIES

                                 Investment  securities  available  for sale are
                                 reported at fair value,  with unrealized  gains
                                 and  losses,  when  material,   reported  as  a
                                 separate component of stockholders' equity, net
                                 of the related tax effect.  Other comprehensive
                                 losses of  $115,500  were  recorded  during the
                                 year ended  December 31, 2002  resulting from a
                                 decrease in the fair value of the securities.

                                 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  and equipping 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 2000, 2001 and 2002.

                                 The  capitalized  oil  and gas  property,  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
                                 consideration  of  price  changes  only  to the
                                 extent provided

                                                                            F-12
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 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 writedown was recorded in
                                 2002, 2001 or 2000.

                                 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

                                 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.

                                 IMPAIRMENT OF LONG-LIVED  ASSETS AND LONG-LIVED
                                 ASSETS TO BE DISPOSED OF

                                 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.
                                 Accordingly,    the   accompanying    financial
                                 statements reflect no charges or allowances for
                                 impairment.


                                                                            F-13
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 STOCK-BASED COMPENSATION

                                 Statement of Financial Accounting Standards No.
                                 123, ("SFAS 123"),  "Accounting for Stock-Based
                                 Compensation"  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:

<TABLE>
<CAPTION>
                                                                         2002               2001                 2000
                      -----------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>                  <C>
                      Net loss attributable to common
                      shareholders
                          As reported                             $(3,661,344)       $(2,653,970)         $(1,799,441)
                          Stock based compensation                    (77,821)          (257,328)           2,253,011
                                                                  -----------        -----------          -----------
                          Pro forma                               $(3,739,165)        (2,911,298)          (4,052,452)
                      -----------------------------------------------------------------------------------------------
                      Basic and diluted loss per share
                          As reported                            $      (0.33)        $    (0.26)         $     (0.19)
                          Pro forma                                     (0.34)             (0.28)               (0.44)
                      -----------------------------------------------------------------------------------------------
</TABLE>

                                 ACCOUNTS RECEIVABLE

                                 Senior management  reviews accounts  receivable
                                 on  a  monthly   basis  to   determine  if  any
                                 receivables will potentially be  uncollectible.
                                 We include  any  accounts  receivable  balances
                                 that are determined to be uncollectible,  along
                                 with  a  general   reserve,   in  our   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, we believe  no  allowance  for  doubtful
                                 accounts as of December 31, 2002 is  necessary.
                                 However, actual write-offs may occur.

                                 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  carryforwards.  Management  evaluates the
                                 likelihood  of  realization  of such  assets at
                                 year end  reserving any such amounts not likely
                                 to be

                                                                            F-14
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 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  has  entered  into  contracts  to
                                 supply two manufacturers  with natural gas from
                                 the Swan  Creek  field  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  11,062,436  shares for the year
                                 ended December 31, 2002,  10,235,253 shares for
                                 the year ended December 31, 2001, and 9,253,622
                                 shares for the year ended  December  31,  2000.
                                 Dilated   loss  per  share  does  not  consider
                                 approximately 1,473,000,  943,000 and 1,001,000
                                 potential  weighted  average  common shares for
                                 2002, 2001 and 2000 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.  All  share  and per share
                                 amounts  have been  adjusted  to reflect the 5%
                                 stock dividend.


                                                                            F-15
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 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  July   2001,   the   Financial   Accounting
                                 Standards  Board issued  Statement of Financial
                                 Accounting  Standard (SFAS) No. 141,  "Business
                                 Combinations"  and SFAS No.142,  "Goodwill  and
                                 Other   Intangible   Assets".   SFAS  No.   141
                                 addresses   the   initial    recognition    and
                                 measurement  of goodwill  and other  intangible
                                 assets  acquired in a business  combination and
                                 SFAS No. 142 addresses the initial  recognition
                                 and  measurement of intangible  assets acquired
                                 outside  of  a  business   combination  whether
                                 acquired  individually or with a group of other
                                 assets.  These  standards  require  all  future
                                 business combinations to be accounted for using
                                 the  purchase  method of  accounting.  Goodwill
                                 will no longer be amortized but instead will be
                                 subject to impairment  tests at least annually.
                                 The Company was  required to adopt SFAS No. 141
                                 on July 1,  2001,  and to  adopt  SFAS 142 on a
                                 prospective  basis as of January  1, 2002.  The
                                 Company has not effected a business combination
                                 and carries no  goodwill on its balance  sheet;
                                 accordingly,  the  adoption of these  standards
                                 did  not  have  an  effect  on  the   Company's
                                 financial position or results of operations.

                                 In 2001,  the  Financial  Accounting  Standards
                                 Board (FASB)  issued SFAS No. 143,  "Accounting
                                 for Asset Retirement Obligations." SFAS No. 143
                                 addresses  financial  accounting  and reporting
                                 for obligations  associated with the retirement
                                 of   tangible   long-lived   assets   and   the
                                 associated   asset   retirement   costs.   This
                                 statement  requires  companies  to  record  the
                                 present value of  obligations  associated  with
                                 the retirement of tangible long-lived assets in
                                 the  period  in  which  it  is  incurred.   The
                                 liability is capitalized as part of the related
                                 long-lived asset's carrying amount.  Over time,
                                 accretion of the  liability is recognized as an
                                 operating  expense and the capitalized  cost is
                                 depreciated  over the  expected  useful life of
                                 the  related   asset.   The   Company's   asset
                                 retirement  obligations relate primarily to the
                                 plugging    dismantlement,     removal,    site
                                 reclamation  and similar  activities of its oil
                                 and gas  properties.  Prior to adoption of this
                                 statement,   such   obligations   were  accrued
                                 ratably over the productive

                                                                            F-16
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 lives of the assets  through its  depreciation,
                                 depletion  and  amortization  for  oil  and gas
                                 properties   without   recording   a   separate
                                 liability  for such  amounts. The Company plans
                                 to adopt  SFAS  143  beginning  on  January  1,
                                 2003; however, the effect of adoption  of  this
                                 statement  on future  results of  operations or
                                 financial position has not yet been  determined
                                 by management.

                                 SFAS No. 144,  Accounting for the Impairment or
                                 Disposal  of   Long-Lived   Assets,   addresses
                                 accounting  and reporting for the impairment or
                                 disposal  of  long-lived  assets.  SFAS No. 144
                                 supersedes  SFAS No.  121,  Accounting  for the
                                 Impairment   of   Long-Lived   Assets  and  for
                                 Long-Lived  Assets to be Disposed  Of. SFAS No.
                                 144 establishes a single  accounting  model for
                                 long-lived assets to be disposed of by sale and
                                 expands on the  guidance  provided  by SFAS No.
                                 121 with respect to cash flow estimations. SFAS
                                 No. 144  becomes  effective  for the  Company's
                                 fiscal   year   beginning   January   1,  2003.
                                 Management  does  not  expect  that adoption of
                                 this  standard  will have a  material impact on
                                 the Company's  financial position or results of
                                 operations.

                                 The FASB issued  Statement No. 145,  Rescission
                                 of FASB Statements No. 4, 44, and 64, Amendment
                                 of  FASB   Statement   No.  13,  and  Technical
                                 Corrections,  on April 30,  2002.  SFAS No. 145
                                 will be effective  for fiscal  years  beginning
                                 after May 15,  2002.  This  statement  rescinds
                                 SFAS No. 4,  Reporting  Gains and  Losses  From
                                 Extinguishment  of Debt,  and requires that all
                                 gains and losses  from  extinguishment  of debt
                                 should be  classified  as  extraordinary  items
                                 only if they meet the  criteria  in APB No. 30.
                                 Applying   APB   No.   30   will    distinguish
                                 transactions  that  are  part  of  an  entity's
                                 recurring   operations   from  those  that  are
                                 unusual or infrequent or that meet the criteria
                                 for  classification  as an extraordinary  item.
                                 Any gain or loss on extinguishment of debt that
                                 was  classified,  as an  extraordinary  item in
                                 prior periods  presented that does not meet the
                                 criteria in APB No. 30 for classification as an
                                 extraordinary item must be reclassified.  There
                                 is  no  current   impact  of  adoption  on  the
                                 Company's  financial  position  or  results  of
                                 operations.

                                 The FASB issued  Statement No. 146,  Accounting
                                 for  Costs  Associated  with  Exit or  Disposal
                                 Activities,   in  June   2002.   SFAS  No.  146
                                 addresses  financial  accounting  and reporting
                                 for  costs  associated  with  exit or  disposal
                                 activities and nullifies  Emerging  Issues Task
                                 Force Issue No. 94-3, Liability Recognition for
                                 Certain Employee Termination Benefits and Other
                                 Costs to Exit an  Activity  (including  Certain
                                 Costs  incurred in a  Restructuring).  SFAS No.
                                 146  applies  to  costs  incurred  in an  "exit
                                 activity",  which includes,  but is not limited
                                 to, a restructuring,  or a "disposal  activity"
                                 covered by SFAS No. 144.

                                                                            F-17
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================


                                 SFAS No. 146  requires  that a liability  for a
                                 cost   associated  with  an  exit  or  disposal
                                 activity be  recognized  when the  liability is
                                 incurred.   Previously,  under  Issue  94-3,  a
                                 liability  for an exit cost was  recognized  at
                                 the date of an entity's  commitment  to an exit
                                 plan.  Statement No. 146 also  establishes that
                                 fair  value  is  the   objective   for  initial
                                 measurement of the liability. The provisions of
                                 SFAS No. 146 are effective for exit or disposal
                                 activities  that are initiated  after  December
                                 31,  2002.  Management  does  not  expect  that
                                 adoption  of this standard will have a material
                                 effect  on the  Company's financial position or
                                 results of operations.

                                 In    November    2002,    the   FASB    issued
                                 Interpretation No. 45,  Guarantor's  Accounting
                                 and  Disclosure  Requirements  for  Guarantees,
                                 Including  Indirect  Guarantees of Indebtedness
                                 to Others, an interpretation of FASB Statements
                                 No.  5,  57 and 107  and a  rescission  of FASB
                                 Interpretation  No.  34.  This   Interpretation
                                 elaborates on the  disclosures  to be made by a
                                 guarantor  in its interim and annual  financial
                                 statements   about   its   obligations    under
                                 guarantees  issued.  The  Interpretation   also
                                 clarifies  that  a  guarantor  is  required  to
                                 recognize,  at  inception  of  a  guarantee,  a
                                 liability for the fair value of the  obligation
                                 undertaken.   The   initial   recognition   and
                                 measurement  provisions  of the  Interpretation
                                 are applicable to guarantees issued or modified
                                 after  December 31,  2002.  The Company has not
                                 guaranteed the debts of others, therefore, this
                                 interpretation   is  not  expected  to  have  a
                                 material   effect   on   Tengasco's   financial
                                 statements.

                                 In December 2002, the FASB issued SFAS No. 148,
                                 Accounting  for   Stock-Based   Compensation  -
                                 Transition and Disclosure, an amendment of FASB
                                 Statement No. 123. This  Statement  amends FASB
                                 Statement No. 123,  Accounting for  Stock-Based
                                 Compensation, to provide alternative methods of
                                 transition  for a voluntary  change to the fair
                                 value  method  of  accounting  for  stock-based
                                 employee   compensation.   In  addition,   this
                                 Statement amends the disclosure requirements of
                                 Statement   No.   123  to   require   prominent
                                 disclosures   in  both   annual   and   interim
                                 financial statements.  Management  has  adopted
                                 certain  of  the  disclosure  modifications are
                                 required   for   fiscal   years   ending  after
                                 December 15, 2002 and are included in the notes
                                 to  the   accompanying   consolidated financial
                                 statements.


                                                                            F-18
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 In January 2003, the FASB issued Interpretation
                                 No.  46,  Consolidation  of  Variable  Interest
                                 Entities,   an   Interpretation  of  Accounting
                                 Research Bulletin No. 51. Interpretation No. 46
                                 requires  a company to  consolidate  a variable
                                 interest  entity if the  company has a variable
                                 interest (or combination of variable interests)
                                 that will  absorb a  majority  of the  entity's
                                 expected  losses  if  they  occur,   receive  a
                                 majority  of  the  entity's  expected  residual
                                 returns  if they  occur,  or both.  A direct or
                                 indirect   ability  to  make   decisions   that
                                 significantly   affect   the   results  of  the
                                 activities of a variable  interest  entity is a
                                 strong  indication  that a  company  has one or
                                 both of the characteristics  that would require
                                 consolidation of the variable  interest entity.
                                 Interpretation No. 46 also requires  additional
                                 disclosures    regarding    variable   interest
                                 entities.  The new  interpretation is effective
                                 immediately  for  variable   interest  entities
                                 created   after   January  31,  2003,   and  is
                                 effective in the first interim or annual period
                                 beginning  after June 15,  2003,  for  variable
                                 interest  entities  in which a company  holds a
                                 variable   interest  that  it  acquired  before
                                 February  1, 2003.  Management  does not expect
                                 that  adoption of this interpretation will have
                                 a  material effect  on  the Company's financial
                                 position or results of operations.

                                 RECLASSIFICATIONS

                                 Certain    prior   year   amounts   have   been
                                 reclassified   to  conform  with  current  year
                                 presentation.

3.  RELATED  PARTY               During 2002 the Company received debt financing
    TRANSACTIONS                 from  a  director  totaling  $750,000  to  fund
                                 operating   cash  flow  needs  and  to  finance
                                 continued  development of the Swan Creek field.
                                 Interest    incurred    on   this    debt   was
                                 approximately   $15,000   for  the  year  ended
                                 December 31, 2002. See Note 7.

                                 During 2002, the Company borrowed $110,000 from
                                 a former director. The advance was non-interest
                                 bearing and was repaid in July 2002.

                                 During 2001,  the Company  repaid all principal
                                 and interest due to related parties,  using the
                                 proceeds from the line of credit with Bank One.
                                 Interest   incurred  to  related   parties  was
                                 approximately  $15,000,  $546,000  and $135,000
                                 for the years ended December 31, 2002, 2001 and
                                 2000, respectively.


                                                                            F-19
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 During  2001,  the  Company  converted  debt of
                                 $200,000  payable  to a  director  into  42,017
                                 shares of common stock.

                                 During  2000,  the Company  paid  approximately
                                 $270,000 in consulting  fees and commissions on
                                 equity transactions to a member of the Board of
                                 Directors.

4.  OIL AND GAS                  The  following  table  sets  forth  information
    PROPERTIES                   concerning    the   Company's   oil   and   gas
                                 properties:

<TABLE>
<CAPTION>
                                 DECEMBER 31,                                      2002               2001
                                 --------------------------------------------------------------------------
                                 <S>                                        <C>                <C>
                                 Oil and gas properties, at cost            $17,099,753        $15,117,224
                                 Accumulation depreciation,

                                     depletion and amortization              (3,235,432)        (1,847,294)
                                 --------------------------------------------------------------------------

                                 Oil and gas properties, net                $13,864,321        $13,269,930
                                 ==========================================================================
</TABLE>

                                 During the years ended December 31, 2002,  2001
                                 and  2000,  the  Company   recorded   depletion
                                 expense of approximately $1,388,000, $1,342,000
                                 and $197,000, 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
                                 $220,000   and   $509,000,    respectively   in
                                 depreciation  expense  related to the  pipeline
                                 for the years ended December 31, 2002 and 2001.
                                 No depreciation expense was recorded in 2000 as
                                 the pipeline was not yet complete.


                                                                            F-20
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                        In 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. 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 PROPERTY               Other  property and equipment  consisted of the
    AND EQUIPMENT                following:

<TABLE>
<CAPTION>
                                 DECEMBER 31,                                           2002             2001
                                 -----------------------------------------------------------------------------
                                 <S>                                              <C>              <C>
                                 Machinery and equipment                          $1,887,190       $1,737,189
                                 Vehicles                                            675,411          610,510
                                 Other                                                63,734           63,739
                                 -----------------------------------------------------------------------------

                                                                                   2,626,335        2,411,438

                                 Less accumulated depreciation                      (940,385)        (731,334)
                                 -----------------------------------------------------------------------------

                                 Other property and equipment - net               $1,685,950       $1,680,104
                                 -----------------------------------------------------------------------------
</TABLE>



                                                                            F-21
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================


7.  LONG TERM DEBT               Long-term debt to unrelated  entities consisted
                                 of the following:

<TABLE>
<CAPTION>
                                 DECEMBER 31,                                              2002               2001
                                 -----------------------------------------------------------------------------------

<S>                                                                                    <C>               <C>
                                 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% (4.5% at December 31, 2002).
                                 Collateralized by the oil and gas properties
                                 and the related operations and revenues.               7,501,777         $9,101,777

                                 Unsecured note payable to an institution, with
                                 $65,000 principal payments due quarterly
                                 beginning January 1, 2000; remaining balance
                                 due October 2004; with interest payable monthly
                                 at 8% per annum. Note is convertible into
                                 common stock of the Company at a rate of $6.25
                                 per share of common stock.                               480,000            720,000

                                 Convertible notes payable to five individuals;
                                 due January 2004, with interest payable
                                 quarterly at 8% per annum. Notes are
                                 convertible into common stock of the Company at
                                 a rate of $3.00 per share of common stock.               650,000                  -

                                 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.                                                  73,335             87,500

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

                                 Balance carried forward                                8,705,112          9,909,277
                                 -----------------------------------------------------------------------------------
</TABLE>


                                                                            F-22
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

<TABLE>
<CAPTION>
                                 DECEMBER 31,                                             2002               2001
                                 -----------------------------------------------------------------------------------
<S>                                                                                     <C>                <C>
                                 Balance brought forward                                8,705,112          9,909,277
                                 -----------------------------------------------------------------------------------

                                 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.                            412,342            393,311
                                 -----------------------------------------------------------------------------------

                                 Total long term debt                                   9,117,454         10,302,588

                                 Less current maturities                               (7,861,245)        (6,399,831)
                                 -----------------------------------------------------------------------------------

                                 Long term debt less current maturities              $  1,256,209       $  3,902,757
                                 -----------------------------------------------------------------------------------
</TABLE>

                                 The  Company is  subject  to certain  financial
                                 (ratio)    covenants   and    restrictions   on
                                 indebtedness,   dividend  payments,   financial
                                 guarantees,  business  combinations,  reporting
                                 requirements  and  other  related  items on the
                                 revolving  line of  credit  with a bank.  As of
                                 December  31,  2002,  the  Company  is  not  in
                                 compliance with all covenants.  During 2002, as
                                 a result of ongoing  negotiations  to refinance
                                 or  repay  the  debt,  the  bank  declared  all
                                 amounts   immediately  due  and  payable.   The
                                 Company is presently paying $200,000 per month.
                                 As  a  result of ongoing negotiations with Book
                                 One,  management has reclassified the loan fees
                                 associated with this note to a current asset as
                                 it  is likely that  these  fees  will  be fully
                                 amortized in 2003.


                                                                            F-23
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 Long-term debt to related parties  consisted of
                                 the following:

<TABLE>
<CAPTION>
                                 DECEMBER 31,                                              2002               2001
                                 -----------------------------------------------------------------------------------
<S>                                                                                      <C>             <C>
                                 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.                              $500,000         $        -

                                 Note payable to a director due January
                                 2004,with interest payable quarterly at 12% per
                                 annum. Note is secured by 10% of the pipeline.           250,000                  -
                                 -----------------------------------------------------------------------------------

                                 Total long term debt to related parties                  750,000                  -
                                 Less current maturities                                        -                  -
                                 -----------------------------------------------------------------------------------

                                 Long term debt to related parties, less
                                 current maturities                                      $750,000         $        -
                                 ===================================================================================
</TABLE>

                                 The aggregate  maturities of long term debt due
                                 to related  parties  and  others as of December
                                 31, 2002, are as follows:

                                       Year                            Amount
                                 -----------------------------------------------

                                       2003                        $7,861,245
                                       2004                         1,720,468
                                       2005                           101,468
                                       2006                           101,803
                                       Thereafter                      82,470
                                 -----------------------------------------------

                                                                   $9,867,454

                                 ===============================================


8.  COMMITMENTS                  The  Company  is a  party  to  lawsuits  in the
    AND CONTINGENCIES            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.


                                                                            F-24
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 In the ordinary  course of business the Company
                                 has entered into various  equipment  and office
                                 leases which have remaining  terms ranging from
                                 one to four years.  Approximate  future minimum
                                 lease payments to be made under  noncancellable
                                 operating leases are as follows:

                                   Year                                  Amount
                                 -----------------------------------------------

                                   2003                                $ 60,158
                                   2004                                  59,210
                                   2005                                  56,970
                                   2006                                     500
                                 -----------------------------------------------

                                                                       $176,838
                                 ===============================================

                                 Office rent expense was approximately  $84,000,
                                 $91,000 and $86,000 for each of the three years
                                 ended December 31, 2002, respectively.

9.  CUMULATIVE
    CONVERTIBLE                  Shares  of  both  Series  A and B of  Preferred
    REDEEMABLE                   Stock  are or will be  immediately  convertible
    PREFERRED STOCK              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  if the Company
                                 subsequently  issues shares of common stock for
                                 consideration less than $7.00 and $9.00 for the
                                 Series A and B,  respectively,  per share.  The
                                 conversion     prices    will    be    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 may
                                 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.

                                                                            F-25
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 The  Company  failed  to pay  the  3rd  and 4th
                                 quarterly  dividend  payments  of the  Series A
                                 preferred  stock during 2002.  As a result,  in
                                 February   2003,   the  Series  A  shareholders
                                 exercised   their  rights  to  place  four  new
                                 members on the Board of Directors.

                                 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 (March 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   accrues  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 July 2006.

10. STOCK DIVIDEND               On August 1, 2001,  the Company paid a 5% stock
                                 dividend  distributable  on  October 1, 2001 to
                                 shareholders of record of the Company's  common
                                 stock on September 4, 2001. Based on the number
                                 of  common  shares  outstanding  on the  record
                                 date,  the Company  issued  498,016 new shares.
                                 All  references in the  accompanying  financial
                                 statements  to the number of common  shares and
                                 per share  amounts  are based on the  increased
                                 number of shares giving  retroactive  effect to
                                 the stock dividend.

                                                                            F-26
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================


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. 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  and
                                 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 2002, 2001 and 2000 is
                                 summarized below:

<TABLE>
<CAPTION>
                                               2002                         2001                      2000
                                     -------------------------     ------------------------  ------------------------
                                                    WEIGHTED                     WEIGHTED                   WEIGHTED
                                                     AVERAGE                      AVERAGE                    AVERAGE
                                                    EXERCISE                     EXERCISE                   EXERCISE
                                         SHARES        PRICE         SHARES         PRICE       SHARES         PRICE
----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>           <C>          <C>             <C>          <C>
            OUTSTANDING,
              beginning
              of year                  516,028        $9.23         1,017,450    $  8.54         530,250      $6.91
            Granted                    160,742         2.86            78,750      12.39         855,451       8.69
            Exercised                        -         -             (256,772)      8.69         (21,751)      8.69
            Expired/canceled                 -         -             (323,400)      7.85        (346,500)      6.91
                                     ---------                     ----------                 ----------

            OUTSTANDING,
              end of year              676,770         7.71           516,028       9.23       1,017,450       8.54
----------------------------------------------------------------------------------------------------------------------

            EXERCISABLE,
              end of year              676,770        $7.71           474,889    $  9.21         930,258      $8.49
======================================================================================================================
</TABLE>


                                                                            F-27
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 The share information  disclosed above has been
                                 adjusted  to  reflect  the  5%  stock  dividend
                                 declared during 2001. See Note 10.

                                 The  following  table  summarizes   information
                                 about stock options outstanding at December 31,
                                 2002:

<TABLE>
<CAPTION>
                                                                  OPTIONS                         OPTIONS
                                                                OUTSTANDING                     EXERCISABLE
                                                 ------------------------------------------   ---------------
                                                                                WEIGHTED
                                                     WEIGHTED                    AVERAGE
                                                      AVERAGE                  REMAINING
                                                     EXERCISE                CONTRACTUAL
                                                        PRICE        SHARES  LIFE (YEARS)           SHARES
                                 ==========================================================   ---------------
<S>                                                 <C>             <C>             <C>            <C>
                                                    $    2.86       160,742         2.67           160,742
                                                    $    8.69       437,278         0.85           437,278
                                                    $   14.44        21,000         1.13            21,000
                                                    $   11.05        47,250         1.30            47,250
                                                    $   12.70        10,500         1.71            10,500
                                                                 ------------                 ---------------

                                 Total              $    7.71       676,770                        676,770
                                 ============================================================================
</TABLE>

                                 The  weighted  average  fair value per share of
                                 options  granted during 2002,  2001 and 2000 is
                                 $1.45,    $3.62,   and   $3.41    respectively,
                                 calculated     using     the      Black-Scholes
                                 Option-Pricing model.

                                 No   compensation   expense  related  to  stock
                                 options was incurred in 2002, 2001 or 2000. The
                                 Company issued 70,715 options to  non-employees
                                 and  non-directors  in  2000.  The  expense  of
                                 $242,000 for these options has been included in
                                 professional  fees expense  because the options
                                 were issued to providers of such services.  The
                                 expense  was  calculated  using  a fair  market
                                 value of the options based on the Black-Scholes
                                 option-pricing   model  assumptions   discussed
                                 below.

                                 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 2002, 2001 and
                                 2000:  Expected  volatility  of 74.2% for 2002,
                                 50% for  2001  and 50% for  2000;  a risk  free
                                 interest  rate of 3.67% in 2002,  3.67% in 2001
                                 and 5.86% in 2000; and an expected  option life
                                 of 3 years for 2002, 2001 and 2000.


                                                                            F-28
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

12. INCOME TAXES                 The  Company has no taxable  income  during the
                                 three year period ended December 31, 2002.

                                 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:

<TABLE>
<CAPTION>
                 DECEMBER 31,                                        2002               2001                2000
                 ------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>                 <C>
                 Statutory rate                                        34%                34%                34%
                 Tax benefit at statutory rate                $(1,073,000)        $ (769,000)         $(452,500)
                 State income tax benefit                        (189,000)          (136,000)           (75,500)
                 Other                                                  -                  -             24,000
                 Increase in deferred tax asset
                   valuation allowance                          1,262,000            905,000            504,000
                 ------------------------------------------------------------------------------------------------

                 Total income tax provision                   $         -         $        -          $       -
                 ================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                 DECEMBER 31,                                        2002                2001                2000
                 -------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>                 <C>
                 Net operating loss carryforward              $ 7,139,000         $ 5,877,000         $ 4,972,000
                 Capital loss carryforward                        263,000             263,000             263,000
                 -------------------------------------------------------------------------------------------------

                                                                7,402,000           6,140,000           5,235,000

                 Valuation allowance                           (7,402,000)         (6,140,000)         (5,235,000)
                 -------------------------------------------------------------------------------------------------

                 Net deferred taxes                           $         -         $         -         $        -
                 ================================================================================================
</TABLE>

                                 The Company  recorded a valuation  allowance at
                                 December  31, 2002, 2001 and 2000  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,  2002,  the Company had net
                                 operating loss  carryforwards  of approximately
                                 $18,217,000, which will expire between 2010 and
                                 2022, if not utilized.


                                                                            F-29
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

13. SUPPLEMENTAL CASH            The  Company   paid   approximately   $571,000,
    FLOW INFORMATION             $853,500  and  $544,000  for  interest in 2002,
                                 2001  and  2000,   respectively.   The  Company
                                 capitalized approximately $148,000 and $128,000
                                 of this amount in 2001 and 2000,  respectively.
                                 No interest was  capitalized  during 2002.  The
                                 Company paid no income taxes in 2002,  2001 and
                                 2000.
























                                                                            F-30
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

14. QUARTERLY DATA AND           The following table sets forth,  for the fiscal
    SHARE INFORMATION            periods   indicated,    selected   consolidated
    (UNAUDITED)                  financial data.

<TABLE>
<CAPTION>
                                                                                           FISCAL YEAR ENDED 2002
------------------------------------------------------------------------------------------------------------------
                                                        First          Second              Third           Fourth
                                                      Quarter         Quarter            Quarter          Quarter
------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>                <C>              <C>
Revenues                                           $1,176,482      $1,297,668         $1,507,308       $1,719,020
Net loss                                            (818,341)       (858,197)          (721,879)        (756,138)
Net loss attributable to common
   stockholders                                     (930,799)       (984,139)          (856,074)        (890,332)
------------------------------------------------------------------------------------------------------------------
Loss per common share
   Basic and diluted                               $   (0.09)      $   (0.09)         $   (0.08)       $   (0.07)
------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                           FISCAL YEAR ENDED 2001
------------------------------------------------------------------------------------------------------------------
                                                        First          Second              Third           Fourth
                                                      Quarter         Quarter            Quarter          Quarter
------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>                <C>              <C>
Revenues                                           $1,448,318      $1,863,068         $2,583,758     $ 1,101,542
Net loss                                            (368,768)       (336,034)          (378,597)      (1,179,388)
Net loss attributable to common
   stockholders                                     (447,546)       (423,523)          (491,055)      (1,291,846)
------------------------------------------------------------------------------------------------------------------
Loss per common share
   Basic and diluted                               $   (0.05)      $   (0.04)         $   (0.05)     $     (0.12)
------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                           FISCAL YEAR ENDED 2000
------------------------------------------------------------------------------------------------------------------
                                                        First          Second              Third           Fourth
                                                      Quarter         Quarter            Quarter          Quarter
------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>                <C>           <C>
Revenues                                           $1,179,912      $1,270,283         $1,666,583    $  1,124,298
Net Income (loss)                                    (70,453)       (379,234)             84,909     (1,177,106)
Net Income (loss) attributable to common
   stockholders                                     (110,231)       (451,394)             18,064     (1,255,880)
------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share
   Basic and diluted                               $   (0.01)      $   (0.05)         $        -    $     (0.13)
------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                            F-31
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 Third  quarter 2001 results  reflect the effect
                                 on  depletion  expense  that  resulted  from  a
                                 decrease  in reserve  estimates  provided  in a
                                 study  performed  by  Ryder  Scott  and  issued
                                 August 10,  2001.  The amount  recorded  during
                                 this  quarter  was  $562,000  higher  than  the
                                 quarterly  estimates made by management  during
                                 the  first  three  quarters  as a  result  of a
                                 change in estimate arising from new information
                                 provided  in the Ryder  Scott  Report.  Amounts
                                 disclosed  above  differ  from those filed with
                                 the SEC during  the third  quarter of 2001 as a
                                 result of an error in recording  this change in
                                 estimate  to  depletion  at  the  time  of  the
                                 filing.  Management  has amended the  September
                                 30, 2001 SEC Form 10-Q filing during 2002.

15. SUPPLEMENTAL  OIL AND        Information  with respect to the  Company's oil
    GAS INFORMATION              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, 2002, 2001 and 2000.

                                 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, 2002,  2001
                                 and 2000:

<TABLE>
<CAPTION>
                                                                      2002             2001               2000
                                 ------------------------------------------------------------------------------
<S>                                                              <C>              <C>                <C>
                                 Property acquisition
                                   Proved                      $         -      $         -        $         -
                                   Unproved                              -                -              5,702
                                 Less - proceeds from
                                   sales of properties            (100,000)        (750,000)        (1,176,411)
                                 Development costs               2,082,529        5,571,883          2,627,705
                                 ------------------------------------------------------------------------------

                                                               $ 1,982,529      $ 4,821,883        $ 1,456,996
                                 ==============================================================================
</TABLE>


                                                                            F-32
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 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:

<TABLE>
<CAPTION>
                                 December 31,                              2002            2001           2000
                                 ------------------------------------------------------------------------------
<S>                                                                <C>              <C>            <C>
                                 Revenues                          $  5,437,723     $ 6,656,758    $ 5,241,076
                                 Production costs and taxes          (3,094,731)     (2,951,746)    (2,614,414)
                                 Depreciation, depletion and
                                     amortization                    (1,388,138)     (1,342,000)      (197,000)
                                 ------------------------------------------------------------------------------

                                 Income from oil and gas
                                     producing activities          $    954,854     $ 2,363,012    $ 2,429,662
                                 ------------------------------------------------------------------------------
</TABLE>

                                 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 tax
                                 loss carryforwards.

                                 OIL AND GAS RESERVES (UNAUDITED)

                                 The  following  table sets forth the  Company's
                                 net proved oil and gas reserves at December 31,
                                 2002,  2001  and 2000  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.


                                                                            F-33
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

<TABLE>
<CAPTION>
                                                                                OIL (BBLS)           GAS (MCF)
                                 -----------------------------------------------------------------------------
<S>                                                                             <C>                <C>
                                 Proved reserves:

                                 Balance, January 1, 2000                       3,227,203          74,795,287
                                   Discoveries and extensions                      56,103           1,059,147
                                   Revisions of previous estimates             (1,309,366)        (27,998,986)
                                   Production                                    (159,035)           (315,577)
                                 -----------------------------------------------------------------------------

                                 Balance, December 31, 2000                     1,814,905          47,539,871
                                   Discoveries and extensions                      62,254           4,915,431
                                   Revisions of previous estimates               (672,443)        (25,263,634)
                                   Production                                    (148,041)         (1,311,466)
                                 -----------------------------------------------------------------------------

                                 Balance, December 31, 2001                     1,056,675          25,880,202
                                   Discoveries and extensions                      34,968             937,000
                                   Revisions of previous estimates                542,229             786,430
                                   Production                                    (157,973)         (1,004,899)
                                 -----------------------------------------------------------------------------

                                 Proved reserves at, December 31, 2002          1,475,899          26,598,733
                                 =============================================================================

                                 Proved developed producing
                                   reserves at, December 31, 2002               1,108,293           6,592,711
                                 =============================================================================

                                 Proved developed producing
                                   reserves at, December 31, 2001                 767,126           7,157,183
                                 =============================================================================

                                 Proved developed producing
                                   reserves at, December 31, 2000               1,553,759           2,888,769
                                 =============================================================================
</TABLE>


                                 Of the  Company's  total proved  reserves as of
                                 December   31,   2002  and   2001   and   2000,
                                 approximately  37%, 36% and 21%,  respectively,
                                 were classified as proved developed  producing,
                                 19%, 26% and 34%, respectively, were classified
                                 as proved developed  non-producing and 44%, 37%
                                 and  45%,  respectively,   were  classified  as
                                 proved   undeveloped.   All  of  the  Company's
                                 reserves are located in the continental  United
                                 States.


                                                                            F-34
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 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:

<TABLE>
<CAPTION>
                                                                              AMOUNTS IN THOUSANDS
                                                              ------------------------------------------------
                                 December 31,                             2002             2001          2000
                                 -----------------------------------------------------------------------------
<S>                                                                   <C>             <C>           <C>
                                 Future cash inflows                  $152,180        $  78,296     $ 505,733
                                 Future production
                                     costs and taxes                   (41,870)         (26,083)      (41,689)
                                 Future development costs              (11,348)          (6,384)       (8,225)
                                 Future income tax expenses                  -                -      (122,881)
                                 -----------------------------------------------------------------------------

                                 Net future cash flows                  98,962           45,829       332,938

                                 Discount at 10% for
                                     timing of cash flows              (52,314)         (24,095)      (97,195)
                                 -----------------------------------------------------------------------------

                                 Discounted future net
                                     cash flows from
                                     proved reserves                  $ 46,648        $  21,734     $ 235,743
                                 -----------------------------------------------------------------------------
</TABLE>




                                                                            F-35
<PAGE>


                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 The  following  unaudited  table sets forth the
                                 changes   in  the   standardized   measure   of
                                 discounted future net cash  flows  from  proved
                                 reserves  during 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                  AMOUNTS IN THOUSANDS
                                                                  --------------------------------------------
                                                                             2002            2001        2000
                                 -----------------------------------------------------------------------------
<S>                                                                    <C>              <C>         <C>
                                 BALANCE, beginning of year            $   21,734       $ 235,743   $ 100,882
                                 Sales, net of production costs
                                   and taxes                               (2,343)         (3,705)     (2,627)
                                 Discoveries and extensions                 1,686           4,167       1,778
                                 Changes in prices and
                                   production costs                        20,586        (299,527)    360,082
                                 Revisions of quantity estimates            6,120         (33,449)   (186,289)
                                 Development costs incurred                                     -       1,236
                                 Interest factor - accretion
                                   of discount                              2,173          32,198      13,355
                                 Net change in income taxes                     -          86,237     (53,572)
                                 Changes in future development
                                   costs                                   (4,860)          2,666      (3,237)
                                 Changes in production rates
                                   and other                                1,552          (2,596)      4,135
                                 -----------------------------------------------------------------------------

                                 BALANCE, end of year                   $  46,648       $  21,734   $ 235,743
                                 -----------------------------------------------------------------------------
</TABLE>

                                 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, 2002,  2001
                                 and 2000 were  $27.25,  $17.03  and  $25.62 per
                                 barrel  of oil and  $4.01,  $2.33 and $9.66 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, 2002 reserve report.


                                                                            F-36
<PAGE>

                                                 TENGASCO, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



================================================================================

                                 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 carryforwards, for both regular
                                 and alternative minimum tax.

                                 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.











                                                                            F-37