<PAGE>

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

                             REPORT ON FORM 10-KSB/A

(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, 1997 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 small business issuer 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)

         Issuer's telephone number, including area code: (423) 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.

         Check 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 / /

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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-KSB
or any amendment to this Form 10-KSB. [ ]

         State issuer's revenues for its most recent fiscal year: $0

         State the aggregate market value of the voting stock held by
nonaffiliates (based on the closing price on April 6, 1998 of $9.38):
$33,809,141.

         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  
(April 6, 1998): 7,284,801

         Documents Incorporated By Reference: None.

         Transitional Small Business Disclosure Format (check one): 
                                                             Yes [  ]  No [ X ]

<PAGE>

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

                  The Company intends to continue its 48 well drilling program
on the Swan Creek leases. The existence of substantial deposits of hydrocarbons
(oil and/or gas) in the Swan Creek structure (i.e. the rock formation beneath
the surface) is confirmed by the following facts:

                  The Swan Creek structure is located in an area known as the
Eastern Overthrust Belt which is an area with numerous faults. A fault is an
area where geologic plates overlap. The porous rock within such areas generally
contains significant amounts of oil and/or gas. The Eastern Overthrust Belt is
geologically similar to the Western Overthrust Belt located in the Rocky
Mountains, where there are other oil and gas producing properties.

                  The Company has successfully completed seven wells in this
area, all of which have been flow tested by metering gas from the wells through
one-half inch orifice. These tests all verify the presence of a substantial
reservoir of natural gas and/or oil. One of these wells, the Reed #1 tested at
4,800,000 cubic feet of gas per day with a pressure of 800 psi. Another well,
the Sutton #1 tested at 1,200,000 cubic feet per day with a pressure of 150 psi.

                  The Company's plan of operations for the next twelve months
calls for the drilling of 24 additional wells on the Swan Creek leases at a cost
of approximately $250,000 per well (over a two to three year period
approximately 50 additional wells are to be drilled).

                  During the first quarter of 1998, the Company completed its
pipeline in Tennessee which will enable it to sell gas from the Swan Creek
leases sometime early in the second quarter of 1998. Additional costs of
approximately $804,000 were incurred in the first quarter of 1998 to complete
the pipeline.

                  The Company is currently drilling two of the additional wells
with funds advanced on a participation basis by a director and a third-party.
This arrangement provides for the participants to receive 25% of income.
Drilling is anticipated to be continued with additional funds provided on a
similar participating basis until income from well production is sufficient to
fund further drilling. To date, the Company has not drilled any dry wells. There
can be no assurance, of course, that all of the funding necessary for the
completion of the wells will become available.

                  Effective December 31, 1997, the Company acquired from AFG, a
private company, approximately 30,000 of acres of leases in the vicinity of
Hayes, Kansas (the "Kansas Properties"). Included in the acquisition which
closed on March 5, 1998 are 149 producing oil wells, 59 producing gas wells and
a related 50 mile pipeline

                                        1

<PAGE>

and gathering system. Historically, these oil and gas wells have produced
approximately $3.4 million in net annual revenues. However, the first quarter of
1998 net revenues have been lower than in the prior two years as a result of
lower oil and gas prices. The Company expects to increase current production by
reworking certain existing wells at a projected cost of $1.4 million. The
acquisition was for a total purchase price of approximately $5.5 million, which
consisted of $3 million in cash and seller financing of $2.5 million. Interest
on the debt is at 9% and is payable in 23 installments of $79,500 plus a final
payment of approximately $984,000 in February 2000. The Company's ability to
rework existing wells and/or drill additional wells is, however, dependent on it
obtaining additional debt or equity financing.

                  The Company's future plans include constructing two extensions
to its pipelines in Tennessee so as to enable it to exploit other leases which
are part of the Swan Creek leases. These extensions which will be approximately
40 miles in length will cost approximately $7.5 million. The Company's ability
to expand its operations in this manner is dependent upon the success of the
Company's drilling program. Moreover, no assurance can be given that the Company
will be able to obtain the required rights of way to construct any such
pipeline, and the pipeline currently under construction will only serve
production from a portion of the Swan Creek Field.

                  The Company does not presently have the funds needed to enable
it to complete the extensions to its pipeline.

Other Significant Plans

                  The Company also intends to actively pursue the gas marketing
business on the Eastern seaboard. The Eastern seaboard, and Tennessee in
particular, has numerous industrial end users of natural gas that are currently
exposed to a limited number of gas suppliers. In this regard, the Company also
anticipates income from the sale of gas pursuant to a marketing agreement with
Enserch Energy Services, Inc. ("Enserch"), a major marketer of natural gas,
pursuant to which the Company will receive 50% of the profits derived from the
sale of natural gas in Tennessee and other Southeastern States. Enserch is a
wholly owned subsidiary of Texas Utilities, Inc., a public company listed on the
New York Stock Exchange engaged in the production and sale of hydrocarbons. It
has a net worth of more than $2,000,000,000. To date, Enserch has not exploited
the market in Tennessee and Southeastern United States.

                  The Enserch agreement has a term of five years and will
terminate May 31, 2002 and thereafter, will continue from year to year unless
terminated.

                                        2

<PAGE>


                  Exploitation of the other leases held by the Company is being
placed on hold at the present time so that the Company can focus on the Swan
Creek Leases and the Kansas Properties as a result of their higher economic
attractiveness.

                  In addition to an active drilling program and the Kansas
Properties, the Company intends to continue strategically acquiring leases in
promising areas in the States of Kentucky and Tennessee. No assurance can be
given that the Company will be able to identify or acquire any such leases or
that if it does acquire any such leases, they will be profitable.

                  The Company has no plans, at present, to increase the number
of its employees significantly.

                  This plan of operation is based upon many variables and
estimates, all of which may change or prove to be other than or different from
information relied upon.

Results of Operations

                  During the year ended December 31, 1997, the Company had no
revenues of as compared with revenues of $26,253 for the year ended December 31,
1996. The Company has shut in the wells which produced the gas in 1996 and has
transferred some of the equipment to the Swan Creek leases in anticipation of
the completion of its pipeline.

                  Depletion, depreciation and amortization expense, which
remained constant, was $79,267 in 1997 and $76,520 in 1996.

                  A realized loss on sale of investments of $80,677 in 1997 was
incurred as a result of the Company trading in natural gas future and option
contracts during December 1997. The Company did not have any open positions in
any derivative contracts at December 31, 1997. Trading in derivatives during the
first quarter of 1998 has not resulted in any material realized or unrealized
gains or losses for the Company.

                  General and administrative expense increased by approximately
$267,000 in 1997 primarily as the result of additional personnel at the
Company's headquarters and the cost of travel and expense by management in an
effort to raise funds through debt and equity financing.

                  Interest expense also increased from $201,969 in 1996 to
$1,885,448 in 1997 as the result of: (1) amortization of $1,100,000 in loan fees
which were paid by the issuance of common stock and options; (2) amortization of
the imputed value of stock warrants issued in connection with notes payable (the
validity of these

                                        3

<PAGE>

warrants is being contested by the Company. See, "Part I" - "Item 3 - Legal
Proceedings"); (3) amortization of debt issuance costs relating to the pipeline
financing which occurred in the fourth quarter of 1996; (4) increased amounts of
debt financing during 1997; and, (5) amortization of costs to convert debt to
equity for a related party.

                  Public relations and legal and accounting expense increased by
approximately $563,000 in 1997 as a result of costs incurred to promote the
Company's common stock through several market makers, as well as significant
costs for legal and accounting services related to the filings of Forms 10-SB
and SB-2.

Liquidity

                  The Company expects to earn a profit in 1998 as a result of
its acquisition of the Kansas Properties and sales of natural gas to a local
public utility through its new pipeline which should commence in April or May of
1998 upon connection of seven existing natural gas wells to the pipeline.

                  During 1997, as in the prior year, revenues from operations
were insufficient to fund the Company's operations. The Company's primary source
of funds during this past year were from private placements of restricted common
stock of the Company in the amount of approximately $6,307,000, obtaining
short-term debt financing of approximately $1,000,000 from an individual, Neal
Harding, and loans in the aggregate amount of $463,000 from related parties.

                  The loan from Mr. Harding was used primarily for pipeline
construction. Repayment of the loan from Mr. Harding was guaranteed by IRC,
which also granted an option to Mr. Harding to purchase 300,000 shares of stock
of the Company it owned at a price of $10 per share. One-half of that loan was
repaid in January 1998 from existing cash revenues and Mr. Harding has agreed to
extend payment of the balance of the loan until June 30, 1998.

                  In 1997, IRC, Malcolm E. Ratliff and Tracmark, Inc., a
subsidiary of IRC, advanced loans to the Company in the aggregate amount of
$463,000. These loans, plus accrued interest, were satisfied by the issuance of
59,328 shares of the Company's common stock to IRC, 2,204 shares to Malcolm E.
Ratliff and 24,552 shares to Tracmark, Inc.

                  The Company is continuing to seek additional debt and or
equity funding in order to complete additional wells, rework existing wells and
extend its pipeline as described above.

                   An additional $3,000,000 in cash which was on hand at
December 31, 1997, was used as partial payment for the Kansas

                                        4

<PAGE>

Properties.

                  The Company has experienced losses totalling $4,370,570 and
$1,761,064 for the years ended December 31, 1997 and 1996, respectively, and has
a working capital deficit of $1,774,571 at December 31, 1997. (See, Report of
Independent Certified Public Accountants included elsewhere in this report.) In
addition, the Company completed its pipeline in Tennessee in the first quarter
of 1998 at an additional cost of approximately $804,000. Management's plans
include raising additional capital in order to pay for drilling additional oil
and gas wells. In addition, beginning in January 1998, management expects the
Company to incur positive cash flow from its acquisition of the Kansas
Properties and in May 1998 from the Swan Creek leases and the use of its
pipeline in Tennessee. It is anticipated that these revenues will be able to be
used to pay the costs of drilling additional oil and gas wells. This is,
however, a forward looking statement and is subject to many variables over which
the Company has no control such as the price of oil and gas, competition,
inflation, etc. Therefore, there can be no assurances that the revenues from the
Kansas Properties and Swan Creek leases will be sufficient to pay the costs of
drilling additional oil and gas wells.

New Accounting Pronouncements

                  Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" is effective for years beginning after December
15, 1997. This statement establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. This
pronouncement is not expected to have a material impact on the Company's
financial statements when adopted.

                  SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" is effective for years beginning after December 15, 1997.
This statements establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This pronouncement is not
expected to have a material impact on the Company's financial statements when
adopted.

Year 2000 Risks

                  As is the case with other companies using computers in their
operations, the Company is faced with the task of addressing the Year 2000 issue
during the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit codes to perform computations or
decision-making

                                        5

<PAGE>

functions. The Company has not yet performed a comprehensive review of its
computer programs to identify the systems that would be affected by the Year
2000 issue nor has it yet reviewed the Company's Year 2000 exposure to
customers, distributors, suppliers and banking institutions. Management is
presently unable to estimate the costs associated with modification or
replacement of systems affected by the Year 2000 issue, however, these costs
could be significant.

ITEM 7            FINANCIAL STATEMENTS

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

                                        6

<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.

                                TENGASCO, INC.
                                (Registrant)

                                By:s/Malcolm E. Ratliff
                                   --------------------------
                                     Malcolm E. Ratliff,
                                     Chief Executive Officer

                                Dated:  June 12, 1998

         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.

<TABLE>
<CAPTION>
Signature                                   Title                                       Date
<S>                                         <C>                                         <C>

s/Malcolm E.  Ratliff                       Chief Executive                             June 12, 1998
----------------------                      Officer
Malcolm E. Ratliff                          


s/Allen H. Sweeney                          Chairman of the Board                       June 12, 1998
-------------------                         of Directors
Allen H. Sweeney                           


s/Joseph Earl Armstrong                     Director                                    June 12, 1998
-----------------------
Joseph Earl Armstrong


s/James B. Kreamer                          Director                                    June 10, 1998
-----------------------
James B. Kreamer


s/William A. Moffett                        Director                                    June 10, 1998
-----------------------
William A. Moffett


s/Shigemi Morita                            Director                                    June 12, 1998
-----------------------
Shigemi Morita


<PAGE>

s/Robert M. Carter                          President                                   June 12, 1998
------------------                          Vice-President
Robert M. Carter                            


s/William F. Stenken                        Chief Accounting                            June 12, 1998
----------------------                      Officer
William F. Stenken                          


s/Sheila F. Sloan                           Treasurer                                   June 12, 1998
----------------------
Sheila F. Sloan


s/Elizabeth Wendelken                       Secretary                                   June 12, 1998
----------------------
Elizabeth Wendelken

<PAGE>





                                                     Tengasco, Inc.




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


                                            Consolidated Financial Statements
                                       Years Ended December 31, 1997 and 1996



<PAGE>


                                                          Tengasco, Inc.

                                                                Contents

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


 Report of Independent Certified Public Accountants                    2


 Consolidated Financial Statements

     Balance sheets                                                    3

     Statements of loss                                                4

     Statements of stockholders' equity                                5

     Statements of cash flows                                          6

     Notes to financial statements                                  7-29


                                     F-1

<PAGE>


Report of Independent Certified Public Accountants


Board of Directors
  Tengasco, Inc.
Knoxville, Tennessee

We have audited the accompanying consolidated balance sheets of Tengasco, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of loss, stockholders' equity and cash flows for the years then
ended. 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 generally accepted auditing
standards. 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.

As discussed in Note 16, the Company has restated its consolidated financial
statements at December 31, 1997 and for the year then ended to reflect changes
to amounts recorded for interest expense and additional paid-in capital relative
to common shares issued in a conversion of corporate debt. The effects of these
corrections are discussed in Note 16.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tengasco, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. In addition, as of December 31, 1997,
management estimates that additional costs of approximately $804,000 are
required to complete its pipeline facilities under construction. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                BDO Seidman, LLP


Atlanta, Georgia
March 12, 1998,
  except for Note 16
  which is as of June 8, 1998

                                     F-2

<PAGE>


</TABLE>
<TABLE>
<CAPTION>
December 31,                                                                                 1997                1996
-----------------------------------------------------------------------------------------------------------------------

<S>                                                                                  <C>                  <C>        
Assets (Note 8)

Current
   Cash and cash equivalents (including $25,000 restricted
     certificate of deposit in 1997) (Note 3)                                        $  4,451,274         $   146,554
   Accounts receivable                                                                          -               4,658
   Inventory (Note 3)                                                                     140,253                   -
   Prepaid expenses                                                                       270,939               7,463
-----------------------------------------------------------------------------------------------------------------------

Total current assets                                                                    4,862,466             158,675

Oil and gas properties, net (on the basis
   of full cost accounting) (Note 5)                                                    6,872,571           1,287,142

Pipeline facilities under construction, at cost (Note 6)                                2,596,967             887,315

Property and equipment, net (Notes 7 and 9)                                               302,146             203,244

Other                                                                                      10,661             190,845
-----------------------------------------------------------------------------------------------------------------------










                                                                                      $14,644,811          $2,727,221
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     F-3

<PAGE>

                                                               Tengasco, Inc.

                                                  Consolidated Balance Sheets


<TABLE>
<CAPTION>
December 31,                                                                                 1997                1996
-----------------------------------------------------------------------------------------------------------------------

<S>                                                                                    <C>           <C>             
Liabilities and Stockholders' Equity

Current
   Due to AFG Energy, Inc. (Note 3)                                                    $3,552,005          $        -
   Notes payable (Note 8)                                                               2,007,486             780,000
   Loans payable to affiliates (Note 4)                                                   252,398              48,190
   Current maturities of long-term debt (Note 9)                                           41,161              14,017
   Accounts payable - trade                                                               527,398             347,093
   Accrued liabilities                                                                    256,589              35,086
-----------------------------------------------------------------------------------------------------------------------

Total current liabilities                                                               6,637,037           1,224,386

Due to AFG Energy, Inc. (Note 3)                                                        1,865,078                   -

Long term debt, less current maturities (Note 9)                                          141,215              47,828
-----------------------------------------------------------------------------------------------------------------------

Total liabilities                                                                       8,643,330           1,272,214
-----------------------------------------------------------------------------------------------------------------------

Commitments and contingencies (Notes 6, 8 and 10)

Stockholders' equity (as restated (Note 16)) (Notes 8 and 10) Common stock,
   $.001 par value; 50,000,000 shares
     authorized                                                                             7,029               5,708
   Additional paid-in capital                                                          13,470,446           4,783,369
   Unamortized stock option awards                                                        (63,540)           (292,186)
   Accumulated deficit                                                                 (7,412,454)         (3,041,884)
-----------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                              6,001,481           1,455,007
-----------------------------------------------------------------------------------------------------------------------

                                                                                      $14,644,811          $2,727,221
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-4

<PAGE>
                                                              Tengasco, Inc.

                                             Consolidated Statements of Loss

<TABLE>
<CAPTION>

Years ended December 31,                                                                     1997                1996
                                                                                      As restated
                                                                                         (Note 16)
-----------------------------------------------------------------------------------------------------------------------

<S>                                                                             <C>                     <C>          
Oil and gas revenues                                                            $                -      $      26,253
-----------------------------------------------------------------------------------------------------------------------

Costs and expenses
   Production costs and taxes                                                               3,748              17,138
   Depletion, depreciation and amortization                                                79,267              76,520
   General and administrative costs                                                     1,535,841           1,268,771
   Interest expense                                                                     1,885,448             201,969
   Public relations                                                                       395,292              34,575
   Legal and accounting                                                                   390,297             188,344
   Realized loss on sale of investments                                                    80,677                   -
-----------------------------------------------------------------------------------------------------------------------

Total costs and expenses                                                                4,370,570           1,787,317
-----------------------------------------------------------------------------------------------------------------------

Net loss                                                                              $(4,370,570)        $(1,761,064)
-----------------------------------------------------------------------------------------------------------------------

Basic and diluted loss per common share                                                   $(0.71)              $(0.32)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

         See accompanying notes to consolidated financial statements.


                                     F-5

<PAGE>

                                                                Tengasco, Inc.

                               Consolidated Statements of Stockholders' Equity


<TABLE>
<CAPTION>

                                                                                              Unamortized
                                                                                Additional          stock
                                                       Common Stock                paid-in         option     Accumulated
                                                 -------------------------
                                                     Shares       Amount           capital         awards         deficit
------------------------------------------------ ------------ ------------ --- ------------- -------------- ---------------

<S>                                              <C>             <C>          <C>              <C>           <C>         
Balance, December 31, 1995                        5,229,300       $5,229       $ 2,425,185      $(130,208)    $(1,280,820)

   Common stock issued for exercised options        327,079          327            90,792              -               -

   Common stock issued for the
     extinguishment of debt                          65,569           66           638,823              -               -

   Common stock subscribed for the
     extinguishment of debt                          48,897           49           421,052              -               -

   Stock  option awards                                   -            -           225,000       (225,000)              -

   Amortization of stock option awards                    -            -            -    -         63,022               -

   Common stock options granted to
     non-employees                                        -            -           371,864              -               -

   Common stock issued in private
     placements                                      36,982           37           280,653              -               -

   Stock warrants issued in connection with
     notes payable                                        -            -           330,000              -               -
     
   Net loss for the year ended
     December 31, 1996                                    -            -                 -              -      (1,761,064)
---------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1996                        5,707,827        5,708         4,783,369       (292,186)     (3,041,884)

   Common stock issued for exercised options        345,414          345            94,645              -               -

   Common stock issued for the
     extinguishment of debt - As restated
     (Notes 4 and 16)                                86,084           86           677,829              -               -

   Stock  option awards and amortization, net             -            -          (175,069)       228,646               -

   Common stock options granted to
     non-employees                                        -            -           295,419              -               -

   Common stock issued in private
     placements                                     754,510          754         6,307,201              -               -

   Stock issued for loan origination fee 
     (Note 8)                                       100,000          100         1,024,900              -               -

   Stock issued for services                         36,000           36           462,152              -               -


   Net loss for the year ended
     December 31, 1997 - As restated (Note 16)            -            -                 -              -      (4,370,570)
---------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997 - As restated
    (Note 16)                                     7,029,835       $7,029       $13,470,446      $ (63,540)    $(7,412,454)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-6

<PAGE>

                                                               Tengasco, Inc.

                                        Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

Years ended December 31,                                                                     1997                1996
                                                                                      As restated
                                                                                         (Note 16)
-----------------------------------------------------------------------------------------------------------------------

<S>                                                                                   <C>                 <C>         
Operating activities
   Net loss                                                                           $(4,370,570)        $(1,761,064)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
       Depletion, depreciation and amortization                                            79,267              76,520
       Loss on disposal of property and equipment                                               -               3,671
       Compensation paid in stock options                                                 736,183             434,886
       Amortization of loan fees and inputed interest incurred
         from issuance of common stock and stock options                                1,293,694                   -
       Amortization of imputed value of stock warrants issued
         in connection with notes payable                                                 220,000             110,000
       Amortization of deferred loan costs                                                170,833              56,667
       Changes in assets and liabilities:
         Accounts receivable                                                                4,658               4,360
         Prepaid expenses and other assets                                                 (4,125)             (2,677)
         Accounts payable                                                                 180,305             300,171
         Accrued liabilities                                                              148,333              13,463
-----------------------------------------------------------------------------------------------------------------------

Net cash used in operating activities                                                  (1,541,422)           (764,003)
-----------------------------------------------------------------------------------------------------------------------

Investing activities
   Proceeds from sale of marketable equity securities                                           -             250,000
   Additions to property and equipment                                                   (178,169)            (60,754)
   Net additions to oil and gas properties                                               (545,429)           (744,951)
   Proceeds on sale of oil and gas interests                                              310,000             100,000
   Additions to pipeline facilities under construction                                 (1,709,652)           (887,315)
-----------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities                                                  (2,123,250)         (1,343,020)
-----------------------------------------------------------------------------------------------------------------------

Financing activities
   Payment of loan costs and other                                                              -            (238,798)
   Proceeds from borrowings                                                             1,617,924           2,156,581
   Repayments of borrowings                                                               (51,478)            (36,727)
   Proceeds from issuance of common stock                                               6,402,946             371,809
-----------------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                                               7,969,392           2,252,865
-----------------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                               4,304,720             145,842

Cash and cash equivalents, beginning of year                                              146,554                 712
-----------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of year                                                $ 4,451,274        $    146,554
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-7

<PAGE>


                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



1.   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

                                        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.

                                        During 1996, the Company formed Tengasco
                                        Pipeline Corporation, a wholly-owned
                                        subsidiary, to manage the construction
                                        and operation of a 23-mile gas pipeline
                                        as well as other pipelines planned for
                                        the future.

                                        Consolidation

                                        The consolidated financial statements
                                        include the accounts of the Company and
                                        Tengasco Pipeline Corporation. All
                                        significant intercompany balances and
                                        transactions have been eliminated.

                                        Cash and Cash Equivalents

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

                                     F-8

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


                                        Inventory

                                        Inventory consists primarily of crude
                                        oil in tanks and is carried at the lower
                                        of current market value or cost.

                                        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. 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. The costs of significant
                                        development projects awaiting completion
                                        of pipeline facilities are excluded from
                                        amortization until such time as the
                                        pipeline facilities are completed. The
                                        Company's proved gas reserves were
                                        estimated by Coburn Petroleum
                                        Engineering ("Coburn") and Columbia
                                        Engineering, independent petroleum
                                        engineers, as of December 31, 1997 and
                                        by Coburn as of December 31, 1996.

                                        The capitalized oil and gas property and
                                        pipeline costs, 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 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 

                                     F-9

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


                                        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.

                                        Pipeline Facilities Under Construction

                                        Pipeline facilities under construction
                                        are carried at cost. The Company will
                                        provide for depreciation of the pipeline
                                        facilities using the straight-line
                                        method over the estimated useful life of
                                        the asset once the pipeline is completed
                                        and placed in service. The pipeline
                                        facilities are expected to be completed
                                        during the first quarter of 1998.
                                        Accordingly, no depreciation expense has
                                        been recorded for 1997 and 1996 relating
                                        to the pipeline facilities.

                                        Property and Equipment

                                        Property and equipment are carried at
                                        cost. The Company provides for
                                        depreciation of property and equipment
                                        using the straight-line method over the
                                        estimated useful lives of the assets
                                        which range from five to seven years.

                                        Other Assets

                                        Other assets in 1996 consisted
                                        principally of deferred loan costs
                                        which were amortized over the
                                        respective loan terms.

                                        Income Taxes

                                        The Company accounts for income taxes
                                        in accordance with Statement of
                                        Financial Accounting Standards No. 109,
                                        "Accounting for Income Taxes" which
                                        requires the use of the "liability
                                        method." Accordingly, deferred tax
                                        liabilities and assets are determined
                                        based on the temporary differences
                                        between the financial statement and tax
                                        bases of assets and liabilities, using
                                        enacted tax rates in effect for the
                                        year in which the differences are
                                        expected to reverse.

                                        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 

                                     F-10

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


                                        insurance limit. At December 31, 1997,
                                        the Company had deposits with one
                                        financial institution in an amount
                                        which exceeds the federally insured
                                        limit by approximately $4 million. 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.

                                        Earnings Per Common Share

                                        In March 1997, the Financial Accounting
                                        Standards Board ("FASB") issued
                                        Statement of Financial Accounting
                                        Standards ("SFAS") No. 128, "Earnings
                                        Per Share." The new Standard simplifies
                                        the computation of earnings per share
                                        and requires presentation of two
                                        amounts, basic and diluted earnings per
                                        share for all periods presented.

                                        Basic earnings per share is computed by
                                        dividing income 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 is calculated in a manner
                                        consistent with that of basic loss per
                                        share while giving effect to all
                                        dilutive potential common shares that
                                        were outstanding during the period.
                                        Basic and diluted loss per share are
                                        based upon 6,189,293 shares for the year
                                        ended December 31, 1997 and 5,427,247
                                        shares for the year ended December 31,
                                        1996. There were 618,551 and 1,206,800
                                        potential weighted common shares
                                        outstanding during 1997 and 1996 related
                                        to common stock options and warrants.
                                        These shares were not included in the
                                        computation of the diluted per share
                                        amount because the Company was in a net
                                        loss position and, thus, any potential
                                        common shares were anti-dilutive.

                                        The weighted average number of shares
                                        outstanding for the year ended December
                                        31, 1996, as previously presented, has
                                        been restated to comply with the
                                        provisions of Securities Exchange
                                        Commission Staff Accounting Bulletin 98.

                                        Accounting Estimates

                                        The accompanying financial statements
                                        are prepared in conformity with
                                        generally accepted accounting principles
                                        which requires 

                                     F-11

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


                                        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.

                                        Fair Values of Financial Instruments

                                        Fair values of cash and cash equivalents
                                        and short-term debt approximate cost 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.

                                        Derivatives

                                        Beginning in December 1997, the Company
                                        began trading in derivative financial
                                        instruments for speculative purposes.
                                        Derivative financial instrument
                                        contracts entered into are comprised of
                                        natural gas future and option contracts.
                                        At December 31, 1997, there were no open
                                        positions in any derivative contracts.
                                        Net trading losses of $80,677 are
                                        included in the accompanying Statements
                                        of Loss for the year ended December 31,
                                        1997.

                                        Significant Risks and Uncertainties

                                        The Company's operations are subject to
                                        all of the environmental and operational
                                        risks normally associated with the oil
                                        and gas industry. The Company maintains
                                        insurance that is customary in the
                                        industry; however, there are certain
                                        risks for which the Company does not
                                        maintain full insurance coverage. The
                                        occurrence of a significant event that
                                        is not fully covered by insurance could
                                        have a significant adverse effect on the
                                        Company's financial position.

                                        New Accounting Pronouncements

                                        SFAS No. 130, "Reporting Comprehensive
                                        Income" is effective for years beginning
                                        after December 15, 1997. This statement
                                        establishes standards for reporting and
                                        display of comprehensive income, its
                                        components and accumulated balances.
                                        This pronouncement is not expected to
                                        have a material impact on the Company's
                                        financial statements when adopted.


                                     F-12

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


                                        SFAS No. 131, "Disclosures about
                                        Segments of an Enterprise and Related
                                        Information" is effective for years
                                        beginning after December 15, 1997. This
                                        statement establishes standards for the
                                        way that public business enterprises
                                        report information about operating
                                        segments in annual financial statements.
                                        It also establishes standards for
                                        related disclosures about products and
                                        services, geographic areas, and major
                                        customers. This pronouncement is not
                                        expected to have a material impact on
                                        the Company's financial statements when
                                        adopted.

                                        Reclassifications

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


2.   Going Concern                      The Company has experienced losses
                                        totalling $4,370,570 and $1,761,064 for
                                        the years ended December 31, 1997 and
                                        1996, respectively, and has a working
                                        capital deficit of $1,774,571 at
                                        December 31, 1997. These matters raise
                                        substantial doubt about the Company's
                                        ability to continue as a going concern.
                                        In addition, as of December 31, 1997,
                                        management estimates that additional
                                        costs of approximately $804,000 are
                                        required to complete its pipeline
                                        facilities under construction.
                                        Management's plans include raising
                                        additional capital in order to complete
                                        the pipeline facilities and drill
                                        additional oil and gas wells. In
                                        addition, beginning in January 1998,
                                        management expects the Company to incur
                                        positive cash flow from its acquisition
                                        of various oil and gas properties in
                                        the state of Kansas (see Note 3). The
                                        accompanying financial statements do
                                        not include any adjustments relating to
                                        the recoverability and classifications
                                        of recorded asset amounts or the
                                        amounts and classifications of
                                        liabilities that might be necessary
                                        should the Company be unable to
                                        continue as a going concern.

3.   Business 
     Aquisition                         On December 18, 1997, the Company
                                        entered into an asset purchase
                                        agreement in which certain producing
                                        oil and gas properties and inventory
                                        located in the state of Kansas ("the
                                        Kansas Properties") were acquired from
                                        AFG Energy, Inc. ("AFG"). The
                                        agreement, which was effective as of
                                        December 31, 1997, closed on March 5,
                                        1998, whereby the Company paid
                                        $2,990,253 in cash and entered into a
                                        note payable agreement with AFG in the
                                        amount of $2,500,000. The note will
                                        accrue interest at 9% per annum and is
                                        due in 23 monthly installments of
                                        principal and interest of $79,500 with
                                        a

                                     F-13

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


                                        balloon payment of $983,773 due in
                                        February, 2000. The acquisition has
                                        been accounted for as a purchase and,
                                        accordingly, the purchase price of
                                        $5,490,253 has been allocated to the
                                        assets acquired based on the estimated
                                        fair values at the date of acquisition
                                        as follows:

<TABLE>
<CAPTION>
                                                                                                               Amount
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                                               <C>        
                                        Inventory - oil in tanks                                          $   140,253
                                        -----------------------------------------------------------------------------

                                        Oil and gas properties
                                          Leasehold costs                                                   3,745,000
                                          Lease and well equipment                                          1,284,000
                                          Pipeline                                                            321,000
                                        -----------------------------------------------------------------------------

                                        Total oil and gas properties                                        5,350,000
                                        -----------------------------------------------------------------------------

                                                                                                           $5,490,253
                                        -----------------------------------------------------------------------------
</TABLE>

                                        At December 31, 1997, the purchase price
                                        of the Kansas Properties is included in
                                        the Company's consolidated balance
                                        sheet. The results of operations will be
                                        included in the consolidated financial
                                        statements beginning January 1, 1998.

                                        The unaudited pro forma results of
                                        operations presented below show the
                                        Company's operations for 1997 and 1996
                                        as though the acquisition had taken
                                        place at the beginning of each period
                                        presented. The pro forma results have
                                        been prepared for comparative purposes
                                        only, and are not necessarily indicative
                                        of what the actual results of operations
                                        would have been had the acquisition
                                        occurred at the beginning of each period
                                        presented, or what the results of
                                        operations of the Company will be in the
                                        future.

<TABLE>
<CAPTION>
                                        Year ended December 31,                             1997                 1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                           <C>                 <C>       
                                        Revenues                                      $3,430,329          $3,194,748
                                        Net loss                                      (3,893,208)         (1,274,607)
                                        Basic and diluted loss per
                                          common share                                    $(0.63)             $(0.23)
                                        -----------------------------------------------------------------------------

</TABLE>

                                     F-14

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



4.   Related Party 
     Transactions                       The Company has a loan payable to a
                                        major stockholder in the amount of
                                        $250,000. Additionally, the Company has
                                        a loan payable to an affiliate in the
                                        amount of $2,398. A major stockholder
                                        of the Company is also a major
                                        stockholder of the affiliate. The loans
                                        bear interest at the rate of 10% per
                                        annum and are due on demand.

                                        During 1997, the Company converted
                                        approximately $334,000 and $138,000 of
                                        debt payable to related parties IRC and
                                        Tracmark, respectively, to common stock.
                                        The Company also converted approximately
                                        $12,000 of debt payable to a major
                                        stockholder to common stock (see Note
                                        14).

                                        During 1996, the Company converted
                                        approximately $1,060,000 of debt payable
                                        to IRC to common stock and common stock
                                        subscribed (see Note 14). The Company
                                        also converted approximately $100,000 of
                                        debt payable to a major stockholder to
                                        common stock subscribed (see Note 14).


5.   Oil and Gas 
     Properties                         The following table sets forth
                                        information concerning the Company's
                                        oil and gas properties at December 31:

<TABLE>
<CAPTION>
                                                                                          1997                  1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                         <C>                   <C>       
                                        Evaluated                                   $6,823,246            $1,288,243
                                        Unevaluated                                     76,743                26,317
                                        -----------------------------------------------------------------------------
                                                                                     6,899,989             1,314,560

                                        Accumulation depreciation,
                                          depletion and amortization                   (27,418)              (27,418)
                                        -----------------------------------------------------------------------------

                                                                                     $6,872,571           $1,287,142
                                        -----------------------------------------------------------------------------
</TABLE>

                                        Evaluated costs excluded from
                                        amortization at December 31, 1997 and
                                        1996 consist of approximately $913,000
                                        and $730,000, respectively, of costs
                                        relating to the Company's Swan Creek
                                        development project which is awaiting
                                        the completion of a gas pipeline
                                        expected to be completed in the first
                                        quarter of 1998. In addition, evaluated
                                        costs at December 31, 1997 include
                                        approximately $5,350,000 of costs
                                        associated with the acquisition of the
                                        Kansas Properties (see Note 3).

                                     F-15

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



6.   Pipeline Facilities 
     Under Construction                 During the fourth quarter of 1996, the
                                        Company began construction of a 23-mile
                                        gas pipeline which will (1) connect the
                                        Swan Creek development project to a gas
                                        purchaser and (2) enable the Company to
                                        develop gas transmission business
                                        opportunities in the future.

                                        As of December 31, 1997, management
                                        estimates the costs to complete the
                                        pipeline are approximately $804,000.

                                        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 plus 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.


7.   Property and                       Property and equipment consisted of 
     Equipment                          the following:

<TABLE>
<CAPTION>
                                                                                             1997               1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                              <C>                <C>     
                                        Machinery and equipment                          $277,433           $245,756
                                        Vehicles                                          231,228             83,299
                                        Other                                              44,971             42,113
                                        -----------------------------------------------------------------------------

                                                                                          553,632            371,168

                                        Less accumulated depreciation                    (251,486)          (167,924)
                                        -----------------------------------------------------------------------------

                                        Property and equipment - net                     $302,146           $203,244
                                        -----------------------------------------------------------------------------
</TABLE>

                                     F-16

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


<TABLE>
<S>                                     <C>                                     
8. Notes Payable                        Notes payable consisted of the following:

<CAPTION>
                                                                                           1997                 1996
                                        -----------------------------------------------------------------------------
<S>                                     <C>                                          <C>            <C>             
                                        Note payable to an individual;
                                        approximately $500,000 due in each of
                                        January 1998 and July 1998 with interest
                                        payable quarterly at 11% per annum;
                                        collateralized by equipment owned by a
                                        major shareholder of the Company. An
                                        affiliate is serving as guarantor on the
                                        loan. The Company provided the lender
                                        with 100,000 shares of common stock as a
                                        loan origination fee. In conjunction
                                        with the loan agreement, the lender has
                                        an option to purchase 300,000 shares of
                                        the Company's common stock from IRC. In
                                        January 1998, the Company paid $500,000
                                        of principal on this note (A).               $1,007,486     $              -
                                        Note payable, in default, to an
                                        investment company due May 1997 with 
                                        interest payable monthly at 10% per
                                        annum; less unamortized discount of
                                        $123,750 at December 31, 1996, relating
                                        to stock warrants issued; collateralized
                                        by a subordinated security interest in
                                        all assets ofthe Company (B).                   500,000              376,250

                                        Note payable, in default, to an
                                        individual due April 1997 with interest
                                        payable monthly at 10% per annum; less
                                        unamortized discount of $48,125 at
                                        December 31, 1996, relating to stock
                                        warrants issued; collateralized  by all         
                                        assets of the Company (B), (C).                 250,000              201,875

                                        Note payable, in default, to a company
                                        due April 1997 with interest payable
                                        monthly at 10% per annum; less
                                        unamortized discount of $48,125 at
                                        December 31, 1996, relating to stock
                                        warrants issued; collateralized by all  
                                        assets of the Company (B).                      250,000              201,875
                                        -----------------------------------------------------------------------------

                                                                                     $2,007,486             $780,000
                                        -----------------------------------------------------------------------------

</TABLE>

                                     F-17

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



                                        (A) As of December 31, 1997, the Company
                                        was in violation of a covenant regarding
                                        this loan. As a result, the lender has
                                        the option to declare the remaining note
                                        payable balance immediately due and
                                        payable.

                                        In conjunction with the issuance of the
                                        notes payable denoted in (B) and (C)
                                        listed above, the Company granted the
                                        lenders detachable stock warrants which
                                        enable the holder to obtain up to
                                        200,000 shares of the Company's common
                                        stock at a price of $5 per share.

                                        (B) These notes had not been repaid as
                                        of the above noted due dates. As noted
                                        in (D) below, the Company has filed a
                                        claim against the lenders.

                                        (C) In March 1997, the individual note
                                        holder (above) filed a lawsuit asserting
                                        the Company was in default of the
                                        $250,000 note. This action seeks the
                                        principal amount, interest, and costs of
                                        collection. No additional costs have
                                        been accrued in the accompanying
                                        consolidated financial statements in
                                        connection with this lawsuit, as a range
                                        of such costs cannot be estimated.
                                        Management believes, however, it has
                                        certain defenses to this motion as noted
                                        in (D) below.

                                        (D) Also in March 1997, the Company
                                        filed a claim against the three lenders
                                        discussed in (B) and (C) above and a
                                        former officer of the Company asserting
                                        that the Company did not authorize the
                                        issuances of certain stock warrants
                                        related to the borrowings and seeking
                                        rescission of the warrant agreements.
                                        The Company is disputing the validity of
                                        the stock warrant agreements based upon
                                        certain provisions which were not
                                        authorized by the board of directors. If
                                        the Company is unsuccessful in its
                                        attempt to rescind these stock warrant
                                        agreements, these provisions could
                                        result in the lenders obtaining
                                        additional shares and a potential
                                        controlling interest, as the stock
                                        warrant agreements provide for the
                                        granting of increasing amounts of
                                        shares, at pro-rata reduced prices, in
                                        the event the market price of the
                                        Company's stock falls below $16 per
                                        share.

                                     F-18

<PAGE>

                                                             Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



<TABLE>
<S>                                     <C>                                      

9. Long Term Debt                       Long-term debt consisted of the following:
<CAPTION>
                                                                                           1997                1996
                                        -----------------------------------------------------------------------------
<S>                                     <C>                                           <C>               <C>         

                                        8.75% installment note, payable $861
                                        monthly, including interest, due
                                        September 2002, collateralized by a
                                        vehicle.                                      $  39,871         $          -

                                        10.5% installment note, payable $789
                                        monthly, including interest, due October
                                        2001, collateralized by a
                                        vehicle.                                         29,730                    -

                                        11% installment note, payable $667
                                        monthly, including interest, due
                                        December 2001, collateralized by a
                                        vehicle.                                         25,671               30,563

                                        10.0% installment note, payable $503
                                        monthly, including interest, due
                                        September 2002, collateralized by a
                                        vehicle.                                         22,759                    -

                                        9.75% installment note, payable $492
                                        monthly, including interest, due July
                                        2002, collateralized by a
                                        vehicle.                                         21,762                    -

                                        9.75% installment note, payable $480
                                        monthly, including interest, due May
                                        2002, collateralized by a vehicle.
                                                                                         20,601                    -

                                        10.7% installment note, payable $423
                                        monthly, including interest, due May
                                        2000, collateralized by a vehicle.
                                                                                         10,761               14,466

                                        12% installment note, payable $385
                                        monthly, including interest, due April
                                        2000, collateralized by a
                                        vehicle.                                          9,248               12,545
                                        -----------------------------------------------------------------------------

                                        Balance carried forward                         180,403               57,574
                                        -----------------------------------------------------------------------------
</TABLE>

                                     F-19

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>


                                                                                           1997                 1996
                                        -----------------------------------------------------------------------------
<S>                                     <C>                                           <C>               <C>         

                                        Balance brought forward                        $180,403               $57,574
                                        -----------------------------------------------------------------------------

                                        Other                                             1,973                4,271
                                        -----------------------------------------------------------------------------

                                        Total long term debt                            182,376               61,845
                                        Less current maturities                         (41,161)             (14,017)
                                        -----------------------------------------------------------------------------

                                        Long term debt, less current
                                          maturities                                   $141,215             $ 47,828
                                        -----------------------------------------------------------------------------
</TABLE>

                                        The approximate future maturities of
                                        debt were as follows:
<TABLE>
<CAPTION>

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

<S>                                              <C>                                                       <C>      
                                                 1998                                                      $  41,161
                                                 1999                                                         42,937
                                                 2000                                                         41,380
                                                 2001                                                         39,919
                                                 2002                                                         16,979
                                        -----------------------------------------------------------------------------

                                                                                                            $182,376
                                        -----------------------------------------------------------------------------
</TABLE>


10.    Commitments
       and Contingencies                As of December 31, 1997, the future
                                        minimum payments to be made under
                                        noncancellable operating leases were:

<TABLE>
<CAPTION>
                                                 Year                                                         Amount
                                        -----------------------------------------------------------------------------

<S>                                              <C>                                                         <C>    
                                                 1998                                                        $52,590
                                                 1999                                                         52,590
                                                 2000                                                         52,590
                                                 2001                                                          5,280
                                                 2002                                                          5,280
                                        -----------------------------------------------------------------------------

                                                                                                            $168,330
                                        -----------------------------------------------------------------------------

</TABLE>
                                        Rent expense was approximately $60,000
                                        and $54,000 for the years ended December
                                        31, 1997 and 1996, respectively.

                                     F-20

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements


                                        At December 31, 1997, the Company owed,
                                        but had not yet issued, certain
                                        individuals an aggregate amount of
                                        46,401 shares of Tengasco, Inc. common
                                        stock, valued at approximately $421,931,
                                        as payment for placement fees in
                                        connection with common stock private
                                        placements which occurred during the
                                        fourth quarter of 1997.

                                        As is the case with other companies
                                        using computers in their operations,
                                        the Company is faced with the task of
                                        addressing the Year 2000 issue during
                                        the next two years. The Year 2000 issue
                                        arises from the widespread use of
                                        computer programs that rely on
                                        two-digit date codes to perform
                                        computations or decision-making
                                        functions. The Company has not yet
                                        performed a comprehensive review of its
                                        computer programs to identify the
                                        systems that would be affected by the
                                        Year 2000 issue nor has it yet reviewed
                                        the Company's Year 2000 exposure to
                                        customers, distributors, suppliers and
                                        banking institutions. Management is
                                        presently unable to estimate the costs
                                        associated with modification or
                                        replacement of systems affected by the
                                        Year 2000 issue, however, these costs
                                        could be significant.


11.    Stock Options                    Changes that occurred in options
                                        outstanding in 1997 and 1996 are
                                        summarized below:

<TABLE>
<CAPTION>
                                                                         1997                         1996
                                                               -------------------------     ------------------------
                                                                                 Average                      Average
                                                                                Exercise                     Exercise
                                                                     Shares        Price          Shares        Price
                                        ------------------------------------------------------------------------------

<S>                                     <C>                      <C>              <C>         <C>             <C>   
                                        Outstanding,
                                          beginning
                                           of year               1,202,420        $3.295      1,791,849       $0.483
                                        Granted                    230,000         5.000        730,000        5.566
                                        Exercised                 (345,414)        0.275       (327,079)       0.275
                                        Expired/canceled          (627,006)        5.359       (992,350)       0.275
                                                                  --------                     --------

                                        Outstanding,
                                          end of year              460,000         5.314      1,202,420        3.295

                                        Exercisable,
                                          end of year              354,583         5.440        538,805        1.882
                                        ------------------------------------------------------------------------------

</TABLE>

                                     F-21

<PAGE>


                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements

                                        The following table summarizes
                                        information about stock options
                                        outstanding at December 31, 1997
<TABLE>
<CAPTION>

                                                                                                            Options
                                                             Options Outstanding                        Exercisable
                                                 ---------------------------------------------     -----------------
                                                                                    Average
                                                                                  Remaining
                                                 Exercise                       Contractual
                                                    Price           Shares             Life                  Shares
                                        ----------------------------------------------------------------------------

<S>                                     <C>        <C>             <C>         <C>                          <C>    
                                                   $5.000          355,000     0.48 years                   249,792
                                                    6.375          105,000     1.27 years                   104,791
                                                                   -------                                  -------

                                        Total                      460,000                                  354,583
                                        ----------------------------------------------------------------------------
</TABLE>

                                        The fair value of stock options used to
                                        compute compensation expense to
                                        non-employees is the estimated present
                                        value at grant date using the
                                        Black-Scholes option-pricing model with
                                        the following weighted average
                                        assumptions for 1997 and 1996: expected
                                        volatility of 54% for both years; a
                                        risk-free interest rate of 5.76% in 1997
                                        and 5.21% in 1996; and an expected
                                        option life of 1.25 years in 1997 and
                                        2.45 years in 1996. The amount of
                                        compensation expense included in general
                                        and administrative costs in the
                                        accompanying consolidated statements of
                                        loss was approximately $220,000 and
                                        $372,000 at December 31, 1997 and 1996,
                                        respectively.

                                        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:

                                     F-22

<PAGE>


                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>


                                                                                           1997                1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                         <C>                 <C>         
                                        Net loss
                                            As reported                             $(4,370,570)        $(1,761,064)
                                            Pro forma                                (4,507,821)         (1,932,628)
                                        -----------------------------------------------------------------------------

                                        Basic and diluted loss per share
                                            As reported                                  $(0.71)             $(0.32)
                                            Pro forma                                     (0.73)              (0.36)
                                        -----------------------------------------------------------------------------
</TABLE>

                                        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 1997
                                        and 1996: Expected volatility of 54% for
                                        both years; a risk free interest rate of
                                        5.76% in 1997 and 5.52% in 1996; and an
                                        expected option life of 1.25 years in
                                        1997 and 2.72 years in 1996.


12.    Income Taxes                     The Company had no taxable income
                                        during the years ended December 31,
                                        1997 and 1996.

                                        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>
                                        Year ended December 31,                            1997               1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                         <C>                  <C>       
                                        Statutory rate                                     34%                  34%
                                        Tax (benefit) at statutory rate             $(1,486,000)         $(599,000)
                                        State income tax (benefit)                     (248,000)           (99,000)
                                        Nondeductible interest expense                  126,000                  -
                                        Other                                            (9,000)             3,000
                                        Increase in deferred tax asset
                                          valuation allowance                         1,617,000            695,000
                                        -----------------------------------------------------------------------------

                                        Total income tax provision             $              -    $             -
                                        -----------------------------------------------------------------------------

</TABLE>
                                         
                                     F-23

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



                                        The components of the net deferred tax
                                        assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                        Year ended December 31,                              1997              1996
                                        -----------------------------------------------------------------------------
<S>                                     <C>                                            <C>             <C>         
                                          Net operating loss carryforward              $2,381,000      $    798,000
                                          Capital loss carryforward                       270,000           238,000
                                          Accrued expenses                                323,000           223,000
                                        -----------------------------------------------------------------------------

                                                                                        2,974,000         1,259,000

                                        Valuation allowance                            (2,794,000)       (1,177,000)
                                        -----------------------------------------------------------------------------

                                                                                          180,000            82,000
                                        -----------------------------------------------------------------------------

                                        Deferred tax liability:
                                          Oil and gas properties                          155,000            81,000
                                          Property and equipment                           25,000             1,000
                                        -----------------------------------------------------------------------------

                                                                                          180,000            82,000
                                        -----------------------------------------------------------------------------

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

                                        The Company recorded a valuation
                                        allowance at December 31, 1997 and 1996
                                        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.

                                        As of December 31, 1997, the Company had
                                        net operating loss carryforwards for
                                        federal income tax purposes of
                                        approximately $5,954,000 which will
                                        expire, if not utilized, as follows:

<TABLE>
<CAPTION>
                                                 Year                                                        Amount
                                        -----------------------------------------------------------------------------

<S>                                              <C>                                                    <C>        
                                                 2010                                                   $   546,000
                                                 2011                                                     1,378,000
                                                 2012                                                     4,030,000
                                        -----------------------------------------------------------------------------

                                                 Total                                                   $5,954,000
                                        -----------------------------------------------------------------------------

</TABLE>

                                     F-24

<PAGE>


                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



                                        Additionally, at December 31, 1997, the
                                        Company had capital loss carryforwards
                                        of approximately $675,000 which will
                                        expire, if not offset against capital
                                        gains, as follows: 2001-$594,000,
                                        2002-$81,000.


13. Subsequent Events                   In the first quarter of fiscal 1998, the
                                        Company authorized the granting of up to
                                        10,000 shares of common stock to the
                                        spouse of a deceased officer of the
                                        Company as a death benefit.

                                        In the first quarter of fiscal 1998, the
                                        Company granted options to purchase
                                        26,167 shares of the Company's common
                                        stock to a director of the Company at a
                                        per share price of $5.00.


14.  Supplemental 
     Disclosure 
     of Cash Flows                      The Company paid approximately $282,000
                                        and $26,000 for interest in 1997 and
                                        1996, respectively. The Company paid $0
                                        for income taxes in 1997 and 1996.

                                        In 1997, the Company issued 86,084
                                        shares of common stock to extinguish
                                        approximately $484,000 of debt. Loan
                                        fees of approximately $194,000 were
                                        incurred in connection with this
                                        issuance of common stock.

                                        The assets acquired and liabilities
                                        incurred in connection with the purchase
                                        of the Kansas Properties have not been
                                        reflected in the accompanying 1997
                                        Statement of Cash Flows as the
                                        transaction, which was effective on
                                        December 31, 1997, did not close until
                                        March 1998 (see Note 3).

                                        In 1996, the Company transferred
                                        property and equipment with a net book
                                        value of $46,539 to lenders in exchange
                                        for debt reductions aggregating $42,865
                                        resulting in a loss of $3,674.

                                        In 1996, the Company issued 114,466
                                        shares of common stock and common stock
                                        subscribed to extinguish approximately
                                        $1,060,000 of debt, which approximated
                                        fair value of the shares.


                                     F-25

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements




15.  Supplemental Oil and
     Gas Information                    Information with respect to the
                                        Company's oil and gas producing
                                        activities is presented in the
                                        following tables. Estimates of reserve
                                        quantities, as well as future
                                        production and discounted cash flows
                                        before income taxes, were determined by
                                        Coburn Petroleum Engineering ("Coburn")
                                        and by Columbia Engineering,
                                        independent petroleum engineers, as of
                                        December 31, 1997 and by Coburn as of
                                        December 31, 1996.

                                        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, 1997 and
                                        1996:

<TABLE>
<CAPTION>
                                                                                             1997              1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                            <C>               <C>       
                                        Property acquisition
                                          Proved                                       $5,406,080        $   78,991
                                          Unproved                                         50,424            25,274
                                        Less - proceeds from sales of
                                          properties                                     (310,000)         (100,000)  )
                                        Development costs                                 438,924           673,022
                                        -----------------------------------------------------------------------------

                                                                                       $5,585,428         $ 677,287
                                        -----------------------------------------------------------------------------
</TABLE>

                                        Results of Operations from Oil and Gas
                                        Producing Activities

                                        The following table sets forth the
                                        Company's results of operations from oil
                                        and gas producing activities for the
                                        years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                              1997             1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                           <C>                <C>       
                                        Revenues                                      $          -       $   26,253
                                        Production costs and taxes                          (3,748)         (17,138)
                                        Depreciation, depletion and
                                            amortization                                   (44,673)         (52,145)
                                        -----------------------------------------------------------------------------

                                        Results of operations before income
                                            taxes                                          (48,421)         (43,030)
                                        Income taxes                                             -                -
                                        -----------------------------------------------------------------------------
</TABLE>
  
                                     F-26

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements

<TABLE>
<S>                                     <C>                                           <C>                <C>       
                                        Results of operations from oil
                                            and gas producing activities                  $(48,421)      $  (43,030)
                                        -----------------------------------------------------------------------------
</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.
                                        For the year ended December 31, 1996,
                                        the depreciation, depletion and
                                        amortization rate per barrel of oil
                                        equivalent production was $20.16. The
                                        Company had no production of oil or gas
                                        during 1997.

                                        Oil and Gas Reserves (unaudited)

                                        The following table sets forth the
                                        Company's net proved oil and gas
                                        reserves at December 31, 1997 and 1996
                                        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.
<TABLE>
<CAPTION>

                                                                                       Oil (bbls)          Gas (Mcf)
                                        -----------------------------------------------------------------------------
<S>                                     <C>                                             <C>               <C>      
                                        Proved reserves
                                          Balance, January 1, 1996                        101,565          5,336,392
                                             Acquisition of proved reserves                     -         17,212,571
                                             Revisions of previous estimates                    -             33,902
                                             Production                                         -            (15,510)
                                        -----------------------------------------------------------------------------

                                          Balance, December 31, 1996                      101,565         22,567,355
                                             Discoveries and extensions                   198,065             75,476
                                             Acquisition of proved reserves             1,884,448          2,654,250
                                             Revisions of previous estimates            (101,565)         (4,679,460)
                                             Production                                         -                  -
                                        -----------------------------------------------------------------------------

                                          Balance, December 31, 1997                    2,082,513         20,617,621
                                        -----------------------------------------------------------------------------

                                        Proved developed producing
                                          reserves at, December 31, 1997                1,277,707          1,384,980
                                        -----------------------------------------------------------------------------
  
</TABLE>  

                                     F-27

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements
<TABLE>
<S>                                     <C>                                             <C>               <C>      
                                        Proved developed producing reserves
                                        at, December 31, 1996                                   -                  -
                                        -----------------------------------------------------------------------------
</TABLE>

                                     F-28


<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements



                                        Of the Company's total proved reserves
                                        as of December 31, 1997, approximately
                                        27% were classified as proved developed
                                        producing, 34% were classified as proved
                                        developed non-producing and 39% were
                                        classified as proved undeveloped. All of
                                        the Company's reserves are located in
                                        the continental United States.

                                        Standardized Measure of Discounted
                                        Future Net Cash Flows (unaudited)

                                        The standardized measure of discounted
                                        future net cash flows from the Company's
                                        proved oil and gas reserves at December
                                        31, 1997 and 1996 is presented in the
                                        following table:

<TABLE>
<CAPTION>
                                                                                              1997             1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                            <C>              <C>        
                                        Future cash inflows                            $87,493,504      $84,106,507
                                        Future production costs and taxes              (21,813,667)      (6,219,598)
                                        Future development costs                        (2,873,550)      (5,775,000)
                                        Future income tax expenses                     (12,918,485)     (18,909,520)
                                        -----------------------------------------------------------------------------

                                        Net future cash flows                           49,887,802       53,202,389

                                        Discount at 10% for timing of cash flows       (17,864,113)     (22,823,876)
                                        -----------------------------------------------------------------------------

                                        Discounted future net cash flows from
                                        proved reserves                                $32,023,689      $30,378,513
                                        -----------------------------------------------------------------------------
</TABLE>

                                        The following table sets forth the
                                        changes in the standardized measure of
                                        discounted future net cash flows from
                                        proved reserves during 1997 and 1996:


                                     F-29

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>

                                                                                             1997              1996
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                          <C>              <C>         
                                        Balance, beginning of year                    $30,378,513      $  3,663,462
                                        -----------------------------------------------------------------------------

                                        Sales, net of production costs
                                            and taxes                                       3,748            (9,115)
                                        Acquisition of proved reserves                 10,351,389        33,874,577
                                        Discoveries and extensions                      1,984,106                 -
                                        Changes in prices and
                                            production costs                          (13,640,812)        2,374,267
                                        Revisions of quantity estimates                (8,576,161)           42,164
                                        Changes in development costs                    3,882,741                 -
                                        Net change in income taxes                      3,454,082        (9,975,394)
                                        Interest factor - accretion of discount         4,134,810           465,765
                                        Changes in production rates
                                            and other                                      51,273           (57,213)
                                        -----------------------------------------------------------------------------

                                        Balance, end of year                          $32,023,689       $30,378,513
                                        -----------------------------------------------------------------------------

</TABLE>
                                        The acquisition of proved reserves in
                                        1997 relates to the Kansas Properties
                                        and the acquisition of proved reserves
                                        in 1996 relates to the Swan Creek
                                        development project.

                                        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, 1997 and 1996 were $16.53
                                        and $19.10 per barrel of oil and $2.57
                                        and $2.94 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.

                                        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. 

                                     F-30

<PAGE>

                                                            Tengasco, Inc.

                                 Notes to Consolidated Financial Statements

                                        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.


16. Restatement of 1997 
    Financial Statements                The Company has restated the 1997
                                        financial statements to reflect changes
                                        to amounts recorded for interest
                                        expense and additional paid-in capital
                                        relative to the issuance of 86,084
                                        shares of common stock to extinguish
                                        approximately $484,000 of debt. The
                                        value assigned to shares issued was
                                        consistent with the value received in
                                        the private placement of shares with
                                        third parties (see Note 4).

                                        With respect to the 1997 financial
                                        statements, the restatement resulted in
                                        the recording of additional interest
                                        expense of $193,694 which increased the
                                        net loss by $193,694 ($0.04 basic and
                                        diluted loss per common share). The
                                        restatement has no effect on total
                                        stockholders' equity or on net cash used
                                        in operating activities.

                                        These matters are summarized in the
                                        table below:
<TABLE>
<CAPTION>

                                        Year ended December 31, 1997
                                        -----------------------------------------------------------------------------

<S>                                     <C>                                                              <C>         
                                        Net loss as originally stated:                                   $(4,176,876)
                                            Adjustment:                                                     (193,694)
                                        -----------------------------------------------------------------------------

                                        Net loss as restated:                                            $(4,370,570)
                                        -----------------------------------------------------------------------------

                                        Basic and diluted loss per common share:
                                        Net loss per share as originally stated:                             $(0.67)
                                            Adjustment:                                                       (0.04)
                                        -----------------------------------------------------------------------------

                                        Net loss per share, as restated                                      $(0.71)
                                        -----------------------------------------------------------------------------

</TABLE>
  

                                     F-31