# U.S. Securities and
Exchange CommissionWashington, D.C. 20549

# 

# Form 10-Q

# QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OFTHE SECURITIES
EXCHANGE ACT OF 1934

# 

# For the Quarterly
period ended September 30, 2005

# Commission File No.
0-20975

Tengasco, Inc.(Exact name of
registrant as specified in its charter)



|Tennessee                                                   |  | 87-0267438                       
|----------------------------------------------------------- |  | ---------------------------------
|                                                            |  |                                  
|State or other jurisdiction ofIncorporation or organization |  | (IRS Employer Identification No.)

# 10215 Technology Drive
N.W. Suite 301Knoxville, TN 37932 (Address of principal
executive offices)

# 



# (865-675-1554)(Issuers
telephone number, including area code)



Indicate by check mark whether the
issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YesX  No__

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).  Yes_  NoX

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes_ NoX

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date: 58,499,448 common shares at September 30, 2005.

---



# TENGASCO, INC.

TABLE OF CONTENTS

|PART I.  | FINANCIAL INFORMATION                                                                                                                     | PAGE 
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------- | -----
|         | ITEM 1.  FINANCIAL STATEMENTS*     Condensed Consolidated Balance Sheets as of  September 30, 2005 and
                 December 31, 2004 | 3-4  
|         | *     Consolidated Statements of Operations for the three and nine monthsended September 30, 2005 and 2004                                | 5    
|         | *     Consolidated Statements of Stockholders' Equity for the nine months
                 ended September 30, 2005 and 2004              | 6    
|         | *     Consolidated Statements of Cash Flows for the nine months ended
                 September 30, 2005 and 2004                        | 7    
|         | *     Notes to Condensed  Consolidated Financial Statements                                                                               | 8-16 
|         | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS                            | 16-21
|         | ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                                                        | 21-22
|         | ITEM 4.  CONTROLS AND PROCEDURES                                                                                                          | 22-23
|PART II. | OTHER INFORMATION                                                                                                                         |      
|         | ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                       | 23   
|         | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                               | 23-24
|         | ITEM 5. OTHER INFORMATION                                                                                                                 | 24-25
|         | ITEM 6. EXHIBITS                                                                                                                          | 26   
|         | *      SIGNATURES                                                                                                                         | 26   
|         | *      EXHIBITS                                                                                                                           | 27-30
|         |                                                                                                                                           |      
|         |                                                                                                                                           |      
|         |                                                                                                                                           |      

2

---



# TENGASCO, INC.

# CONDENSED CONSOLIDATED
BALANCE SHEETS

# ASSETS



# 



|                                         | September 30, 2005(Unaudited) | December 31,2004
|---------------------------------------- | ----------------------------- | ----------------
|Assets                                   |                               |                 
|Current                                  |                               |                 
|Cash and cash equivalents                |                               |                 
|Accounts receivable                      |                               |                 
|Participant receivables                  |                               |                 
|Inventory                                |                               |                 
|Other current assets                     |                               |                 
|                                         |                              
|Total current assets                     |                               |                 
|Oil and gas properties,net (on the basis |                               |                 
|of full cost accounting)                 |                               |                 
|Pipeline facilities, net                 |                               |                 
|Other property and equipment, net        |                               |                 
|                                         |                              
|                                         |                               |                 
|                                         |                              

See accompanying
notes to condensed consolidated financial statements

3

---



# TENGASCO, INC.

# CONDENSED CONSOLIDATED
BALANCE SHEETS

# LIABILITIES AND
STOCKHOLDERS EQUITY



|                                                              | September 30, 2005(Unaudited) | December 31,2004
|------------------------------------------------------------- | ----------------------------- | ----------------
|Current liabilities                                           |                               |                 
|Current maturities of long-term debt                          |                               |                 
|Accounts payable                                              |                               |                 
|Accrued interest payable                                      |                               |                 
|Other accrued liabilities                                     |                               |                 
|Notes payable to related parties (Note 5)                     |                               |                 
|Drilling program (Note 6)                                     |                               |                 
|Current shares subject to mandatory redemption (Note 6)       |                               |                 
|                                                              |                              
|Total current liabilities                                     |                               |                 
|Shares subject to mandatory redemption (Note 6)               |                               |                 
|Drilling program (Note 6)                                     |                               |                 
|Asset retirement obligations (Note 7)                         |                               |                 
|Long term debt, less current maturities                       |                               |                 
|                                                              |                              
|Total liabilities                                             |                               |                 
|                                                              |                              
|Stockholders' equity                                          |                               |                 
|Common stock, $.001 par value; authorized 100,000,000 shares; |                               |                 
|58,499,448 and 48,927,828 shares issued and outstanding       |                               |                 
|Additional paid-in capital                                    |                               |                 
|Accumulated deficit                                           |                               |                 
|                                                              |                              
|Total stockholders' equity                                    |                               |                 
|                                                              |                              
|                                                              |                               |                 
|                                                              |                              

See accompanying
notes to condensed consolidated financial statements

4

---



# TENGASCO, INC.

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS

# (Unaudited)







|                                          | For the Three Months EndedSeptember 30, | For the Nine Months EndedSeptember 30,
|----------------------------------------- | --------------------------------------- | --------------------------------------
|
|Revenues and other income                 |                                         |                                       
|Oil and gas revenues                      |                                         |                                       
|Pipeline transportation  revenues         |                                         |                                       
|Interest income                           |                                         |                                       
|                                          |                                         |                                       
|Total revenues and other income           |                                         |                                       
|Cost and other deductions                 |                                         |                                       
|Production costs and taxes                |                                         |                                       
|Depletion, depreciation and amortization  |                                         |                                       
|Interest expense                          |                                         |                                       
|General and administrative cost           |                                         |                                       
|Public Relations                          |                                         |                                       
|Professional fees                         |                                         |                                       
|                                          |                                         |                                       
|Total cost and other deductions           |                                         |                                       
|Loss on sale of equipment                 |                                         |                                       
|Gain from extinguishment of debt          |                                         |                                       
|                                          |                                         |                                       
|Net income/ loss attributable to common   |                                         |                                       
|shareholders                              |                                         |                                       
|                                          |                                         |                                       
|Net income/ loss attributable to common   |                                         |                                       
|shareholders per share basic and diluted: |                                         |                                       
|Operations                                |                                         |                                       
|                                          |                                         |                                       
|Total                                     |                                         |                                       
|                                          |                                         |                                       
|Weighted average shares outstanding       |                                         |                                       
|                                          |                                         |                                       

See accompanying
notes to condensed consolidated financial statements

5

---



# TENGASCO, INC.

# CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

# (Unaudited)







|                        | Common Stock |  |  |           
|----------------------- | ------------ |  |  | ----------
|
|Balance at December 31, |              |  |  |           
|2004                    |              |  |  | 48,927,828
|Net Income              |              |  |  | -         
|Options                 |              |  |  | -         
|Lawsuit Settlement      |              |  |  | 4,000     
|Conversion of Preferred |              |  |  |           
|Stock                   |              |  |  | 9,567,620 
|                        |             
|Balance September 30,   |              |  |  |           
|2005 (Unaudited)        |              |  |  | 58,499,448
|                        |             
|                        |              |  |  |           

See accompanying notes
to condensed consolidated financial statements

6

---





# TENGASCO, INC.

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS



|                                                           | For the Nine
Months EndedSeptember 30, 2005(unaudited) | For the Nine
Months Ended
September 30, 2004(unaudited)
|---------------------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------
|
|Operating activities                                       |                                                        |                                                        
|Net income/ loss                                           |                                                        |                                                        
|Adjustments to reconcile net loss to net cash              |                                                        |                                                        
|used in operating activities:                              |                                                        |                                                        
|Depreciation, depletion and amortization                   |                                                        |                                                        
|Accretion of redeemable shares                             |                                                        |                                                        
|Accretion on Asset Retirement Obligation                   |                                                        |                                                        
|Gain on extinguishment of Asset Retirement Obligation      |                                                        |                                                        
|Loan fee amortization                                      |                                                        |                                                        
|Gain on exchange of redeemable liabilities                 |                                                        |                                                        
|Amortization of stock options & warrants                   |                                                        |                                                        
|Loss on sale of vehicles/equipment                         |                                                        |                                                        
|Gain on sale of pipeline facilities                        |                                                        |                                                        
|Changes in assets and liabilities:                         |                                                        |                                                        
|Accounts receivable                                        |                                                        |                                                        
|Participant receivables                                    |                                                        |                                                        
|Other current assets                                       |                                                        |                                                        
|Inventory                                                  |                                                        |                                                        
|Other assets                                               |                                                        |                                                        
|Investments                                                |                                                        |                                                        
|Accounts payable                                           |                                                        |                                                        
|Accrued interest payable                                   |                                                        |                                                        
|Other accrued liabilities                                  |                                                        |                                                        
|Settlement on Asset Retirement Obligations                 |                                                        |                                                        
|                                                           |                                                       
|Net cash provided by (used in) operating activities        |                                                        |                                                        
|                                                           |                                                       
|Investing activities                                       |                                                        |                                                        
|Increase/decrease to other property & equipment            |                                                        |                                                        
|Net additions to oil and gas properties                    |                                                        |                                                        
|Sale of Kansas gas field (See Note 8)                      |                                                        |                                                        
|Increase/decrease in pipeline facilities                   |                                                        |                                                        
|                                                           |                                                       
|Net cash provided by (used in) investing activities        |                                                        |                                                        
|                                                           |                                                       
|Financing activities                                       |                                                        |                                                        
|Exchange of redeemable liabilities                         |                                                        |                                                        
|Proceeds from exercise of options                          |                                                        |                                                        
|Proceeds from borrowings                                   |                                                        |                                                        
|Repayments of borrowings                                   |                                                        |                                                        
|Decrease in Drilling Program liability                     |                                                        |                                                        
|Dividends paid on redeemable liabilities                   |                                                        |                                                        
|Exchange of redeemable liabilities for cash & common stock |                                                        |                                                        
|Net proceeds from rights offering                          |                                                        |                                                        
|                                                           |                                                       
|Net cash (used in) provided by financing activities        |                                                        |                                                        
|                                                           |                                                       
|Net change in cash and cash equivalents                    |                                                        |                                                        
|Cash and cash equivalents, beginning of period             |                                                        |                                                        
|                                                           |                                                       
|Cash and cash equivalents, end of period                   |                                                        |                                                        
|                                                           |                                                       

See accompanying
notes to condensed consolidated financial statements

7

---



# Tengasco, Inc.

# Notes to Condensed
Consolidated Financial Statements

# (Unaudited)

(1) 
Basis of Presentation

| | The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended September 30,
2005 are not necessarily indicative of the results that may be expected for the year ended
December 31, 2005. Additionally, deferred income taxes and income tax expense is not
reflected in the Companys financial statements due to the fact that the Company has
had recurring losses and deferred tax assets arising from net operating gross
carry-forwards have been fully reserved. Certain prior year amounts have been reclassified
to conform with current year presentation. For further information, refer to the
Companys consolidated financial statements and footnotes thereto for the year ended
December 31, 2004 included in the Companys annual report on Form 10-K.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (2)  Going Concern

| | The
accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern and assume realization of
assets and the satisfaction of liabilities in the normal course of business. The Company
has incurred continuous losses through operations and has an accumulated deficit of
$33,274,634 and a working capital deficit of $1,871,450 as of September 30, 2005. During
2002, the Company was informed by its primary lender (Bank One) that the entire amount of
its outstanding credit facility was immediately due and payable, as provided for in the
Credit Agreement. The Company disputed its obligation to make this payment and has
resolved the dispute by settlement of the debt in May 2004. As a result, the Company
continues to pursue other long-term financing. The Company also had significant redemption
amounts due to be satisfied in 2005 related to its Cumulative Convertible Series B
Preferred Shares (see Note 6). These circumstances raised substantial doubt about the
Companys ability to continue as a going concern. These items have now been resolved
by the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 4, 2005, the Company sold its gas producing properties in Rush County, Kansas for
$2.4 million and used the net proceeds of the sale to pay down the $2.5 million debt to
Dolphin Offshore Partners, L.P. (Dolphin), incurred by the Company to fund the
settlement of the litigation with Bank One in May, 2004. This had the effect of reducing
the payment of high interest on this note, and reducing the total secured debt owed by the
Company to $700,000 as of March 4, 2005, consisting of $150,000 remaining principal of the
$2.5 million note, and the principal of a $550,000
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---



| | note
evidenced by the loan from Dolphin to the Company used for the cash exchange to holders of
the Companys Series A 8% Cumulative Convertible Preferred Stock (Series A
Shares). See Note 5 to the financial statement. Dolphin is the Companys
largest shareholder. Peter E. Salas, the Chairman of the Companys Board of Directors
is the sole shareholder and controlling person of Dolphin Management Inc., the general
partner of Dolphin.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 22, 2005 all holders of the Companys Series B and C Cumulative Convertible
Preferred Stock (the Series B and Series C shares) having a total aggregate
value of $5,113,045 consisting of face value, dividends, and interest exchanged all
rights under their Series B and C shares for cash or for the Companys common stock.
As a result of the exchange, as of August 22, 2005 the Company no longer has any holders
of Series B or C preferred stock and no further obligations under any Series B and C
shares.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Holders
of approximately 54.3% of the face value of outstanding Series B and C shares exchanged
their preferred shares having an aggregate value of $2,721,140 for cash payments
totaling $1,814,184. The Company obtained the funds for this exchange primarily from
proceeds of a loan of $1,814,000 from Dolphin. The loan from Dolphin was evidenced by a
promissory note dated August 22, 2005 secured by a lien on the Companys assets and
bearing 12% interest per annum payable interest only monthly until the principal amount of
the note becomes due on December 31, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
the end of the period covered by this Report, on October 5, 2005, Hoactzin Partners, L.P.
(Hoactzin) surrendered to the Company the two outstanding promissory notes
dated December 30, 2004 and August 22, 2005 made by the Company to Dolphin in the
aggregate principal amount of $2,514,000. In exchange for the surrender of these notes,
the Company entered into an agreement granting Hoactzin a 94.3% working interest in a
twelve-well drilling program to be undertaken by the Company on its properties in Kansas.
The Company will retain the remaining 5.7% working interest in the drilling program. Peter
E. Salas, is the controlling person of Hoactzin. This transaction is not reflected in the
financial statements as of September 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the exchange and retirement of these two outstanding notes to Dolphin, the
Company no longer has any material debt other than approximately $170,000 in
purchase-money financing for equipment. In addition, the total face value of the
Companys outstanding preferred stock is now $200,000. The Companys assets in
Tennessee and Kansas are also now free of liens as of the date of filing of this Report.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the foregoing, management believes the Company is now better positioned to
establish a banking relationship with an institutional lender on acceptable terms to fund
the Companys activities. Although the Company is hopeful that as a result of the
substantial reduction of its debt position that it will soon be able to establish such a
relationship, there is no assurance it will be able to do so.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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| | Managements
plans also include the continuation of its drilling efforts. The Company plans to drill
wells in new locations it has identified in Kansas on its existing leases in response to
drilling activity in the area establishing new areas of oil production. In September 2004,
the Company drilled and completed the Lewis No. 3 well in Kansas using only funds from the
proceeds of the Companys ongoing operations. By using the Companys own funds,
it was not necessary to permit any third party to either participate in financing of
drilling or to acquire any interest in the well. The Company receives all proceeds of
production attributable to the working interest in the Lewis No. 3 well. The Company has
also drilled eight wells in the first nine months of 2005 as part of a drilling program in
Kansas. See Part II, Item 5. All of these wells were drilled using operating cash flow.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (3)  Earnings per Share

| | In
accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
Per Share (SFAS 128), basic and diluted income/loss per share are based
on 51,374,620 and 48,506,977 weighted average shares outstanding for the quarters ended
September 30, 2005 and September 30, 2004 respectively, and 49,750,556 and 38,283,371 for
the nine months ended September 30, 2005 and September 30, 2004 respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the disclosure provisions of the Statement of Financial Accounting
Standards (SFAS or statement) No.148, Accounting for Stock-Based
Compensation-Transition and Disclosure (SFAS 148), which amends SFAS No.
123 Accounting for Stock-Based Compensation, (SFAS 123). SFAS 148
provides alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation, which was originally provided
under SFAS 123. The Statement also improves the timeliness of disclosures by requiring the
information be included in interim, as well as annual, financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company issued 740,000 shares of stock options on September 9, 2005 to officers and
directors. The Company calculated the fair value per share of options granted using the
Black Scholes pricing model. Compensation expense relating to stock options in the amount
of $56,020 was recognized in the third quarter of 2005. The Company used a expected
volatility of 60%, a risk free interest rate of 3.67%; and an expected option life of
2-1/2 years to calculate the compensation expense amount.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (4)  Recent Accounting Pronouncements

| | In
March 2004, The Emerging Issues Task Force (EITF) reached a consensus that
mineral rights, as defined in EITF Issue No. 04-02, Whether Mineral Rights are
Tangible or Intangible Assets,(EITF 04-02) are tangible assets and that
they should be
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---



| | removed
as examples of intangible assets in SFAS Nos. 141 and 142. The Financial Accounting
Standards Board (FASB) has recently ratified this consensus and directed the
FASB staff to amend SFAS Nos. 141 and 142 through the issuance of FASB Staff Positions FSP
FAS 141-1 and FSP FAS 142-1. Historically, the Company has included the cost of such
mineral rights as tangible assets, which is consistent with the EITFs consensus. As
such, EITF 04-02 will not affect the Companys consolidated condensed financial
statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment.
This statement revised SFAS No. 123, Accounting for Stock-Based
Compensation, and superseded APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. SFAS No. 123(R)
requires companies to recognize on the income statement the grant-date fair value of stock
options and other equity-based compensation issued to employees. The SEC recently adopted
a new rule that defers the effective date of SFAS No. 123(R) and allows companies to
implement the provisions of the Statement at the beginning of their next fiscal year. As a
result, the Company currently expects to adopt SFAS No. 123(R) as of
January 1, 2006, using the modified prospective transition method. Under the
modified prospective method, awards that are granted, modified or settled after
January 1, 2006 will be measured in accordance with SFAS No. 123(R).
Unvested equity-classified awards that were granted prior to January 1, 2006
will be accounted for in accordance with SFAS No. 123, except that the amounts will
be recognized on the Companys consolidated statements of operations. The Company is
currently evaluating the impact of SFAS No. 123(R) and expects that it will recognize
additional compensation expense during first quarter 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (5)  Related Party Transactions

| | From
December 2002 through December 9, 2003, Dolphin Offshore Partners, L.P.
(Dolphin) acquired a total of an 85% undivided interest in the Companys
Tennessee and Kansas pipelines as collateral for a series of seven loans totaling
$2,125,000. On December 24, 2003, Dolphin loaned the Company the sum of $1,000,000 which
was used for working capital and to pay all interest and principal in full of convertible
loans to the Company then being held by several persons. On February 2, 2004, Dolphin
loaned the Company the sum of $225,000 which was used for making payment of principal and
interest to the Companys former lender, Bank One. All of the aforementioned notes to
Dolphin were repaid in full on March 30, 2004 from the proceeds received by the Company
from its Rights Offering. Mr. Peter E. Salas, the Chairman of the Board of the Directors
of the Company is the sole shareholder and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---



controlling
person of Dolphin Management Inc., the general partner of Dolphin.

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

| | On
December 30, 2004, Dolphin loaned the Company $550,000 bearing interest at 12% per annum
with interest payable monthly and principal payable on May 20, 2005, which loan was
secured by lien on the Companys Tennessee and Kansas properties and the Tennessee
pipeline. On March 4, 2005, Dolphin was paid $2,350,000 from the proceeds received from
the sale of the Companys Kansas gas field to reduce the principal of the promissory
note dated May 18, 2004 in the original amount of $2,500,000, to $150,000 (See Note 8).
The balance owed on the two outstanding notes to Dolphin at March 31, 2005 was $700,000.
On May 19, 2005 these notes were replaced with a new note to Dolphin for $700,000 payable
on August 20, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 18, 2005 the Board of Directors adopted a resolution authorizing the extension of
promissory note dated May 19, 2005 made by the Company to Dolphin, the principal balance
of which was $700,000. By an amended and restated note dated August 18, 2005, the due date
of the note was extended on the same terms as the existing note from August 20, 2005 to
December 31, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Thereafter,
the Company borrowed the sum of $1,814,000 from Dolphin to fund an exchange of cash for
Series B & C Preferred Stock. (See note 6 to the financial statements). The loan from
Dolphin was evidenced by a promissory note secured by a lien on the Companys assets
and bearing 12% interest per annum payable interest only monthly until the principal
amount of the note becomes due on December 31, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (6)  Cumulative
Convertible Preferred Stock and Drilling Program

| | The
Company issued three classes of convertible preferred stock (Series A, Series B and Series
C). The Company was required to redeem one-twentieth of the maximum number of Series A
Preferred Stock outstanding commencing on October 1, 2003 and at each quarterly date
thereafter. The Company was required to redeem all outstanding Series B Preferred Stock on
the fifth anniversary of the issuance of those shares which was September 5, 2005. The
Company was required to redeem any remaining Series C Preferred Stock together with any
accrued and unpaid dividends in May 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the provisions of SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Debt (SFAS 150)
on July 1, 2003. Under SFAS 150, mandatorily redeemable preferred stock is reclassified at
fair value to a liability. The Company determined that each of the Series A, Series B and
Series C preferred stock qualify as shares subject to mandatory redemption, and as such,
were reclassified as liabilities upon adoption of SFAS 150. Accordingly, the difference
between the carrying amount at the date of adoption and the fair value of the shares
(discounted at rates between 12% and 12.5%) was recognized as a cumulative effect of a
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---



| | change
in accounting principle of $365,675 effective July 1, 2003. The difference between the
carrying amount of shares subject to mandatory redemption and the face value amount of
preferred stock is being accreted at rates between 12% and 12.5% into interest expense and
the liability until conversion or redemption of the shares. The Company had dividends in
arrears as of December 31, 2004 of $649,692 and $8,000 as of September 30, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December, 2004, the Company completed an exchange offer to the thirteen holders of the
Companys Series A 8% Cumulative Convertible Preferred Stock in the amount of
$2,867,900. Seven of the thirteen Series A holders elected the cash exchange option, and
Series A shares having a face value of $1,085,000 were exchanged on or before December 31,
2004 for cash payments of $723,370. A gain was recorded on this transaction in the amount
of $458,310, the difference between the carrying amount and the cash settlement amount.
The Company obtained funds for the exchange from cash on hand and the proceeds of a loan
from Dolphin.  The loan from Dolphin was evidenced by a note dated December 30, 2004
in principal amount of $550,000 bearing 12% interest per annum payable interest only until
due on May 20, 2005 and secured by a lien on the Companys Tennessee and Kansas
assets. This note was replaced by a new note extending the due date to August 20,
2005.  Five of the thirteen Series A holders elected to participate in a drilling
program in exchange for their Series A Shares, and on December 31, 2004 the amount of
$1,582,900 of Series A Shares plus accrued dividends of $31,658 were exchanged for
approximately 6.5 Units in an eight-well drilling program in Kansas (the Drilling
Program).  A liability was recorded for the Drilling Program in the amount of
$1,755,603 and Shares subject to mandatory redemption was reduced by the same
amount.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Drilling Program liability recorded represents the estimated fair value of the liability
calculated upon adoption of SFAS 150 less accretion, from such date to the date of the
exchange. The remaining 1.5 units in the Drilling Program continue to be owned by the
Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | During
the first nine months of 2005 the Company completed six wells of the eight well Drilling
Program. The Company reduced the Drilling Program liability by $1,316,702 and offset oil
and gas properties by the corresponding amount. This represents 75% of the Drilling
Program liability on December 31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 22, 2005 all holders of the Companys Series B and C Cumulative Convertible
Preferred Stock (the Series B and Series C shares) having a total aggregate
value of $5,113,045 consisting of face value, dividends, and interest have exchanged
all rights under their Series B and C shares for cash or for the Companys common
stock. As a result of the exchange, as of August 22, 2005 the Company no longer has any
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---



holders
of Series B or C preferred stock and no further obligations under any Series B and C
shares.

| | Holders
of approximately 54.3% of the face value of outstanding Series B and C shares exchanged
their preferred shares having an aggregate value of $2,721,140 for cash payments
totaling $1,814,184. The Company obtained the funds for this exchange primarily from
proceeds of a loan of $1,814,000 from Dolphin. The loan from Dolphin was evidenced by a
promissory note dated August 22, 2005 secured by a lien on the Companys assets and
bearing 12% interest per annum payable interest only monthly until the principal amount of
the note becomes due on December 31, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
second option offered to the Series B and C holders was to exchange their Series B and C
shares for four shares of the Companys common stock for each dollar of the face
value and unpaid accrued dividends and interest on their Series B and C shares. All of the
holders, including Dolphin, of the remaining aggregate value of $2,391,905 or 45.7% of the
Series B and C shares selected this option. As a result, a total of 9,567,620 shares of
the Companys common stock were issued to those holders. Of this total number,
4,595,040 shares of unregistered common stock was issued to Dolphin in exchange for the
$1,148,760 in aggregate value of the Series B shares held by Dolphin
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded a gain from the exchange of Series B and C shares for cash and stock of
$577,422, the difference between the carrying amount and the cash settlement amount and
the stock issued.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (7)  Asset Retirement
Obligation

| | In
accordance with SFAS 143, the Company has recorded a liability and corresponding increase
in long-lived assets for the present value of material obligations associated with the
retirement of tangible long-lived assets. Over the passage of time, accretion of the
liability is recognized as an operating expense and the capitalized cost is depleted over
the estimated useful life of the related asset. The Companys asset retirement
obligations relate primarily to the plugging, dismantling and removal of wells drilled to
date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
determined that the following assumptions in estimating the initial recording of the
Companys Asset Retirement Obligation were appropriate: using a credit-adjusted risk
fee rate of 12%; an estimated useful life of wells ranging from 30-40 years; and,
estimated plugging and abandonment cost ranging from $5,000 per well to $10,000 per well.
Management continues to periodically evaluate the appropriateness of these assumptions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the first nine months of 2005 and 2004, the Company recorded accretion expenses of $39,007
and $55,026 associated with this liability. These expenses are included in interest
expense in the Consolidated Statements of Operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 4, 2005 the Company sold its Kansas gas wells, and consequently the asset and the
corresponding liability relating to asset retirement obligations on these wells was
extinguished. The asset account was credited for $60,998 and the liability was removed in
the amount of $133,397, creating a gain on the extinguishment of future obligations in the
amount of $72,399, which was credited to interest expense.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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# (8) Sale of Gas Wells

| | On
March 4, 2005 the Company sold its Kansas gas wells, leases and the associated gathering
system in place in Rush County, Kansas to Bear Petroleum, Inc. for $2.4 million. The
Companys gas producing properties in Kansas were physically separated from the oil
properties, and were all located in Rush County, Kansas consisting of 51 producing gas
wells and associated gathering system. All proceeds of this sale, being the sales price
less a sales commission of $50,000, were immediately paid to Dolphin Offshore Partners,
L.P. to reduce the principal of the promissory note to Dolphin in the amount of $2.5
million to $150,000. (See note 5 to the financial statements) The Company recorded a
credit to oil and gas properties of $2,350,000, the sale price net of commission.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (9)  Rights Offering

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

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

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

| | As
provided in the Rights Offering, 7,029,604 rights were exercised pursuant to the basic
subscription privilege, resulting in the purchase of 21,088,812 shares at $0.25 per share
for gross proceeds to the Company of $5,272,203 resulting from the basic subscription
privilege. A total of 15,211,118 rights were exercised pursuant to the oversubscription
privilege, resulting in additional gross proceeds to the Company of $3,802,797. Of the
shares purchased pursuant to the Rights Offering 14,966,344 shares were purchased by
directors, officers and owners of 10% of the Companys outstanding common stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the time the Rights Offering closed on March 18, 2004 all 36.3 million shares offered had
been subscribed and, as a result, the Company raised approximately $9.1 million. The total
number of shares subscribed actually exceeded the 36.3 million shares available for
issuance under the offering. Consequently, all shares subscribed for under
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---



| | the
basic privilege were issued and the number of shares issued under the over-subscription
privilege was proportionately reduced to equal the number of remaining shares. The
allocation and issuance of the oversubscribed shares was made by Mellon Investor Services,
the Companys subscription agent who also returned payments for those over-subscribed
shares that were not available.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
net proceeds of the Rights Offering were used to pay non-bank indebtedness in the
aggregate amount of approximately $6 million (including up to $3,850,000 in principal
amount plus accrued interest owed by the Company to Dolphin) and to pay $1,157,000 as a
portion of the Companys settlement with Bank One.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance of the net proceeds was used for working capital purposes, including the
drilling of additional wells. Costs incurred in connection with the Rights Offering were
$223,003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM
2       MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                            AND RESULTS OF OPERATIONS

# Results
of Operations and Financial Condition

# Kansas

| | During
the first nine months of 2005, the Company produced and sold 93,886 barrels of oil and
20,729 Mcf of natural gas from its Kansas Properties comprised of 131 producing oil wells
and 51 producing gas wells. The gas production was only for the month of January as the
gas field was sold on March 4, 2005 with the buyers production being retroactive to
February 1, 2005. (See Liquidity and Capital Resources). The first nine months
production of 93,886 barrels of oil compares to 86,399 barrels produced in the first nine
months of 2004. In summary, the nine months production reflected increase in both work
over activity and drilling. Kansas gross oil production for the first nine months of 2005
was 348 barrels per day as compared to 322 barrels per day in the first nine months of
2004. This increase has been a result of the Companys drilling activity in Kansas as
discussed in Part II Item 5 of this report. The oil revenues from the Kansas Properties
were $3,587,042 in the first nine months of 2005 compared to $2,459,725 in 2004. This
increase was mainly due to the higher prices for oil.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Tennessee

| | During
the first nine months of 2005, the Company produced gas from 23 wells in the Swan Creek
field, which it sold in Kingsport, Tennessee to Eastman Chemical Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Natural
gas production from the Swan Creek field for the first nine months of 2005 was an average
of 495 Mcf per day during that period as compared to 625 Mcf per day in the first nine
months of 2004. The first nine months production reflected expected natural decline in
production from the existing Swan Creek gas wells which were first brought into production
in mid-2001 upon completion of the Companys pipeline. For the first nine months of
2005 the Swan Creek field produced 8,015 barrels of oil as compared to 10,499 in 2004.
This natural decline is normal for any producing oil and gas well, and this decline as
experienced on existing wells in Swan Creek was not unexpected.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---



Comparison
of the Nine Months Ended September 30, 2005 and 2004.

| | The
Company recognized $4,851,227 in oil and gas revenues from its Kansas Properties and the
Swan Creek Field during the first nine months of 2005 compared to $4,249,378 in the first
nine months of 2004. The increase in revenues was due to an increase in oil prices in
2005. The revenue increase due to oil price increases were offset by a decrease in
revenues from Kansas gas production reflecting only one month of production due to the
sale of the gas field in Kansas effective February 1, 2005. Kansas gas sales in 2005 were
$72,471 (one month) as compared to $625,698 (nine months) in 2004. Oil prices in the first
nine months of 2005 averaged $52.56 per barrel as compared to $37.09 per barrel in the
first nine months of 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company realized a net income attributable to common shareholders of $110,890 ($0.00) per
share of common stock, including a gain from the extinguishment of debt of $577,422 during the first nine months of 2005 compared to a net loss in the
first nine months of 2004 to common shareholders of $2,233,752 ($0.06) per share of common
stock,including a net gain of $229,076 on debt extinguishment and equipment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Production
costs and taxes in the first nine months of 2005 of $2,229,188 decreased from $2,403,782
in the first nine months of 2004. The difference is due to managements
cost-controlling efforts and the sale of the Kansas gas field.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation,
depletion, and amortization expense for the first nine months of 2005 was $1,431,029
compared to $1,665,106 in the first nine months of 2004. This is due to a reduction in
depletion and depreciation taken because of the sale of the Kansas gas field and equipment
becoming fully depreciated in late 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the first nine months of 2005, general and administrative costs increased from $897,001 in
2004 to $1,019,719 in 2005. This is a result of $45,000 in filing fees paid to the
American Stock Exchange and $56,020 compensation expense related to stock options.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fees, in the first nine months of 2005 were $248,611 compared to $658,415 in the same
period in 2004. These fees have substantially decreased as a result of the settlement of
the Bank One and Paul Miller lawsuits in 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
expense for the first nine months of 2005 decreased from the first nine months of 2004 to
$458,903 from $1,127,578. The substantial decrease is the result of the payoff of the Bank
One loan and the Dolphin notes and the conversion of Series A preferred shares subject to
mandatory redemption into a drilling program or cash payoff in 2004. Additionally the
Company recorded a gain of $72,399 in the first quarter of 2005 relating to the
extinguishment of asset retirement obligation on the wells that were sold in Kansas that
was offset to interest expense.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded a gain from the exchange of Series B and C Cumulative Preferred Stock for
cash and stock of $577,422, the difference between the carrying
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---



amount,
and the cash settlement and stock issued.

| | The
Company recorded a gain from extinguishment of debt in the amount of $336,820 in the
second quarter of 2004, which was the difference between the carrying amount of the Bank
One loan less the settlement amount.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comparison
of the Quarters Ended September 30, 2005 and 2004.

| | The
Company recognized $1,853,885 in oil and gas revenues from its Kansas Properties and the
Swan Creek Field during the third quarter of 2005 compared to $1,536,739 in the third
quarter of 2004. The increase in revenues was due to an increase in oil prices in 2005.
The revenue increase due to oil price increases were not offset by third quarter Kansas
gas production in 2005 as a result of the sale in March 2005 of the Companys Kansas
gas properties. Kansas gas sales were $220,200 in 2004. Kansas oil prices in the third
quarter of 2005 averaged $59.50 per barrel as compared to $41.83 per barrel in the third
quarter of 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company realized a net income attributable to common shareholders of $661,781 ($0.01) per
share of common stock,including a gain from the extinguishment of debt of $577,422 during the third quarter of 2005 compared to a net loss in the
third quarter of 2004 to common shareholders of $(735,819) ($0.02) per share of common
stock including a loss on equipment of $(107,744).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Production
costs and taxes in the third quarter of 2005 of $747,705 decreased from $864,350 in the
third quarter of 2004. The difference is due to cost controlling efforts and the sale of
the Kansas gas field.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation,
depletion, and amortization expense for the third quarter of 2005 was $473,875 compared to
$528,642 in the third quarter of 2004. This is due to a reduction in depletion and
depreciation taken as a result of the sale of the Kansas gas field and equipment becoming
fully depreciated in late 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the third quarter of 2005, general and administrative costs increased above 2004 levels,
due to $45,000 in filing fees paid to the American Stock Exchange and $56,020 compensation
expense related to stock options.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fees, in the second quarter of 2005 were $54,263 compared to $127,137 in the same period
in 2004. These fees have substantially decreased as a result of the settlement of the Bank
One and Paul Miller lawsuits in 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
expense for the third quarter of 2005 decreased from the third quarter of 2004 to $105,913
from $311,655. The substantial decrease is the result of the payoff of the Bank One loan
and the Dolphin notes and the conversion of Series A Preferred shares subject to mandatory
redemption into a drilling program or cash payoff in 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded a gain from the exchange of Series B and C Cumulative Preferred Stock for
cash and stock of $577,422, the difference between the carrying
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---



amount
and the cash settlement amount and the stock issued.

Liquidity
and Capital Resources

| | On
November 8, 2001, the Company signed a credit facility agreement with the Energy Finance
Division of Bank One, N.A. in Houston, Texas. The Company instituted litigation in May
2002 based on certain actions taken by Bank One. On May 13, 2004, the Company resolved its
dispute with Bank One.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 4, 2005, the Company sold its gas producing properties in Rush County, Kansas for
$2.4 million and used the net proceeds of the sale to pay down the $2.5 million debt to
Dolphin Offshore Partners, L.P. (Dolphin) incurred by the Company to fund the
settlement of the litigation with Bank One in May, 2004. This had the effect of reducing
the payment of high interest on this note, and reducing the total secured debt owed by the
Company to Dolphin to $700,000 as of March 4, 2005, consisting of about $150,000 remaining
principal of the $2.5 million note, and the principal of a $550,000 note evidenced by a
loan from Dolphin to the Company which was used to fund the cash exchange to holders of
the Companys Series A 8% Cumulative Convertible Preferred Stock (Series A
Shares). (See Note 6 to the financial statements.) Dolphin is the Companys
largest shareholder. Peter E. Salas, the Chairman of the Companys Board of Directors
is the sole shareholder and controlling person of Dolphin Management Inc. the general
partner of Dolphin.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 22, 2005, all holders of the Companys Series B and C Cumulative Convertible
Preferred Stock (the Series B and Series C shares) having a total aggregate
value of $5,113,045 consisting of face value, dividends, and interest exchanged all
rights under their Series B and C shares for cash or for the Companys common stock.
As a result of the exchange, as of August 22, 2005 the Company no longer has any holders
of Series B or C preferred stock and no further obligations under any Series B and C
shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Holders
of approximately 54.3% of the face value of outstanding Series B and C shares exchanged
preferred shares having an aggregate value of $2,721,140 for cash payments totaling
$1,814,184. The Company obtained the funds for this exchange primarily from proceeds of
a loan of $1,814,000 from Dolphin. The loan from Dolphin was evidenced by a promissory
note dated August 22, 2005 secured by a lien on the Companys assets and bearing 12%
interest per annum payable interest only monthly until the principal amount of the note
becomes due on December 31, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
second option offered to the Series B and C holders was to exchange their Series B and C
shares for four shares of the Companys common stock for each dollar of the face
value and unpaid accrued dividends and interest on their Series B and C shares. All of the
holders, including Dolphin, of the remaining aggregate value of $2,391,905 or 45.7% of the
Series B and C shares selected this option. As a result, a total of 9,567,620 shares of
the Companys common stock was issued to those holders. Of this total number,
4,595,040 shares of unregistered common stock was issued to Dolphin in exchange for the
$1,148,760 in aggregate value of the Series B shares held by Dolphin.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
the end of the period covered by this Report, on October 5, 2005, Hoactzin Partners, L.P.
(Hoactzin) surrendered to the Company the two outstanding promissory notes
made by the Company to Dolphin in the aggregate principal amount of $ 2,514,000 as
described above. In exchange for the surrender of these two notes, the Company
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---



| | entered
into an agreement granting Hoactzin a 94.3% working interest in a twelve-well drilling
program to be undertaken by the Company on its properties in Kansas. The Company will
retain the remaining 5.7% working interest in the drilling program. Peter E. Salas is the
controlling person of Hoactzin.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the exchange and retirement of these two outstanding Dolphin notes, the
Company no longer has any material debt other than approximately $170,000 in
purchase-money financing for equipment. In addition, the total face value of the
Companys outstanding preferred stock is now $200,000. The Companys assets in
Tennessee and Kansas are also now free of liens as of the date of filing of this report.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
believes the Company is now better positioned to establish a banking relationship with an
institutional lender on acceptable terms to fund the Companys activities. Although
the Company is hopeful that as a result of the substantial reduction of its debt position
that it will soon be able to establish such a relationship, there is no assurance it will
be able to do so.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Critical Accounting
Policies

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

# Revenue Recognition

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

# Full Cost Method of
Accounting

| | The
Company follows the full cost method of accounting for oil and gas property acquisition,
exploration and development activities. Under this method, all productive and
non-productive costs incurred in connection with the acquisition of, exploration for, and
development of oil and gas reserves for each cost center are capitalized. Capitalized
costs include lease acquisitions, geological and geophysical work, daily rentals and the
costs of drilling, completing and equipping oil and gas wells. Costs, however, associated
with production and general corporate activities are expensed in the period incurred.
Interest costs related to unproved properties and properties under development are also
capitalized to oil and gas properties. Gains or losses are recognized only upon sales or
dispositions of significant amounts of oil and gas reserves representing
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---



| | an
entire cost center. Proceeds from all other sales or dispositions are treated as
reductions to capitalized costs. The capitalized oil and gas property, less accumulated
depreciation, depletion and amortization and related deferred income taxes, if any, are
generally limited to an amount (the ceiling limitation) equal to the sum of: (a) the
present value of estimated future net revenues computed by applying current prices in
effect as of the balance sheet date (with consideration of price changes only to the
extent provided by contractual arrangements) to estimated future production of proved oil
and gas reserves, less estimated future expenditures (based on current costs) to be
incurred in developing and producing the reserves using a discount factor of 10% and
assuming continuation of existing economic conditions; and (b) the cost of investments in
unevaluated properties excluded from the costs being amortized. No ceiling write-downs
were recorded in 2005 or 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
capitalized costs of oil and gas properties, plus estimated future development costs
relating to proved reserves and estimated costs of plugging and abandonment, net of
estimated salvage value, are amortized on the unit-of-production method based on total
proved reserves. The costs of unproved properties are excluded from amortization until the
properties are evaluated, subject to an annual assessment of whether impairment has
occurred. The Company owns no unproved properties as of this Report.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

ITEM
3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Commodity
Risk

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

21

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Interest
Rate Risk

| | At
September 30, 2005, the Company had debt outstanding of approximately $2,514,000 at a
fixed rate. The Company subsequently converted these notes into a drilling program on
October 5, 2005. The Company did not have any open derivative contracts relating to
interest rates at September 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Forward-Looking
Statements and Risk

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

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

ITEM
4 CONTROLS AND PROCEDURES

Controls
and Procedures

| | The
Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act, is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms and that such information is
accumulated and communicated to our management, including the Companys President and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. As of the end of the period
covered by this Report, and under the supervision and with the participation of the
management, including its President and Chief Financial Officer, management evaluated the
effectiveness of the design and operation of these disclosure controls and procedures.
Based on this evaluation and subject to the foregoing, the Companys President and
Chief Financial Officer concluded that the Companys disclosure controls.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

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| | and
procedures were effective in reaching a reasonable level of assurance of achieving
managements desired controls and procedures objectives.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

Changes
in Internal Controls

| | During
the period covered by this Report, there have not been any changes in the Companys
internal controls that have materially affected or are reasonably likely to materially
affect, the Companys internal controls over financial reporting.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of a continuing effort to improve the Companys business processes management is
evaluating its internal controls and may update certain controls to accommodate any
modifications to its business processes or accounting procedures.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II OTHER INFORMATION

# ITEM 2 UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

| | On
July 19, 2005, the Company issued 100,000 shares of its common stock each to two of its
Directors and 50,000 to another Director for their services as members of the
Companys Audit Committee to replace a prior issuance to these Directors in April,
2005 for the same amount of shares that had been rescinded. The Company also issued 4,000
shares of its common stock as part of the consideration for settlement of a minor lawsuit
brought by the Companys subsidiary to condemn a right-of-way with respect to its
Tennessee pipeline.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 22, 2005 the Series B and C holders exchanged their Series B and C shares for
either a discounted cash value or for shares of the Companys common stock. Those
Series B and C holders who chose the stock exchange option received four shares of the
Companys common stock for each dollar of the face value and unpaid accrued dividends
and interest on their Series B and C shares. A total of 9,567,620 shares of the
Companys common stock was issued to those Series B and C holders who chose the stock
exchange option. Of that total, 4,595,040 shares were issued to Dolphin Offshore Partners,
L.P.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (a)       
               The annual meeting of stockholders of the Company was held on July 19, 2005.
| | ------------------------------------------------------------------------------------------------------

| | (b)       
               The first item voted on was the election of Directors. Clarke H. Bailey, Jeffrey
               R. Bailey, John A. Clendening, Neal F. Harding, Carlos P. Salas, and Peter E.
               Salas were elected as Directors of the Company for a term of one year or until
               their successors were elected and qualified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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| | The
results of voting were as follows: 46,124,097 votes for Clarke H. Bailey and 480,782
withheld; 46,198,841 votes for Jeffrey R. Bailey and 406,038 withheld; 46,204,301 votes
for John A. Clendening and 400,578 withheld; 46,204,301 votes for Neal F. Harding and
400,578 withheld; 46,137,745 votes for Carlos P. Salas and 467,134 withheld; and,
46,179,732 votes for Peter E. Salas and 425,147 withheld.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
plurality of votes at the meeting having voted for each of them, Messrs. Clarke H. Bailey,
Jeffrey R. Bailey, Clendening, Harding, Carlos P. Salas, and Peter E. Salas were duly
elected as Directors of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)       
               The next item voted on was a proposal to approve an amendment to the Tengasco,
               Inc. Stock Incentive Plan to increase the number of shares of common stock that
               may be issued under the plan from 1,000,000 to 3,500,000 shares. The results of
               the voting were as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 28,176,938
votes for the resolution, 1,431,743 votes against and 41,351 votes abstained.
| | ----------------------------------------------------------------------------------------

| | A
majority of the votes cast at the meeting having voted for the resolution, the resolution
was duly passed.
| | ------------------------------------------------------------------------------------------------------------

| | (d)       
               The next item voted on was a proposal to approve a plan to compensate the
               Companys independent directors. The results of the voting were as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 44,735,732 votes for the resolution, 1,161,434 votes against and 707,713 votes abstained.
| | -----------------------------------------------------------------------------------------



| | (e)       
               The next item of business was a proposal to ratify the appointment by the Audit
               Committee of the Board of Directors of Rodefer Moss & Co, PLLC to serve as
               the independent certified public accountants of the Company for fiscal 2005. The
               results of the voting were as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 46,434,800 votes for the resolution, 45,800 votes against and 124,279 votes abstained.
| | --------------------------------------------------------------------------------------

| | A
majority of the votes cast at the meeting having voted for the resolution, the resolution
was duly passed.
| | ------------------------------------------------------------------------------------------------------------

No
other matters were voted on at the meeting.

# ITEM 5 OTHER INFORMATION

| | The
Company currently has drilled 6 wells of the 8 well drilling program in Kansas in which
certain former Series A preferred stock holders of the Company participated by exchange of
their preferred stock for their drilling program interests. See Note 6 to Consolidated
Financial Statements. The participants collectively own
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

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| | approximately
81% of the working interest in the program wells; the Company retains the 19% working
interest in this program. Under the terms of the program, the Company will begin to
receive a management fee of 85% of the net proceeds attributable to the participants
81% working interest after the participants have received proceeds equal to eighty percent
of the value of preferred stock they exchanged for their working interest. Five of the six
wells drilled to date have resulted in commercial oil production. Although no assurances
can be made, the Company anticipates that at current oil prices and expected production
levels from these five wells that the Company may begin to receive the management fee by
approximately December 31, 2006. The sixth well was dry and has been plugged. The Company
expects that it will drill the final two wells in this program during the first quarter of
2006. All wells in this program have been drilled with the Companys own operating
funds.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has also begun drilling under a second drilling program involving 12 wells in
Kansas with Hoactzin Partners, L. P. being the sole program participant other than the
Company. See, Part II, Item 2, Liquidity and Captital Resources. Hoactzin owns
approximately 95% of the working interest in the twelve program wells; the Company retains
the remaining 5% working interest in this program. The Company will begin to receive a
management fee of 85% of the net proceeds attributable to the Hoactzins 95% working
interest in the twelve well program after Hoactzin has received proceeds equal to eighty
percent of the value of Series B and C preferred stock that was exchanged for cash
provided to and used by the Company for that purpose. Two wells have been drilled in this
twelve well program. The first well drilled was a dry hole and has been plugged. The
second well is being completed at this time and is expected to result in commercial
production of oil. Two more wells in this twelve-well program are planned to be drilled
before the end of 2005. Under the terms of this program, the Company has an option to
repurchase the Companys obligations to drill the final six wells of the program, and
thereby amend the program to be a six well program. The option expires March 31, 2006 if
not exercised by the Company. All wells in this program have been drilled with the
Companys own operating funds.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

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ITEM
6 EXHIBITS

(a)    
          The following exhibits are filed with this report:

31.1
Certification of the President, pursuant to Exchange Act Rule, Rule 13a-14a/15d-14a.

31.2 Certification
of Chief Financial Officer, pursuant Exchange Act Rule, Rule 13a-14a/15d-14.

32.1 Certification of the President, pursuant to 18 U.S.C Section 1350 as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.

32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant duly caused this report to be signed on its behalf by the undersigned hereto duly authorized.

Dated:
November 10, 2005

TENGASCO,
INC.

|                                                            |  | 
|----------------------------------------------------------- |  | 
|By: s/ Jeffrey R. BaileyJeffrey R. BaileyPresident/Director |  | 
|                                                            |  | 
|By: s/ Mark A. RuthMark A. RuthChief Financial Officer      |  | 

26

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Exhibit
31.1 CERTIFICATION

I,
Jeffrey R. Bailey

| | 1.     I have  reviewed  this  Quarterly  Report on Form  10-Q of  Tengasco,  Inc.  for the  quarter  ended
       September 30, 2005.2.    
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 4.    
The Registrants other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
(13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a)       

                     Designed such disclosure controls and procedures, or caused such disclosure
                    controls and procedures to be designed under our supervision, to ensure that
                    material information relating to the registrant, including its consolidated
                    subsidiaries, is made know to us by others within those entities, particularly
                    during the period in which this report is being prepared:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)       

                     Designed such internal control over financial reporting, or caused such
                    internal control over financial reporting to be designed under our supervision,
                    to provide reasonable assurance regarding the reliability of financial reporting
                    and the preparation of financial statements for external purposes in accordance
                    with generally accepted accounting principles;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)       

                     Evaluated the effectiveness of the registrants disclosure controls and
                    procedures and presented in this report our conclusions about the effectiveness
                    of the disclosure controls and procedures, as of the end of the period covered
                    by this report based on such evaluation, and;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d)       

                     Disclosed in this report any change in the registrants internal control
                    over financial reporting that the occurred during the registrants most
                    recent fiscal quarter (the registrants fourth fiscal quarter in the case
                    of an annual report) that has materially affected, or is reasonably likely to
                    materially affect, the registrants internal control over financial
                    reporting; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.    
The Registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the Registrants board of directors (or persons
performing the equivalent functions);
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a)       
               All significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the Registrants ability to record, process, summarize and
               report financial information; and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)       

                     Any fraud, whether or not material, that involves management or other employees
                    who have a significant role in the Registrants internal control over
                    financial reporting.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated:
November 10, 2005

|                                                            |  | 
|----------------------------------------------------------- |  | 
|By: s/ Jeffrey R. BaileyJeffrey R. BaileyPresident/Director |  | 

27

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Exhibit
31.2 CERTIFICATION

I,
Mark A. Ruth, certify that:

| | 1.     I have  reviewed  this  Quarterly  Report on Form 10-Q of Tengasco,  Inc. for the quarter  ended
       September  30, 2005.2.    
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 4.    
The Registrants other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
(13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a)       
               Designed such disclosure controls and procedures, or caused such disclosure
               controls and procedures to be designed under our supervision, to ensure that
               material information relating to the registrant, including its consolidated
               subsidiaries, is made know to us by others within those entities, particularly
               during the period in which this report is being prepared:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)       

                     Designed such internal control over financial reporting, or caused such
                    internal control over financial reporting to be designed under our supervision,
                    to provide reasonable assurance regarding the reliability of financial reporting
                    and the preparation of financial statements for external purposes in accordance
                    with generally accepted accounting principles;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)       

                     Evaluated the effectiveness of the registrants disclosure controls and
                    procedures and presented in this report our conclusions about the effectiveness
                    of the disclosure controls and procedures, as of the end of the period covered
                    by this report based on such evaluation, and;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d)       

                     Disclosed in this report any change in the registrants internal control
                    over financial reporting that the occurred during the registrants most
                    recent fiscal quarter (the registrants fourth fiscal quarter in the case
                    of an annual report) that has materially affected, or is reasonably likely to
                    materially affect, the registrants internal control over financial
                    reporting; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.    
The Registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the Registrants board of directors (or persons
performing the equivalent functions);
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a)       
               All significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the Registrants ability to record, process, summarize and
               report financial information; and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)       

                     Any fraud, whether or not material, that involves management or other employees
                    who have a significant role in the Registrants internal control over
                    financial reporting.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated:
November 10, 2005

|                                                      |  | 
|----------------------------------------------------- |  | 
|By: s/ Mark A. RuthMark A RuthChief Financial Officer |  | 

28

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Exhibit
32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I hereby certify that:

I have reviewed the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
To the best of my knowledge this Quarterly Report on Form 10-Q (i) fully complies with the requirements
of section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m (a) or
78o (d)); and, (ii) the information contained in this Report fairly present, in all
material respects, the financial condition and results of operations of Tengasco, Inc. and
its subsidiaries during the period covered by this report.Dated: November 10, 2005

|                                                            |  | 
|----------------------------------------------------------- |  | 
|By: s/ Jeffrey R. BaileyJeffrey R. BaileyPresident/Director |  | 

29

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Exhibit
32.2

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I hereby certify that:

I have reviewed the Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005.

To the best of my knowledge this Quarterly
Report on Form 10-Q (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m (a) or
78o (d)); and, (ii) the information contained in this Report fairly present, in all
material respects, the financial condition and results of operations of Tengasco, Inc. and
its subsidiaries during the period covered by this report.Dated November 10, 2005



|                                                      |  | 
|----------------------------------------------------- |  | 
|By: s/ Mark A. RuthMark A RuthChief Financial Officer |  | 

30

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