# U.S. Securities and
Exchange Commission

# Washington, D.C. 20549

# Form 10-Q

# QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF

# THE SECURITIES
EXCHANGE ACT OF 1934

# For the Quarterly
period ended March 31, 2005

# Commission File No.
0-20975

Tengasco, Inc. and
Subsidiaries(Exact)name of small business issuer as specified in its charter)

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

603 Main Avenue, Suite
500, Knoxville, TN 37902(Address of principal
executive offices)

(865-523-1124)(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.

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date: 48,756,977 common shares at May 6, 2005.



---





# TENGASCO, INC. AND
SUBSIDIARIES

TABLE OF CONTENTS

|PART I.  | FINANCIAL INFORMATION                                                                                                     | PAGE 
|-------- | ------------------------------------------------------------------------------------------------------------------------- | -----
|         | ITEM 1.  FINANCIAL STATEMENTS                                                                                             |      
|         | *     Condensed Consolidated Balance Sheets as of March 31, 2005 and
                 December 31, 2004                   | 3-4  
|         | *    Condensed Consolidated Statements of Loss for the three months ended
                 March 31, 2005 and 2004        | 5    
|         | *   Condensed  Consolidated Statements of Stockholders' Equity for the
                 three months ended March 31, 2005 | 6    
|         | *    Condensed Consolidated Statements of Cash Flows for the three months
                 ended March 31, 2005 and 2004  | 7    
|         | *     Notes to Condensed Consolidated Financial Statements                                                                | 8-14 
|         | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS            | 14-18
|         | ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                                        | 18   
|         | ITEM 4.  CONTROLS AND PROCEDURES                                                                                          | 19   
|PART II. | OTHER INFORMATION                                                                                                         |      
|         | ITEM 5. OTHER INFORMATION                                                                                                 | 19-20
|         | ITEM 6. EXHIBITS                                                                                                          | 21   
|         | *      SIGNATURES                                                                                                         | 21   
|         | *      CERTIFICATIONS                                                                                                     | 22-25
|         |                                                                                                                           |      
|         |                                                                                                                           |      
|         |                                                                                                                           |      
|         |                                                                                                                           |      
|         |                                                                                                                           |      
|         |                                                                                                                           |      

2

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# TENGASCO, INC AND
SUBSIDIARIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS

# ASSETS

|                                          | March 31, 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. AND
SUBSIDIARIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS

# LIABILITIES AND
STOCKHOLDERS EQUITY

# 

# 



|                                                              | March 31, 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; |                           |                 
|48,756,977 and 48,756,977 shares issued and outstanding       |                           |                 
|Additional paid-in capital                                    |                           |                 
|Accumulated deficit                                           |                           |                 
|                                                              |                          
|Total stockholders' equity                                    |                           |                 
|                                                              |                          
|                                                              |                           |                 
|                                                              |                          

See accompanying
notes to condensed consolidated financial statements

4

---





# TENGASCO, INC. AND
SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF LOSS

# (Unaudited)

# 

# 

|                                         | For the Three Months EndedMarch 31, 2005 | For the Three Months EndedMarch 31, 2004
|---------------------------------------- | ---------------------------------------- | ----------------------------------------
|Revenues and other income                |                                          |                                         
|Oil and gas revenues                     |                                          |                                         
|Pipeline transportation revenues         |                                          |                                         
|Interest Income                          |                                          |                                         
|                                         |                                         
|Total revenues and other income          |                                          |                                         
|                                         |                                         
|Costs and expenses                       |                                          |                                         
|Production costs and taxes               |                                          |                                         
|Depreciation, depletion and amortization |                                          |                                         
|General and administrative               |                                          |                                         
|Interest expense                         |                                          |                                         
|Public relations                         |                                          |                                         
|Professional fees                        |                                          |                                         
|                                         |                                         
|Total costs and expenses                 |                                          |                                         
|                                         |                                         
|Net loss                                 |                                          |                                         
|                                         |                                         
|Net loss  per share                      |                                          |                                         
|Basic and diluted:                       |                                          |                                         
|Operations                               |                                          |                                         
|                                         |                                         
|Total                                    |                                          |                                         
|                                         |                                         
|Weighted average shares outstanding      |                                          |                                         
|                                         |                                         

See accompanying
notes to condensed consolidated financial statements

5

---





# TENGASCO, INC. AND
SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

# (Unaudited)

|                             | Common Stock |  |  |            |  |   |        | 
|---------------------------- | ------------ |  |  | ---------- |  | - | ------ | 
|
|Balance at December 31, 2004 |              |  |  | 48,756,977 |  | $ | 48,757 | 
|Net Loss                     |              |  |  | --         |  |   | --     | 
|                             |             
|Balance March 31, 2005       |              | 
|(Unaudited)                  |              |  |  | 48,756,977 |  | $ | 48,757 | 
|                             |             
|                             |             

See accompanying notes
to condensed consolidated financial statements

6

---





# TENGASCO, INC. AND
SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS

# (Unaudited)

|                                                      | For the Three Months EndedMarch 31, 2005 | For the Three Months Ended March 31, 2004
|----------------------------------------------------- | ---------------------------------------- | -----------------------------------------
|
|Operating activities                                  |                                          |                                          
|Net 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 |                                          |                                          
|Loss on sale of vehicles/equipment                    |                                          |                                          
|Changes in assets and liabilities:                    |                                          |                                          
|Accounts receivable                                   |                                          |                                          
|Participant receivables                               |                                          |                                          
|Other  current assets                                 |                                          |                                          
|Other assets                                          |                                          |                                          
|Accounts payable                                      |                                          |                                          
|Accrued interest payable                              |                                          |                                          
|Other accrued liabilities                             |                                          |                                          
|Settlement on Asset Retirement Obligations            |                                          |                                          
|                                                      |                                         
|Net cash provided by (used in) operating activities   |                                          |                                          
|                                                      |                                         
|Investing activities                                  |                                          |                                          
|Additions to other property & equipment               |                                          |                                          
|Net additions to oil and gas properties               |                                          |                                          
|Sale of Kansas gas field (See Note 8)                 |                                          |                                          
|                                                      |                                         
|Net cash provided by (used in) investing activities   |                                          |                                          
|                                                      |                                         
|Financing activities                                  |                                          |                                          
|Proceeds from exercise of options                     |                                          |                                          
|Proceeds from borrowings                              |                                          |                                          
|Repayments of borrowings                              |                                          |                                          
|Decrease in Drilling Program liability                |                                          |                                          
|Dividends paid  on preferred 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. and
Subsidiaries

# 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 three months ended March 31,
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. 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
$33,803,875 and a working capital deficit of $4,543,025 as of March 31, 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. As a result, the Company continues to pursue other long-term financing. The
Company also has significant redemption amounts due to be satisfied in 2005 related to its
Mandatorily Redeemable Series B Preferred Shares (see Note 6). These circumstances raise
substantial doubt about the Companys ability to continue as a going concern.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, incurred by the Company to fund the settlement of the litigation with Bank One in
May, 2004. This has the effect of reducing the payment of high interest on this note, and
reducing the total secured debt owed by the Company to $700,000 as of the date of this
report, consisting of about $150,000 remaining principal of the $2.5 million note, and the
principal of the $550,000 note used for the cash exchange of Series A Shares. See Note 5
to the financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the payment of this secured and unsecured debt, and the exchange of most of
its Series A Shares, management believes the Company is now better positioned to both
establish a banking relationship with an institutional lender on
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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| | acceptable terms to fund
the Companys activities. Although the Company is hopeful that as a result of the
substantial reduction of its debt position that it will soon be able to establish such a
relationship, there is no assurance it will be able to do so. Until the Company is able to
establish such a relationship, it will be necessary to fund its operations, including
capital expenditures for the acquisition, exploration and development of oil and gas
reserves from other sources, such as the rights offering as well as equity investment,
private loans or a joint venture with other companies, as to which there can be no
assurances. In addition to its operational cash requirements, the Company also has a
significant amount of loans and other obligations which will either become due or mature
on May 20, 2005, including secured promissory notes due to Dolphin in the principal amount
of $700,000 plus interest thereon, as well as the payment of the accrued distributions on
the Companys Series B 8% Cumulative Convertible Preferred Stock and the scheduled
redemption of both the Series B and Series C 6% Cumulative Convertible Preferred Stock
which become due on September 5, 2005 and April 30, 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The Company
successfully drilled the Dick No. 7 well in Kansas in 2001 and completed the well as an
oil well, however it was not able to drill any new wells in Kansas in 2002 or 2003 due to
lack of funds available for such drilling caused by the Bank One situation. In September
2004, the Company drilled and completed the Lewis No. 3 well in Kansas using only funds
from the proceeds of the Companys ongoing operations. By using the Companys
own funds, it was not necessary to permit any third party to either participate in
financing of drilling or to acquire any interest in the well. The Company receives all
proceeds of production attributable to the working interest in the Lewis No. 3 well. The
Company has also drilled two wells in the first quarter of 2005 as part of a drilling
program in Kansas. See Part II, Item 5.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (3) Earnings per Share

| | In
accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
Per Share (SFAS 128), basic and diluted loss per share are based on
48,756,977 and 17,723,812 weighted average shares outstanding for the quarters ended March
31, 2005 and March 31, 2004 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the three-month periods ended March 31, 2005 and 2004, the Company had no vested,
unexercised, in the money options. As the Company was in a net loss position, any
potential common share equivalents would have been anti-dilutive.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the disclosure provision 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 adoption
of these disclosure provisions did not have an affect on the Companys March 31, 2005
consolidated results of operations, financial position, or cash flows, as there were no
options granted in 2004 or the first quarter of 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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| | SFAS
123 encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Companys stock at the date of the grant over the amount an employee must pay to
acquire the stock. The option price of all the Companys stock options is equal to
the market value of the stock at the grant date. As such, no compensation expense is
recorded in the accompanying consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Staff
Accounting Bulletin (SAB) No. 106, (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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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(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, for February, 2004. 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 18, 2004, Dolphin loaned the Company $2,500,000 bearing interest at 12% per annum with
interest payable monthly beginning June 18, 2004 and principal payable on May 20, 2005,
which loan is secured by a first lien on the Companys Tennessee and Kansas producing
properties and the Tennessee pipeline. The proceeds of the loan were used to fund in part
the settlement 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 is secured by the first
lien on the Companys Tennessee and Kansas properties and the Tennessee pipeline. On
March 4, 2005, Dolphin was paid $2,350,000 to reduce the principal of the promissory note
dated May 18, 2004 in the original amount of $2,500,000, to $150,000 from the proceeds
received from the sale of the Companys Kansas gas fields (See Note 8). The balance
owed on the two outstanding notes to Dolphin at March 31, 2005 is $700,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (6)Cumulative
Convertible Redeemable Preferred Stock and Drilling Program

| | The
Company has issued three classes of convertible preferred stock (Series A, Series B and
Series C). The Company is 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 is required to redeem all outstanding Series B Preferred Stock on
the fifth anniversary of the issuance of those shares which is September 2005. The Company
is 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 shall be
reclassified at fair value to a liability. The Company determined that each of the Series
A, Series B and Series C preferred stock qualify as shares subject to mandatory
redemption, and as such, were reclassified as liabilities upon adoption of SFAS 150.
Accordingly, the difference between the carrying amount at the date of adoption and the
fair value of the shares (discounted at rates between 12% and 12.5%) was recognized as a
cumulative effect of a change in accounting principle of $365,675 effective July 1, 2003.
The difference between the carrying amount of shares subject to mandatory redemption and
the face value amount of preferred stock is being accreted at rates between 12% and 12.5%
into interest expense and the liability until conversion or redemption of the shares.
Accretion associated with these shares subject to mandatory redemption was $224,722 in the
first quarter of 2004 and $123,003 in the first quarter of 2005. The Company has
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | dividends
in arrears as of December 31, 2004 of $649,692 and $726,529 as of March 31, 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
the face amount of $1,085,000 of Series A shares was exchanged on or before December 31,
2004 for cash payments of $723,370. A gain was recorded on this transaction in the amount
of $458,310, the difference between the carrying amount and the cash settlement amount.
The Company obtained funds for the exchange from cash on hand and the proceeds of a loan
from Dolphin Offshore Partners, L.P.  The loan from Dolphin was in the form of a note
in principal amount of $550,000 bearing 12% interest per annum payable interest only until
due on May 20, 2005 and secured by a lien on the Companys Tennessee and Kansas
assets.  Five of the thirteen Series A holders elected to participate in 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 quarter of 2005 the Company completed two wells of the eight well Drilling
Program. The Company reduced the Drilling Program liability by $438,901 and offset oil and
gas properties by the corresponding amount. This represents 25% of the Drilling Program
liability on December 31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (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-
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---





| | 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 evaluate the appropriateness of these assumptions periodically.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the first quarter of 2005 and 2004, the Company recorded accretion expenses of $20,222 and
$18,342 associated with this liability. These expenses are included in interest expense in
the consolidated statements of loss.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 4, 2005 the Company sold the Kansas gas wells, therefore 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, therefore creating a gain on the extinguishment of future
obligations in the amount of $72,399, which was credited to interest expense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (8) Sale of Gas Wells

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

13

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

| | The
net proceeds of the Rights Offering have been used to pay non-bank indebtedness in the
aggregate amount of approximately $6 million (including up to $3,850,000 in principal
amount plus accrued interest owed by the Company to Dolphin) and to pay $1,157,000 as a
portion of the Companys settlement with Bank One. The balance of the net
proceeds 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 three months of 2005, the Company produced and sold 28,882 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 production retroactive to February of 2005. (See
Liquidity and Capital Resources).The first three months production of 28,882
barrels of oil compares to 29,635 barrels produced in the first three months of 2004. In
summary, the three months production reflected expected continued production levels from
the Kansas Properties, which have been in production for many years. The decrease in oil
production reflects a normal decline curve for the Kansas properties. The revenues from
the Kansas properties were $1,125,553 in the first three months of 2005 compared to
$999,707 in 2004. This increase was due to the higher prices for oil, but was partially
offset by only one month of gas revenues.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Tennessee

| | During
the first three 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
(Eastman).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| | Natural
gas production from the Swan Creek field for the first three months of 2005 was an average
of 479 Mcf per day during that period as compared to 617 Mcf per day in the first three
months of 2004. The first three 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 three months of
2005 the Company produced 2,564 barrels of oil as compared to 3,844 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comparison
of the Quarters Ended March 31, 2005 and 2004.

| | The
Company recognized $1,407,649 in oil and gas revenues from its Kansas Properties and the
Swan Creek Field during the first quarter of 2005 compared to $1,332,350 in the first
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 offset by Kansas gas production for
only one month due to the sale of the gas field in Kansas. Kansas gas sales in 2005 were
$72,471 (one month) as compared to $214,203 (three months) in 2004. Oil prices in the
first quarter of 2005 averaged $47.90 per barrel as compared to $33.15 per barrel in the
first quarter of 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company realized a net loss attributable to common shareholders of $418,351 ($0.01) per
share of common stock, during the first quarter of 2005 compared to a net loss in the
first quarter of 2004 to common shareholders of $1,216,305 ($0.07) per share of common
stock
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Production
costs and taxes in the first quarter of 2005 of $785,122 decreased from $871,581 in the
first quarter 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 quarter of 2005 was $479,308 compared to
$589,822 in the first quarter of 2004. This is due to a reduction in depletion and
depreciation taken due to the sale of the Kansas gas field and equipment becoming fully
depreciated in late 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During
the first quarter of 2005, general and administrative costs remained at 2004 levels.

| | Professional
fees, in the first quarter of 2005 were $137,122 compared to $297,875 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 quarter of 2005 decreased from the first quarter of 2004 to $156,072
from $522,727. The substantial decrease is the result of the payoff of the Bank One loan
and the Dolphin notes and the conversion of shares subject to mandatory redemption into a
drilling program and 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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Liquidity
and Capital Resources

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

| | 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, 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 the date of this
report, consisting of about $150,000 remaining principal of the $2.5 million note, and the
principal of the $550,000 note used for the cash exchange of Series A Shares. See Note 5
to the financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the payment of this secured and unsecured debt, and the exchange of most of
its Series A Shares, management believes the Company is now better positioned to both
establish a banking relationship with an institutional lender on acceptable terms to fund
the Companys activities. Although the Company is hopeful that as a result of the
substantial reduction of its debt position that it will soon be able to establish such a
relationship, there is no assurance it will be able to do so. Until the Company is able to
establish such a relationship, it will be necessary to fund its operations, including
capital expenditures for the acquisition, exploration and development of oil and gas
reserves from other sources, such as the rights offering as well as equity investment,
private loans or a joint venture with other companies, as to which there can be no
assurances. In addition to its operational cash requirements, the Company also has a
significant amount of loans and other obligations which will either become due or mature
on May 20, 2005, including secured promissory notes due to Dolphin in the principal amount
of $700,000 plus interest thereon, as well as the payment of the accrued distributions on
the Companys Series B 8% Cumulative Convertible Preferred Stock and the scheduled
redemption of both the Series B and Series C 6% Cumulative Convertible Preferred Stock
which become due on September 5, 2005 and April 30, 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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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 location and usage is
billed each month. Crude oil is stored and at the time of delivery to the customers,
revenues are recognized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Full
Cost Method of Accounting

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

17

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| | 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
three months of 2005, to limit exposure to oil and gas price fluctuations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest
Rate Risk

| | At
March 31, 2005, the Company had debt outstanding of approximately $700,000 at a fixed
rate. The Company did not have any open derivative contracts relating to interest rates at
March 31, 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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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 Chief
Executive Officer 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 Chief Executive Officer 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 Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls 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 5
OTHER INFORMATION

| | Two
wells of the eight-well drilling program in Kansas have been drilled and completed. Both
are currently producing oil from the Arbuckle formation. Both were located by using three
dimensional seismic analyses.  The last four wells the Company has drilled in Kansas
using 3D have all been successful.  This is a technique the Company plans to continue
to use to evaluate both newly acquired Kansas acreage and existing properties that have
been held by production and have potential additional drilling locations remaining. 
A third well in the program is in the early stages of drilling preparations and drilling
should commence shortly.  The Company will continue to focus on Kansas drilling
opportunities where its lease positions and results to date increase geological control of
drilling and diminishes risk.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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| | On
April 28, 2005 the Company rescinded the issuance of 250,000 shares of the Companys
common stock on December 28, 2004 to the three current members of the Companys Audit
Committee of the Board of Directors as consideration for their services in that capacity.
The Company anticipates that an identical number of shares will be issued in the future to
the Companys Audit Committee members upon shareholder approval of any such issuance.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

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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:
May 11, 2005

TENGASCO,
INC.

| | s/Jeffrey R. BaileyJeffrey R. Bailey,President
| | ----------------------------------------------

| | s/Mark A. RuthMark A. Ruth,Chief Financial Officer
| | --------------------------------------------------

21

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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
       March 31, 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:
May 11, 2005

| | s/Jeffrey R. BaileyJeffrey R. Bailey,President
| | ----------------------------------------------

22

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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
       March 31, 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:
May 11, 2005

| | s/Mark A. RuthMark A. Ruth,Chief Financial Officer
| | --------------------------------------------------

23

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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 March 31, 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:
May 11, 2005

| | s/Jeffrey R. BaileyJeffrey R. Bailey,President
| | ----------------------------------------------

24

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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 March 31, 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:
May 11, 2005

| | s/Mark A. RuthMark A. Ruth,Chief Financial Officer
| | --------------------------------------------------

25

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