**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, 2008**

 

Commission File No.            1**-**15555

 

***Tengasco, Inc. and Subsidiaries***

(Exact name of issuer as specified in its charter)

 

 

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

 

**10215 Technology Drive, Suite 301, Knoxville, TN 37932**

(Address of principal executive offices)

 

**(865-675-1554)**

(Issuer’s telephone number, including area code)

 

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

|   | YesX | No__ |
|--------|------|------|

 

Indicate by check mark whether the registrant is a large accelerated            filer, a non-accelerated filer, or a smaller reporting company. See the definitions of            "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule            12b-2 of the Exchange Act.

 

| Large accelerated filer_____

Non-accelerated filer ___

(Do not check if a smaller reporting company) | Accelerated filer____Smaller reporting companyx |   |
|--------------------------------------------------------------------------------------------------------|-------------------------------------------------|--------|

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

 

Indicate the number of shares outstanding of each of the issuer’s            classes of common stock, as of the latest practicable date:59,198,750common shares at May 1,            2008.

 

 

 

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**TENGASCO, INC. AND SUBSIDIARIES**

 

TABLE            OF CONTENTS

 

| PART I.  | FINANCIAL INFORMATION                                                                                                                                                                   | PAGE

                                       |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|
|     | ITEM 1. FINANCIAL STATEMENTS                                                                                                                                                            |                                              |
|     |                                                                                                                                                                                    |                                              |
|     | *    Condensed Consolidated Balance                            Sheets as of March 31, 2008 and December 31, 2007                                                    |  

3-4                                       |
|     |                                                                                                                                                                                    |                                              |
|     | *    Condensed Consolidated                            Statements of Operations for the three months ended March 31, 2008 and                            2007       |  

5                                         |
|     |                                                                                                                                                                                    |                                              |
|     | *    Condensed Consolidated                            Statement of Stockholders’ Equity for the three months ended                            March 31, 2008 |  

6                                         |
|     |                                                                                                                                                                                    |                                              |
|     | *    Condensed Consolidated                            Statements of Cash Flows for the three months ended March 31, 2008 and                            2007       |  

7                                         |
|     |                                                                                                                                                                                    |                                              |
|     | *    Notes to Condensed Consolidated                            Financial Statements                                                                                | 8-16                                              |
|     |                                                                                                                                                                                    |                                              |
|     | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF                            FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                          |  

                             

16-19 |
|     |                                                                                                                                                                                    |                                              |
|     | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT                            MARKET RISK                                                                                            |  

20-21                                     |
|     |                                                                                                                                                                                    |                                              |
|     | ITEM 4.T CONTROLS AND PROCEDURES                                                                                                                                                        | 21-22                                             |
|     |                                                                                                                                                                                    |                                              |
| PART II. | OTHER INFORMATION                                                                                                                                                                       |                                              |
|     |                                                                                                                                                                                    |                                              |
|     | ITEM 2. UNREGISTERD SALES OF EQUITY SECURITIES AND USE                            OF PROCEEDS                                                                                           |  

23                                        |
|     |                                                                                                                                                                                    |                                              |
|     | ITEM 6. EXHIBITS                                                                                                                                                                        | 24                                                |
|     |                                                                                                                                                                                    |                                              |
|     | *    SIGNATURES                                                                                                                                                     | 25                                                |
|     |                                                                                                                                                                                    |                                              |
|     | *    CERTIFICATIONS                                                                                                                                                 | 26-29                                             |

 

 

|   | 2 |
|--------|---|

 

 

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**TENGASCO, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 

 

|                                                                                              | **March 31, 2008**

**(Unaudited)**                        |  

December 31, 2007                            |
|---------------------------------------------------------------------------------------------------|------------------------------------------------------------|------------------------------------------------------|
|                                                                                              |                                                       |                                                 |
| **Assets**                                                                                        |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
| **Current**                                                                                       |                                                       |                                                 |
| Cash and cash equivalents                                                                         | **$**    **904,658**    | $       2,226,839 |
| Accounts receivable                                                                               | **1,420,066**                                              | 1,057,148                                            |
| Participant receivables                                                                           | **16,624**                                                 | 49,872                                               |
| Inventory                                                                                         | **457,487**                                                | 460,365                                              |
| Other current assets                                                                              | **11,056**                                                 | 11,056                                               |
|                                                                                              |                                                       |                                                 |
| **Total current assets**                                                                          | **2,809,891**                                              | 3,805,280                                            |
|                                                                                              |                                                       |                                                 |
| Restricted Cash                                                                                   | **120,500**                                                | 120,500                                              |
| Loan Fees                                                                                         | **221,366**                                                | 223,733                                              |
|                                                                                              |                                                       |                                                 |
| **Oil and gas properties,**net                            (on the basis

of full cost accounting) | **14,344,735**                                             | 13,209,601                                           |
|                                                                                              |                                                       |                                                 |
| **Pipeline facilities,**net                                                                       | **12,780,667**                                             | 12,916,667                                           |
|                                                                                              |                                                       |                                                 |
| **Other property and                            equipment**, net                                  | **260,397**                                                | 256,058                                              |
|                                                                                              |                                                       |                                                 |
| **Deferred Tax Asset**                                                                            | **7,027,000**                                              | 2,100,000                                            |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
| **Methane Project**                                                                               | **3,074,948**                                              | 1,649,710                                            |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              |                                                       |                                                 |
|                                                                                              | **$**     **40,639,504**          | $      34,281,549      |
|                                                                                                   |                                                            |                                                      |  |

 

 

*See accompanying notes to condensed consolidated financial            statements*

 

3

 

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**TENGASCO, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

 

 

|                                                                                                                                                                       |   | **March 31, 2008****(Unaudited)** | **December 31, 2007**   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-------------------------|
|                                                                                                                                                                       |   |                              |                    |   |   |
|                                                                                                                                                                       |   |                              |                    |   |   |
|                                                                                                                                                                       |   |                              |                    |   |   |
| **Current liabilities**                                                                                                                                                    |   |                              |                    |   |   |
| Current maturities of long-term debt                                                                                                                                       |   | **$**                             | **   53,605** |   |                                   $     57,887 |
| Accounts payable                                                                                                                                                           |   |                              | **1,436,784**           |   | 903,238 |
| Accrued interest payable                                                                                                                                                   |   |                              | **-**                   |   | 10,005 |
| Other accrued liabilities                                                                                                                                                  |   |                              | **314,634**             |   | 360,674 |
|                                                                                                                                                                       |   |                              |                    |   |   |
| **Total current liabilities**                                                                                                                                              |   |                              | **1,805,023**           |   | 1,331,804 |
|                                                                                                                                                                       |   |                              |                    |   |   |
|                                                                                                                                                                       |   |                              |                    |   |   |
| Asset retirement obligation                                                                                                                                                |   |                              | **564,528**             |   | 531,101 |
|                                                                                                                                                                       |   |                              |                    |   |   |
| Long term debt, less current maturities                                                                                                                                    |   |                              | **4,320,939**           |   | 4,315,773 |
|                                                                                                                                                                       |   |                              |                    |   |   |
| **Total liabilities**                                                                                                                                                      |   |                              | **6,690,490**           |   | 6,178,678 |
|                                                                                                                                                                       |   |                              |                    |   |   |
|                                                                                                                                                                       |   |                              |                    |   |   |
|                                                                                                                                                                       |   |                              |                    |   |   |
|                                                                                                                                                                            |   |                              |                    |   |   |
| **Stockholders’ equity**                                                                                                                                             |   |                              |                    |   |   |
| Common stock, $.001 par value; authorized 100,000,000                            shares;59,158,750 and 59,155,750 shares issued and                            outstanding |   |                              | **59,159**              |   | 59,156 |
| Additional paid-in capital                                                                                                                                                 |   |                              | **54,723,654**          |   | 54,689,525 |
| Accumulated deficit                                                                                                                                                        |   |                              | **(20,833,799)**        |   | (26,645,810) |
|                                                                                                                                                                       |   |                              |                    |   |   |
| **Total stockholders’ equity**                                                                                                                                       |   |                              | **33,949,014**          |   | 28,102,871 |
|                                                                                                                                                                       |   | **$**                             | **40,639,504**          |   | $                                          34,281,549 |

 

*See accompanying notes to condensed consolidated financial            statements*

 

 

4

 

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**TENGASCO, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

 

 

|                                                                            |   | **For the Three**

**Months Ended**

**March 31, 2008** |                                                                           | **For the Three Months Ended March 31,                            2007** |   |
|----------------------------------------------------------------------------|--------|---------------------------------------------------------|--------------------------------------------------------------------------------|--------------------------------------------------------------------------|--------|
|                                                                       |   |                                                    |                                                                           |                                                                     |   |   |   |
| **Revenues and other income**                                              |   |                                                    |                                                                           |                                                                     |   |   |   |
| Oil and gas revenues                                                       |   | **$**                                                   | **3,295,069**                                                                  |                                                                     | $      | 1,749,771 |   |
| Pipeline transportation revenues                                           |   |                                                    | **2,745**                                                                      |                                                                     |   | 19,408 |   |
| Interest income                                                            |   |                                                    | **7,906**                                                                      |                                                                     |   | 3,221 |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |   |   |
| Total revenues and other income                                            |   |                                                    | **3,305,720**                                                                  |                                                                     |   | 1,772,400 |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |   |   |
| **Costs and expenses**                                                     |   |                                                    |                                                                           |                                                                     |   |   |   |
| Production costs and taxes                                                 |   |                                                    | **1,335,021**                                                                  |                                                                     |   | 963,130 |   |
| Depreciation, depletion and amortization                                   |   |                                                    | **465,300**                                                                    |                                                                     |   | 476,051 |   |
| General and administrative                                                 |   |                                                    | **397,607**                                                                    |                                                                     |   | 345,588 |   |
| Interest expense                                                           |   |                                                    | **107,888**                                                                    |                                                                     |   | 71,023 |   |
| Public relations                                                           |   |                                                    | **17,265**                                                                     |                                                                     |   | 394 |   |
| Professional fees                                                          |   |                                                    | **97,628**                                                                     |                                                                     |   | 125,379 |   |
| Total costs and expenses                                                   |   |                                                    | **2,420,709**                                                                  |                                                                     |   | 1,981,565 |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |   |   |
| **Net Income(Loss) From Operations**                                       |   | **$**                                                   | **885,011**                                                                    |                                                                     | $      | (209,165) |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |   |   |
| Deferred Tax Benefit                                                       |   |                                                    | **5,227,000**                                                                  |                                                                     |   | - |   |
| Income Tax Expense                                                         |   |                                                    | **(300,000)**                                                                  |                                                                     |   | - |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |   |   |
| **Net Income/Loss**                                                        |   |                                                    | **$                                  5,812,011** |                                                                     |   | $                                  (209,165) |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |   |   |
| **Net Income/ Loss per share**Basic and diluted:                           |   |                                                    | **$ .10**                                                                      |                                                                     |   | $ .00 |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |
|                                                                       |   |                                                    |                                                                           |                                                                     |   |
| **Shares used in computing Earnings per                            share** |   |                                                    |                                                                           |                                                                     |   |   |
| Basic                                                                      |   |                                                    | **59,156,805**                                                                 |                                                                     |   | 59,047,979 |   |
| Diluted                                                                    |   |                                                    | **60,943,853**                                                                 |                                                                     |   | 59,047,979 |   |

 

*See accompanying notes to condensed consolidated financial            statements*   

 

 

 

 

5

 

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**TENGASCO, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’            EQUITY**

**(Unaudited)**

 

 

 

|                               | Common Stock                                      |   |                                          |
|------------------------------------|---------------------------------------------------|--------|-----------------------------------------------|
|                               | Shares                                            |   | Amount                                        |   | Additional Paid in Capital |   | Accumulated Deficit |   | Total |
| Balance at December 31, 2007       | 59,155,750                                        |   | $   59,156                     |   | $      54,689,525 |   | $   (26,645,810) |   | $   28,102,871 |
|                               |                                              |   |                                          |   |   |   |   |   |   |
| Net Income                         | -                                                 |   | -                                             |   | - |   | 5,812,011 |   | 5,812,011 |
|                               |                                              |   |                                          |   |   |   |   |   |   |
| Options & Compensation Expense |  

                             

3,000 |   |  

                             

3 |   |  

                             

34,129 |   |  

                             

- |   |  

                             

34,132 |
|                               |                                              |   |                                          |   |   |   |   |   |   |
|                               |                                              |   |                                          |   |   |   |   |   |   |
| Balance March 31, 2008 (Unaudited) |  

59,158,750                                |   |  

$   59,159             |   |  

$      54,723,654 |   |  

$   (20,833,799) |   |  

$   33,949,014 |
|                               |                                              |   |                                          |   |   |   |   |   |   |

*See accompanying notes to condensed consolidated financial            statements*

 

6

 

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**TENGASCO, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

 

 

|                                                                                                                                                      |   | **For the Three Months Ended March 31,                            2008** |            | **For the Three****Months Ended****March 31, 2007** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|-----------------|-----------------------------------------------------|--------|
|                                                                                                                                                      |   |                                                                     |            |                                                |   |   |   |
| **Operating activities**                                                                                                                                  |   |                                                                     |            |                                                |   |   |   |
| Net Loss /Income                                                                                                                                          |   | $                                                                        | **5,812,011**   |                                                | $      | (209,165) |   |
| Adjustments to reconcile net loss/income to net                            cash   used in operating                            activities: |   |                                                                     |            |                                                |   |   |   |
| Depreciation, depletion and amortization                                                                                                                  |   |                                                                     | **465,300**     |                                                |   | 476,051 |   |
| Accretion on Asset Retirement Obligation                                                                                                                  |   |                                                                     | **34,884**      |                                                |   | 18,846 |   |
| (Gain)/Loss on sale of vehicles/equipment                                                                                                                 |   |                                                                     | **-**           |                                                |   | (4,500) |   |
| Compensation and services paid in stock                            options                                                                                |   |                                                                     | **33,322**      |                                                |   | 26,815 |   |
| Deferred tax benefit                                                                                                                                      |   |                                                                     | **(4,927,000)** |                                                |   | - |   |
| Changes in assets and liabilities:                                                                                                                        |   |                                                                     |            |                                                |   |   |   |
| Accounts receivable                                                                                                                                       |   |                                                                     | **(362,918)**   |                                                |   | 3,095 |   |
| Participants receivables                                                                                                                                  |   |                                                                     | **33,248**      |                                                |   | (7,557) |   |
| Inventory                                                                                                                                                 |   |                                                                     | **2,878**       |                                                |   | 23,166 |   |
| Accounts payable                                                                                                                                          |   |                                                                     | **533,546**     |                                                |   | 94,153 |   |
| Accrued interest payable                                                                                                                                  |   |                                                                     | **(10,005)**    |                                                |   | (8,432) |   |
| Other accrued liabilities                                                                                                                                 |   |                                                                     | **(46,040)**    |                                                |   | 107,679 |   |
| Settlement on Asset Retirement Obligation                                                                                                                 |   |                                                                     | **(1,457)**     |                                                |   | (1,743 | ) |
| Net cash provided by operating activities                                                                                                                 |   |                                                                     | **1,567,769**   |                                                |   | 518,408 |   |
|                                                                                                                                                      |   |                                                                     |            |                                                |   |   |   |
| **Investing activities**                                                                                                                                  |   |                                                                     |            |                                                |   |   |   |
| Additions to other property & equipment                                                                                                               |   |                                                                     | **(39,615)**    |                                                |   | - |   |
| Additions to oil and gas properties                                                                                                                       |   |                                                                     | **(1,410,134)** |                                                |   | (559,454) |   |
| Additions to methane project                                                                                                                              |   |                                                                     | **(1,425,238)** |                                                |   | - |   |
|                                                                                                                                                      |   |                                                                     |            |                                                |   |   |   |
| Net cash (used in) investing activities                                                                                                                   |   |                                                                     | **(2,874,987)** |                                                |   | (559,454) |   |
|                                                                                                                                                      |   |                                                                     |            |                                                |   |   |   |
| **Financing activities**                                                                                                                                  |   |                                                                     |            |                                                |   |   |   |
| Proceeds from borrowings                                                                                                                                  |   |                                                                     | **39,615**      |                                                |   | - |   |
| Repayments of borrowings                                                                                                                                  |   |                                                                     | **(40,499)**    |                                                |   | (28,948) |   |
| Loan fees                                                                                                                                                 |   |                                                                     | **(14,889)**    |                                                |   | - |   |
| Proceeds from exercise of warrants &                            options                                                                               |   |                                                                     | **810**         |                                                |   | 19,097 |   |
| Net cash (used in) financing activities                                                                                                                   |   |                                                                     | **(14,963)**    |                                                |   | (9,851) |   |
|                                                                                                                                                      |   |                                                                     |            |                                                |   |   |   |
| Net change in cash and cash equivalents                                                                                                                   |   |                                                                     | **(1,322,181)** |                                                |   | (50,897) |   |
|                                                                                                                                                      |   |                                                                     |            |                                                |   |   |   |
| Cash and cash equivalents, beginning of                            period                                                                                 |   |                                                                     | **2,226,839**   |                                                |   | 369,665 |   |
| Cash and cash equivalents, end of period                                                                                                                  |   | $                                                                        | **904,658**     |                                                | $      | 318,768 |   |

 

*See accompanying notes to condensed consolidated financial            statements*

7

 

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**Tengasco, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements**

             

| **(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, 2008 are not necessarily indicative of the            results that may be expected for the year ended December 31, 2008. For further            information, refer to the Company’s consolidated financial statements and            footnotes thereto included in the Company’s annual report on Form 10-K for the            year ended December 31, 2007.

             

| **(2)**                                 **Deferred Tax                            Benefit** |   |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------|

             

The Company has taxable income for the periods ending December 31, 2007,            December 31, 2006 and December 31, 2005 and the first quarter of 2008.

             

Management continuously estimates its ability to recognize a deferred            tax asset related to prior period net operating loss carry forwards based on its            anticipation of the likely timing and adequacy of future net income. As of March 31,            2008, the Company had approximately $21,000,000 of net operating loss carry forwards.            As of March 31, 2008, Management, using the “more likely than not” criteria            for recognition, determined that it would be likely to realize the benefit of all of            its net operating loss carry forwards to offset future federal taxable income and            accordingly elected to recognize a deferred tax asset of $7,327,000, $2,100,000 of this            amount having been previously recorded in 2007. This resulted in a tax benefit of            $7,327,000 which will be amortized as used with future income. $300,000 of this tax            benefit was amortized in the first quarter of 2008 The recognition of the deferred tax            asset in 2008 will provide a better matching of income tax expense with taxable income            in future periods.

             

The Company has recorded all of its net operating loss carry forwards of            approximately $21,000,000 resulting in a tax benefit of $7,327,000 which will be            amortized as used with future income.

             

| **(3)**                                **Earnings per                            Share** |   |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|

             

In accordance with Statement of Financial Accounting Standards (SFAS)            No. 128, “Earnings Per Share” (“SFAS 128”), basic income per            share is based on 59,156,805 nd 59,047,979 weighted average shares outstanding for the            quarters ended March 31, 2008

 

8

 

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and March 31, 2007 respectively. Diluted earnings per common share are            computed by dividing income available to common shareholders by the weighted-average            number of shares of common stock outstanding during the period increased to include the            number of additional shares of common stock that would have been outstanding if the            dilutive potential shares of common stock had been issued. The dilutive effect of            outstanding options and warrants is reflected in diluted earnings per share. Dilutive            shares outstanding at March 31, 2008 were 1,787,048, related to outstanding options and            warrants. For the period ended March 31, 2007, outstanding options and warrants are            anti-dilutive due to the net loss for the quarter and, accordingly, are disregarded in            the computation of dilutive shares outstanding.

             

| **(4)**                                 **Recent Accounting                            Pronouncements** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|

 

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting            for Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN 48"),            which clarifies the accounting for uncertainty in tax positions taken or expected to be            taken in a tax return, including issues relating to financial statement recognition and            measurement. FIN 48 provides that the tax effects from an uncertain tax position can be            recognized in the financial statements only if the position is "more-likely-than-not"            to be sustained if the position were to be challenged by a taxing authority. The            assessment of the tax position is based solely on the technical merits of the position,            without regard to the likelihood that the tax position may be challenged. If an            uncertain tax position meets the "more-likely-than-not" threshold, the largest amount            of tax benefit that is more than 50 percent likely to be recognized upon ultimate            settlement with the taxing authority, is recorded. The provisions of FIN 48 are            effective for fiscal years beginning after December 15, 2006, with the cumulative            effect of the change in accounting principle recorded as an adjustment to opening            retained earnings. Consistent with the requirements of FIN 48, we adopted FIN 48 on            January 1, 2007. The adoption of FIN 48 had no impact on our results of operations or            financial position. The Company currently has open tax return periods beginning with            December 31, 2004 through December 31, 2007.

             

In September 2006, the Securities and Exchange Commission staff            published Staff Accounting Bulletin SAB No. 108 (“SAB 108”), "Considering            the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year            Financial Statements." SAB 108 addresses quantifying the financial statement effects of            misstatements, specifically, how the effects of prior year uncorrected errors must be            considered in quantifying misstatements in the current year financial statements. SAB            108 is effective for fiscal years ending after November 15, 2006. The Company adopted            SAB 108 in the fourth quarter of 2006. Adoption did not have an impact on the            Company’s consolidated financial statements.

             

In September 2006, the FASB issued SFAS 157, Fair Value Measurements.            The standard provides guidance for using fair value to measure assets and liabilities.            It defines fair value, establishes a framework for measuring fair value under generally            accepted accounting

 

9

 

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principles and expands disclosures about fair value measurement. Under            the standard, fair value refers to the price that would be received to sell an asset or            paid to transfer a liability in an orderly transaction between market participants in            the market in which the reporting entity transacts. It clarifies the principle that            fair value should be based on the assumptions market participants would use when            pricing the asset or liability. In support of this principle, the standard establishes            a fair value hierarchy that prioritizes the information used to develop those            assumptions. Under the standard, fair value measurements would be separately disclosed            by level within the fair value hierarchy. Statement 157 is effective for financial            statements issued for fiscal years beginning after November 15, 2007. The adoption of            SFAS 157 had no significant impact on our financial position, results of operations or            cash flows.

             

In February 2007, the FASB issued SFAS No. 159 “The Fair Value            Option for Financial Assets and Financial Liabilities — as amended (“SFAS            159”). SFAS 159 permits entities to elect to report eligible financial            instruments at fair value subject to conditions stated in the pronouncement including            adoption of SFAS 157 discussed above. The purpose of SFAS 159 is to improve financial            reporting by mitigating volatility in earnings related to current reporting            requirements. The Company is considering the applicability of SFAS 159 and will            determine if adoption is appropriate. The effective date for SFAS 159 is for fiscal            years beginning after November 15, 2007.

             

| **(5)**  **Related                            Party Transactions**.

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

On September 17, 2007, the Company entered into a drilling program with            Hoactzin Partners, L.P. ("Hoactzin") for ten wells consisting of approximately three            wildcat wells and seven developmental wells to be drilled on the Company’s Kansas            Properties (the “Program”). Peter E. Salas, the chairman of the Board of            Directors of the Company is the controlling person of Hoactzin. Mr. Salas is also the            sole shareholder and controlling person of Dolphin Management, Inc., the general            partner of Dolphin Offshore Partners, L.P. which is the Company's largest shareholder.            Under the terms of the Program, Hoactzin was to pay the Company $400,000 for each well            in the Program completed as a producing well and $250,000 per drilled well that was            non-productive. The terms of Program also provide that Hoactzin will receive all the            working interest in the ten wells in the Program, but will pay an initial fee to the            Company of 25% of its working interest revenues net of operating expenses. This is            referred to as a management fee but as defined is in the nature of a net profits            interest. The fee paid to the Company by Hoactzin will increase to 85% of working            interest revenues when net revenues received by Hoactzin reach an agreed payout point            of approximately 1.35 times Hoactzin’s purchase price (the “Payout            Point”). The Company has accounted for funds received for interests in the            Program as an offset to oil and gas properties.

             

As of the date of this Report, the Company has drilled all ten wells in            the Program. Of the ten wells drilled, nine were completed as oil producers and are            currently producing approximately 84 barrels per day in total. Hoactzin paid a total of            $3,850,000 for its interest in the Program resulting in the Payout Point being            determined as $5,215,595. The amount paid by

 

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Hoactzin for its interest in the Program wells exceeded the            Company’s actual drilling costs of approximately $2.8 million for the ten wells            by more than $1 million.

             

Although production level of the Program wells will decline with time in            accordance with expected decline curves for these types of well, based on the drilling            results of the Program wells and the current price of oil, the Program wells are            expected to reach the Payout Point in approximately four years solely from the oil            revenues from the wells. However, under the terms of its agreement with Hoactzin the            time for reaching the Payout Point likely will be accelerated by Hoactzin agreeing to            apply 75% of the net proceeds it receives from the methane extraction project being            developed by the Company’s wholly-owned subsidiary, Manufactured Methane            Corporation, at the Carter Valley, Tennessee landfill to the Payout Point. (The methane            extraction project is discussed in greater detail below.) Those methane project            proceeds when applied should result in the Payout Point being achieved sooner than the            estimated four year period based solely upon revenues from the Program            wells.

             

On September 17, 2007, Hoactzin, simultaneously with subscribing to            participate in the Program, executed a separate agreement with the Company and was            conveyed a 7.5% net profits interest in a methane extraction project being developed by            the Company's wholly-owned subsidiary, Manufactured Methane Corporation ("MMC") at the            Carter Valley landfill owned and operated by BFI Waste Systems of Tennessee, LLC            ("BFI") in Church Hill, Tennessee (the "Methane Project"). When the Methane Project            comes online, initially 75% of the net revenues from the Project received by Hoactzin            will be applied towards the determination of the Payout Point (as defined above) for            the Program. When the Payout Point is reached from either the revenues from the wells            drilled in the Program or the Methane Project or a combination thereof,            Hoactzin’s payments under its net profits interest in the Methane Project will            return to 7.5% net profits interest. The Company believes that the application of            revenues from the Methane Project to reach the Payout Point could accelerate reaching            the Payout Point. As stated above, the price paid by Hoactzin for its interest in the            Program exceeded the Company’s anticipated and actual costs of drilling the ten            wells in the Program. Those excess funds provided by Hoactzin were used to pay for            approximately $1,000,000 of equipment required for the Methane Project, or about 25% of            the Project’s capital costs. The availability of the funds provided by Hoactzin            eliminated the need for the Company to borrow those funds, to have to pay interest to            any lending institution making such loans or to dedicate Company revenues or revenues            from the Methane Project to pay such debt service. Accordingly, the grant of a 7.5%            interest in the Methane Project to Hoactzin was negotiated by the Company as a            favorable element to the Company of the overall transaction.

 

The Company also announced that on September 17, 2007 it entered into an            additional agreement with Hoactzin providing that if the Program and the Methane            Project interest in combination failed to return net revenues to Hoactzin equal to 25%            of the purchase price it paid for its interest in the Program (the “Purchase            Price”) by December 31, 2009, then Hoactzin has an option to exchange up to 20%            of its net profits interest in the Methane Project for convertible preferred stock to            be issued by the Company with a liquidation value equal to 20% of the

 

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Purchase Price less the net proceeds received at the time of any            exchange. At the time the agreement was executed, the Company's forecast of the            probable results of the projects indicated that there was little risk that Hoactzin's            contingent option to acquire preferred stock would ever arise, so the Company placed no            significant value to the preferred stock option. The number of shares issuable under            the contingent option to acquire preferred stock is to be determined based on the then            twenty business day trailing average closing price of Company common stock on the            American Stock Exchange. Each share of the Company's convertible preferred stock would            then be convertible to one share of the Company's registered or unregistered common            stock. Hoactzin has a similar option each year after 2009 in which Hoactzin’s            then-unrecovered Purchase Price at the beginning of the year is not reduced 20% further            by the end of that year, using the same conversion option calculation at date of the            subsequent year’s issuance if any. The Company, however, may in any year make a            cash payment from any source in the amount required to prevent such an exchange option            for preferred stock from arising. In addition, the conversion right is limited to no            more than 19% of the outstanding common shares of the Company. In the event that            Hoactzin’s proceeds from the drilling and methane projects fail to satisfy the            payout point requirements for any period or in its entirety and Hoactzin's contingent            option is triggered, should Hoactzin elect to exercise its contingent option to acquire            convertible preferred shares in the Company, then that portion exercised permanently            reduces Hoactzin's interest in the methane project, up to its entirety, if so            elected.

 

Under this exchange agreement, if no proceeds at all were received by            Hoactzin through 2009 or in any year thereafter (i.e. a worst-case scenario already            impossible in view of the success of the Program), then Hoactzin would have an option            to exchange 20% of its interest in the Methane Project in 2010 and each year thereafter            for preferred stock with liquidation value of 100% of the Purchase Price convertible at            the trailing average price before each year’s issuance of the preferred. The            maximum number of common shares into which all such preferred could be converted cannot            be calculated given the formulaic determination of conversion price based on future            stock price. However, for purposes of a calculation example only, assume a consistent            trailing average stock price of $.75 per common share, and that Hoactzin's payout point            is $3.7 million. Hoactzin could then elect to exchange its interest for 4.93 million            shares of preferred stock which would then be convertible into 8.35% of the            Company’s currently outstanding shares.

 

However, the Company anticipates that with the demonstrated successful            results of the Program that the payout of 25% of the Purchase Price will be reached by            December 31, 2009 and Hoactzin option to exchange its interest for contigent preferred            shares would not be triggered in 2010. The Company further anticipates that at current            oil and gas prices, and at currently expected sales levels of methane gas from the            Methane Project to come online in 2008, that the balance of the unrecovered Purchase            Price by Hoactzin will also be reduced by at least 20% each year thereafter. Based only            on current production from the nine producing wells in the Program (i.e. not            considering any revenue contribution from the Methane Project), expected decline curves            for production, and using current oil prices, the Company expects that by December            2009, Hoactzin will have received approximately 66% of the Purchase Price, far in            excess of the 25%

 

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required in order to obviate any occasion to exchange its interest in            the Methane Project for preferred stock. As a result, the Company believes it is a            remote probability that the Hoactzin contingent option to acquire preferred stock will            be triggered under the terms of this agreement at any time in the future.

             

On December 18, 2007, the Company entered into a Management Agreement            with Hoactzin. On that same date, the Company also entered into an agreement with            Charles Patrick McInturff employing him as a Vice-President of the Company. Pursuant to            the Management Agreement with Hoactzin, Mr. McInturff’s duties while he is            employed as Vice-President of the Company will include the management on behalf of            Hoactzin of its working interests in certain oil and gas properties owned by Hoactzin            and located in the onshore Texas Gulf Coast, and offshore Texas and offshore Louisiana.            As consideration for the Company entering into the Management Agreement, Hoactzin has            agreed that it will be responsible to reimburse the Company for the payment of one-half            of Mr. McInturff’s salary, as well as certain other benefits he receives during            his employment by the Company. In further consideration for the Company’s            agreement to enter into the Management Agreement, Hoactzin has granted to the Company            an option to participate in up to a 15% working interest on a dollar for dollar cost            basis in any new drilling or work-over activities undertaken on Hoactzin’s            managed properties during the term of the Management Agreement. The term of the            Management Agreement is the earlier of the date Hoactzin sells its interests in its            managed properties or 5 years.

             

| **(6)**                               **Oil and Gas Properties** |   |
|---------------------------------------------------------------------------------|--------|

             

The following table sets forth information concerning the            Company’s oil and gas properties

             

|                                                   | **March 31, 2008**              | **December 31, 2007**           |
|--------------------------------------------------------|---------------------------------|---------------------------------|
| Oil and gas properties, at cost                        | **$**  **20,266,621** | **$**  **18,856,487** |
| Unevaluated properties                                 | **3,110,768**                   | **3,110,768**                   |
| Accumulation depreciation,

depletion and amortization |  

**(9,032,654)**         |  

**(8,757,654)**         |
| Oil and gas properties, net                            | **$**  **14,344,735** | **$**  **13,209,601** |

 

The Company recorded $275,000 in depletion expense for the first three            months of 2008 and $275,000 in the first three months of            2007**.**

 

| **(7)**   **Asset Retirement Obligation** |   |
|----------------------------------------------------------|--------|

 

The Company follows the requirements of SFAS 143. Among other things,            SFAS 143 requires entities to record a liability and corresponding increase in            long-lived assets for the present value of material obligations associated with the            retirement of tangible long-lived assets. Over the passage of time, accretion of the            liability is recognized as an operating expense and the capitalized cost is depleted            over the estimated useful life of the related asset. Additionally, SFAS 143 required            that upon initial application of these standards, the Company must recognize a            cumulative effect of a change in accounting principle corresponding to the accumulated            accretion and depletion expense that would

 

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have            been recognized had this standard been applied at the time the long-lived assets were            acquired or constructed. The Company’s asset retirement

obligations relate primarily to the plugging, dismantling and removal of            wells drilled to date. The Company’s calculation of Asset Retirement Obligation            used a credit-adjusted risk free rate of 6%, an estimated useful life of wells ranging            from 30-40 years, estimated plugging and abandonment cost range from $5,000 per well to            $10,000 per well. Management continues to periodically evaluate the appropriateness of            these assumptions.

             

| **(8)**   **Restricted Cash** |   |
|----------------------------------------------|--------|

             

As security required by Tennessee oil and gas regulations, the Company            placed $120,500 in a Certificate of Deposit to cover future asset retirement            obligations for the Company’s Tennessee wells.

             

| (**9)**                               **Bank Loan** |   |
|--------------------------------------------------------------------|--------|

             

On December 17, 2007, Citibank assigned the Company’s revolving            credit facility with Citibank to Sovereign Bank of Dallas, Texas            (“Sovereign”) as requested by the Company.

             

Under the facility as assigned to Sovereign, loans and letters of credit            will be available to the Company on a revolving basis in an amount outstanding not to            exceed the lesser of $20 million or the Company’s borrowing base in effect from            time to time. The Company’s initial borrowing base with Sovereign was set at $7.0            million, an increase from its borrowing base of $3.3 million with Citibank prior to the            assignment.

             

The Company’s initial borrowing on December 17, 2007 under its new            facility with Sovereign was approximately $4.2 million which will bear interest at a            floating rate equal to prime as published in the Wall Street Journal plus 0.25%            resulting in a current interest rate of approximately 7.5%. Interest only is payable            during the term of the loan and the principal balance of the loan is due December 31,            2010. The Sovereign facility is secured by substantially all of the Company’s            producing and non-producing oil and gas properties and pipeline and the Company’s            Methane Project assets.

             

The Company used a portion of the $4.2 million borrowed from Sovereign            to pay off the funds it previously borrowed from Citibank. The remaining $900,000            borrowed from Sovereign was used to pay bank fees and attorney fees relating to the            assignment in the amount of approximately $75,000 and the balance of approximately            $825,000 was used to pay a portion of the purchase price for equipment to be utilized            in the Methane Project currently under construction in Carter Valley, Tennessee by MMC,            the Company’s wholly-owned subsidiary.

             

| **(10)**   **Methane Project** |   |
|-----------------------------------------------|--------|

             

On October 24, 2006 the Company signed a twenty-year Landfill Gas Sale            and Purchase Agreement (the “Agreement”) with BFI Waste Systems of            Tennessee, LLC (“BFI”). The Agreement was thereafter assigned to the            Company’s wholly-owned subsidiary, Manufactured

 

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Methane Corporation (“MMC”) and provides that MMC will            purchase all the naturally produced gas stream presently being collected and flared at            the municipal solid waste landfill in Carter Valley serving the metropolitan area of            Kingsport, Tennessee that is owned and operated by BFI in Church Hill, Tennessee.            BFI’s facility is located about two miles from the Company’s existing            pipeline serving Eastman Chemical Company (“Eastman”). The Company is            installing a proprietary combination of advanced gas treatment technology to extract            the methane component of the purchased gas stream.  Methane is the principal            component of natural gas and makes up about half of the purchased gas stream by volume.            The Company is constructing a small diameter pipeline to deliver the extracted methane            gas to the Company’s existing pipeline for delivery to Eastman (the            “Methane Project”).

             

MCC has received delivery of both its first stage of process equipment            (cleanup and carbon dioxide removal) and the second stage of process equipment            (nitrogen rejection) for the Methane Project. It is anticipated that the total costs            for the Project including pipeline construction, will be approximately $4.1 million            including costs for compression and interstage controls. The costs of the Methane            Project to date have been funded primarily by (a) the money received by the Company            from Hoactzin to purchase its interest in the Program which exceeded the            Company’s actual costs of drilling the wells in that Program by more than $1            million (b) cash flow from the Company’s operations in the amount of            approximately $1 million and (c) $825,000 of the funds the Company borrowed from its            credit facility with Sovereign Bank. The Company anticipates that most of the remaining            balance of the Methane Project costs will be paid from the Company’s cash            flow.

             

The Company anticipates that operation of the Methane Project will begin            in mid-2008 after equipment installation, testing, and startup procedures are begun.            Commercial deliveries of gas will begin when the equipment is installed and tested and            the pipeline is constructed. Upon commencement of operations, the methane gas produced            by the project facilities will be mixed in the Company’s pipeline and delivered            and sold to Eastman Chemical Company (“Eastman”) under the terms of the            Company’s existing natural gas purchase and sale agreement. At current gas            production rates and expected extraction efficiencies, when commercial operations of            the Project begin, the Company expects to deliver about 418 MMBtu per day of additional            gas to Eastman, which would substantially increase the current volumes of natural gas            being delivered to Eastman by the Company from its Swan Creek field. At an assumed            sales price of gas of $7 per MMBtu, near the average natural gas price received by the            Company in 2007, the anticipated net revenues to the Company would be approximately            $800,000 per year from the Methane Project based on anticipated volumes and expenses.            The gas supply from the Project is projected to grow over the years as the underlying            operating landfill continues to expand and generate additional naturally produced gas,            and for several years following the closing of the landfill, currently estimated by BFI            to occur between the years 2022 and 2026.

             

As part of the Methane Project agreement, the Company agreed to install            a new force-main water drainage line for Allied Waste Industries, an affiliate of BFI,            the landfill

             

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owner, in the same two-mile pipeline trench as the gas pipeline needed            for the project, reducing overall

costs and avoiding environmental effects to private landowners resulting            from multiple installations of pipeline. Allied Waste will pay the additional costs for            including the water line. Construction of the gas pipeline needed to connect the            facility with the Company’s existing natural gas pipeline began in January 2008.            As a certificated utility, the Company’s pipeline subsidiary, TPC, requires no            additional permits for the gas pipeline construction. The Company currently anticipates            that pipeline construction will be concluded approximately the same time as equipment            deliveries and installations occur or in the May to June 2008 time period, subject to            weather delays during wintertime construction.

             

**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 2008, the Company sold 49,272 gross            barrels of oil from its Kansas Properties comprised of 149 producing oil wells. Of the            49,272 gross barrels, 34,764 barrels were net to the Company after required payments to            all of the Drilling Program participants and royalty interests. The Company’s            sales for the first three months of 2008 of 34,764 net barrels of oil compares to            29,418 barrels sold to the Company’s interest in the first three months of 2007.            The Company’s net revenues from the Kansas properties were $3,080,721 in the            first three months of 2008 compared to $1,544,147 in 2007. This increase was due to an            increase in prices for oil from an average of $91.36 in 2008 to an average of $52.61 in            2007 and a 5,346 net barrel increase in sales in 2008. In addition, the Company’s            production during the first three months of 2007 was adversely affected by severe            inclement weather in Kansas.

             

| **Tennessee** |   |
|---------------|--------|

             

During the first three months of 2008, the Company produced gas from 23            wells in the Swan Creek field, which it primarily sold in Kingsport, Tennessee to            Eastman Chemical Company. Natural gas production from the Swan Creek field for the            first three months of 2008 was an average of 195 Mcf per day during that period as            compared to 236 Mcf per day in the first three months of 2007. 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 2008, the Company produced            1,424 barrels of oil from the swan creek field as compared to 2,546 in the first three            months of 2007.

             

**Comparison of the Quarters Ended March 31, 2008 and            2007.**

             

The Company recognized $3,305,720 in revenues from its Kansas Properties            and the Swan Creek field during the first quarter of 2008 compared to            $1,772,400

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in the first quarter of 2007. The increase in revenues was due to an            increase in oil prices in 2008 and a 5,346 net barrel increase in oil sales. Oil prices            in the first quarter of 2008 averaged $91.36 per barrel as compared to $52.61 per            barrel in the first quarter of 2007. The Company realized a net income attributable to            common shareholders of $5,812,011 or $0.10 per share of common stock during the first            quarter of 2008, compared to a net loss in the first quarter of 2007 to common            shareholders of $(209,165) or $0.00 per share of common stock. The Company's operating            income was $885,011 or .02 per share in 2008 compared to a loss in operating income in            2007 of ($209,165). The Company recorded the remaining net operating loss carry            forwards of $5,227,000 in the first quarter of 2008 and recorded income tax expense of            $300,000 for the first quarter net income. This resulted in an .08 per share net            income. The Company’s revenue in the first quarter of 2007 was adversely affected            by inclement weather in Kansas and lower oil prices. Production costs and taxes in the            first quarter of 2008 increased to $1,335,021 from $963,130 in the first quarter of            2007. The difference is due to increased workovers to increase production, increased            taxes, and overall cost increases of supplies in the industry.

             

Depreciation, depletion, and amortization expense for the first quarter            of 2008 was $465,300 compared to $476,051 in the first quarter of 2007.

             

During the first quarter of 2008, general and administrative costs            increased to $397,607 from $345,588 in the first quarter of 2007.

 

Professional fees in the first quarter of 2008 were $97,628 compared to            $125,379 in the same period in 2007.

             

Interest expense for the first quarter of 2008 increased to $107,888            from $71,023 in the first quarter of 2007. The increase relates to the Sovereign            loan.

             

**Liquidity and Capital Resources**

             

On December 17, 2007, Citibank assigned the Company’s revolving            credit facility with Citibank to Sovereign Bank of Dallas, Texas            (“Sovereign”) as requested by the Company.

             

Under the facility as assigned to Sovereign, loans and letters of credit            will be available to the Company on a revolving basis in an amount outstanding not to            exceed the lesser of $20 million or the Company’s borrowing base in effect from            time to time. The Company’s initial borrowing base with Sovereign was set at $7.0            million, an increase from its borrowing base of $3.3 million with Citibank prior to the            assignment.

             

The Company’s initial borrowing on December 17, 2007 under its new            facility with Sovereign was approximately $4.2 million which will bear interest at a            floating rate equal to prime as published in the Wall Street Journal plus 0.25%            resulting in a current interest rate of approximately 7.5%. Interest only is payable            during the term of the loan and the principal balance of the loan is due December 31,            2010. The Sovereign facility is secured by substantially all of the Company’s            producing and non-producing oil and gas properties and pipeline and the Company’s            Methane Project assets.

 

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The Company used a portion of the $4.2 million borrowed from Sovereign            to pay off the funds it previously borrowed from Citibank. The remaining $900,000            borrowed from Sovereign was used to pay bank fees and attorney fees relating to the            assignment in the amount of approximately $75,000 and the balance of approximately            $825,000 was used to pay a portion of the purchase price for equipment to be utilized            in the Methane Project currently under construction in Church Hill, Tennessee by MMC,            the Company’s wholly-owned subsidiary.

             

The Company’s cash balance at year-end of $2,226,839 was            attributable to high commodity prices as well as an increase in the borrowing base by            $900,000 on December 17, 2007 and the funding of the Ten Well Program. The Company has            expended approximately $1.5 million of these funds subsequent to year-end on the            Methane Project and completing the Ten Well Program.

             

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

             

| **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, day rate 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.

 

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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 are excluded from the costs being amortized. No ceiling            write-downs were recorded in 2008 or 2007.

             

**Oil and Gas Reserves/Depletion Depreciation**

**and Amortization of Oil and Gas Properties**

             

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

             

The Company’s proved oil and gas reserves as of December 31, 2007            were determined by LaRoche Petroleum Consultants, Ltd. Projecting the effects of            commodity prices on production, and timing of development expenditures includes many            factors beyond the Company’s control.

             

The future estimates of net cash flows from the Company’s proved            reserves and their present value are based upon various assumptions about future            production levels, prices, and costs that may prove to be incorrect over time. Any            significant variance from assumptions could result in the actual future net cash flows            being materially different from the            estimates.             

             

| **Asset Retirement                            Obligations** |   |
|-------------------------------------------------------------|--------|

             

The Company is required to record the effects of contractual or other            legal obligations on well abandonments for capping and plugging wells. Management            periodically reviews the estimate of the timing of the wells’ closure as well as            the estimated closing costs, discounted at the credit adjusted risk free rate of 6%.            Quarterly, management accretes the 6% discount into the liability and makes other            adjustments to the liability for well retirements incurred during the            period.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET            RISKS** 

             

**Commodity Risk**

             

The Company's major market risk exposure is in the pricing applicable to            its oil and gas production. Realized pricing is primarily driven by the prevailing            worldwide price for crude oil and spot prices applicable to natural gas production.            Historically, prices received for oil and gas production have been volatile and            unpredictable and price volatility is expected to continue. Monthly oil price            realizations ranged from a low of $49.05 per barrel to a high of $89.18 per barrel            during 2007 an average of $91.36 in the 1st quarter of 2008. Gas price            realizations ranged from a monthly low of $5.43 per Mcf to a monthly high of $7.59 per            Mcf during the same period. The Company did not enter into any hedging agreements in            2008 or 2007 to limit exposure to oil and gas price fluctuations.

             

**Interest Rate Risk**

             

At March 31, 2008, the Company had debt outstanding of $4,374,544            including, as of that date, $4,212,105 owed on its credit facility with Sovereign Bank            The interest rate on the Sovereign credit facility is variable at a rate equal to LIBOR            plus 2.5%. The Company’s debt owed to other parties of $162,439 has fixed            interest rates ranging from 5.5% to 8.25%. As a result, the Company's annual interest            costs in 2007 fluctuated based on short-term interest rates on approximately 96% of its            total debt outstanding at December 31, 2007. The impact on interest expense and the            Company’s cash flows of a 10 percent increase in the interest rate on the            Citibank Credit facility would be approximately $25,273, assuming borrowed amounts            under the Citibank credit facility remained at the same amount owed as of December 31,            2007. The Company did not have any open derivative contracts relating to interest rates            at December 31, 2006.

             

**Forward-Looking Statements And Risk**

             

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

             

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

 

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prices, may substantially adversely affect the Company's financial            position, results of operations, and cash flows.

             

**ITEM 4T CONTROLS AND PROCEDURES**

             

| **Controls and                            Procedures** |   |
|--------------------------------------------------------|--------|

             

**Evaluation of Disclosure Controls and            Procedures**

             

The Company’s Chief Executive Officer and Principal Financial            Officer, and other members of management team have evaluated the effectiveness of the            Company’s disclosure controls and procedures (as defined in Exchange Act Rules            13a-15(e) and 15d-15(e)). Based on such evaluation, the Company’s Chief Executive            Officer and Principal Financial Officer have concluded that the Company’s            disclosure controls and procedures, as of the end of the period covered by this Report,            were adequate and effective to provide reasonable assurance that information required            to be disclosed by the Company in reports that it files or submits under the Exchange            Act, is recorded, processed, summarized and reported, within the time periods specified            in the SEC’s rules and forms.

             

The effectiveness of a system of disclosure controls and procedures is            subject to various inherent limitations, including cost limitations, judgments used in            decision making, assumptions about the likelihood of future events, the soundness of            internal controls, and fraud. Due to such inherent limitations, there can be no            assurance that any system of disclosure controls and procedures will be successful in            preventing all errors or fraud, or in making all material information known in a timely            manner to the appropriate levels of management.

             

**Management’s Report on Internal Control over Financial            Reporting**

             

Management of the Company is responsible for establishing and            maintaining adequate internal control over financial reporting, as such term is defined            in the Securities Exchange Act of 1934 Rule 13a-15(f). Internal control over financial            reporting refers to the process designed by, or under the supervision of, the            Company’s Chief Executive Officer and Chief Financial Officer, and effected by            the Company’s Board of Directors, management and other personnel, 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, and includes those policies and procedures            that:

             

|   | **•** | Pertain to the maintenance of records that, in                            reasonable detail, accurately and fairly reflect the transactions and                            dispositions of the Company’s assets; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**•**          Provide            reasonable assurance that transactions are recorded as necessary to permit preparation            of financial statements in accordance with generally accepted accounting principles,            and that receipts and expenditures are being made only in accordance with            authorizations of the Company’s management and directors; and

 

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|   | **•** | Provide reasonable assurance regarding prevention or                            timely detection of unauthorized acquisition, use or disposition of the                            Company’s assets that could have a material effect on the                            Company’s financial statements. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Under the supervision and with the participation of the Company’s            management, including the Chief Executive Officer and the Chief Financial Officer, the            Company’s management conducted an evaluation of the effectiveness of the            Company’s internal control over financial reporting as of March 31, 2008 as            required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this            assessment, the Company’s management used the criteria set forth in the framework            in “Internal Control – Integrated Framework” issued by the Committee            of Sponsoring organizations of the Treadway Commission (“COSO”). Based on            the evaluation conducted under the framework in “Internal Control –            Integrated Framework,” issued by COSO the Company’s management concluded            that the Company’s internal control over financial reporting was effective as of            March 31, 2008.

             

This report does not include an attestation report of the            Company’s registered public accounting firm regarding internal control over            financial reporting. Management’s report was not subject to attestation by the            Company’s registered public accounting firm pursuant to temporary rules of the            SEC that permit the Company to provide only management’s report in this Form            10-Q.

             

Because of its inherent limitations, internal control over financial            reporting may not prevent or detect misstatements. Also, projections of any evaluation            of effectiveness into future periods are subject to the risk that controls may become            inadequate because of changes in conditions, or that the degree of compliance with the            policies or procedures may deteriorate.

             

**Changes in Internal Controls**

             

During the period covered by this report, there have been no changes to            the Company’s system of internal control over financial reporting that has            materially affected, or is reasonably likely to materially affect, the Company’s            system of 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.

             

             

22

 

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**PART II OTHER INFORMATION**

             

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

             

During the first quarter of 2008, the Company issued 3,000 registered            and unrestricted shares upon the exercise of options granted under the Tengasco, Inc.            Incentive Stock Plan.

 

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| **ITEM 6** | ****
****EXHIBITS**** |   |
|------------|-----------------------|--------|

             

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

             

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

             

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

             

 

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**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 14, 2008

             

**TENGASCO, INC.**

             

|   | By:s/ Jeffrey R.                            Bailey |
|--------|----------------------------------------------------|

|   | Jeffrey R. Bailey |
|--------|-------------------|

|   | Chief Executive Officer |
|--------|-------------------------|

             

             

|   | By:s/ Mark A.                            Ruth |
|--------|-----------------------------------------------|

|   | Mark A. Ruth |
|--------|--------------|

|   | Chief Financial Officer |
|--------|-------------------------|

             

 

25

 

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I,            Jeffrey R. Bailey, certify that:

 

|   | 1. I have reviewed this Quarterly Report on Form 10-Q of                            Tengasco, Inc. for the quarter ended March 31, 2008. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|

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 annual report, fairly present in all material respects the            financial condition, results of operations and cash flows of the registrant as of, and            for, the periods presented in this report;

 

4. The registrant’s other certifying officers and I are            responsible for establishing and maintaining disclosure controls and procedures (as            defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over            financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f) for the            registrant and we 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 known 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 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 14, 2008

By: s/ Jeffrey R. Bailey

Jeffrey R. Bailey

Chief Executive Officer

             

26

 

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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, 2008. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|

 

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 annual report, fairly present in all material respects the            financial condition, results of operations and cash flows of the registrant as of, and            for, the periods presented in this report;

 

4. The registrant’s other certifying officers and I are            responsible for establishing and maintaining disclosure controls and procedures (as            defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over            financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f) for the            registrant and we 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 known 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 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 14, 2008

             

By:s/ Mark A. Ruth

|                                               Mark A. Ruth |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

|                                              Chief Financial Officer |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

             

 

27

 

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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, 2008.

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 presents, 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 14, 2008 |
|--------|---------------------|

             

|   |   | By:s/Jeffrey R.                            BaileyJeffrey R. BaileyChief Executive   Officer |
|--------|--------|------------------------------------------------------------------------------------------------------------|

             

**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, 2008.

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 presents, 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 14, 2008 |
|--------|---------------------|
|   |                |   | By:s/Mark A.                            Ruth

Mark A. RuthChief Financial Officer |   |
|   |                |   |   |   |
|        |                     |  |  |  |  |  |

             

             

             

 

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