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

REPORT ON FORM 10-K

(Mark one)
/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 2003 or

/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .

Commission File No. 0-20975

TENGASCO, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

TENNESSEE 87-0267438
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

603 MAIN AVENUE, KNOXVILLE, TENNESSEE 37902
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (865) 523-1124.

Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.001 PAR VALUE PER SHARE.

Indicate by checkmark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No / /

Indicate by checkmark if disclosure of delinquent filers in response to
Item 405 of Regulation SK is not contained in this form and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

State the aggregate market value of the voting stock held by
non-affiliates (based on the closing price on March 25, 2004 of ($0.45):
$13,434,488.

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

State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second quarter:

State issuer's revenues for its most recent fiscal year: $6,205,520

State the number of shares outstanding of the registrant's $.001 par
value common stock as of the close of business on the latest practicable date
(March 25, 2004): 48,677,828

Documents Incorporated By Reference: None.



TABLE OF CONTENTS



Page

PART I

Item 1. Business.....................................................................................1

Item 2. Properties..................................................................................21

Item 3. Legal Proceedings...........................................................................28

Item 4. Submission of Matters to a Vote of Security Holders.........................................30

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities..........................................................................30

Item 6. Selected Financial Data.....................................................................33

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation........34

Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................44

Item 8. Financial Statements and Supplementary Data.................................................45

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........45

Item 9A. Controls and Procedures ....................................................................45

PART III

Item 10. Directors and Executive Officers of the Registrant ..........................................46

Item 11. Executive Compensation ......................................................................53

Item 12. Security Ownership of Certain Beneficial Owners and Management ..............................55

Item 13. Certain Relationships and Related Transactions ..............................................60

Item 14. Principal Accountant Fees and Services .....................................................63

PART IV

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

SIGNATURES.......................................................................................................69



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FORWARD LOOKING STATEMENTS

The information contained in this Report, in certain instances,
includes forward- looking statements within the meaning of applicable securities
laws. Forward-looking statements include statements regarding the Company's
"expectations," "anticipations, intentions," "beliefs," or "strategies"
regarding the future. Forward-looking statements also include statements
regarding revenue, margins, expenses, and earnings analysis for 2003 and
thereafter; the Company's ability to continue as a going concern; oil and gas
prices; exploration activities; development expenditures; costs of regulatory
compliance; environmental matters; technological developments; future products
or product development; the Company's products and distribution development
strategies; potential acquisitions or strategic alliances; liquidity and
anticipated cash needs and availability; prospects for success of capital
raising activities; prospects or the market for or price of the Company's common
stock; and control of the Company. All forward-looking statements are based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from the forward-looking
statements. Among the factors that could cause results to differ materially are
the factors discussed in "Risk Factors" below in Item 1 of this Report.

Projecting the effects of commodity prices on production, and timing of
development expenditures include many factors beyond the Company's control. The
future estimates of net cash flows from the Company's proved reserves and their
present value are based upon various assumptions about future production levels,
prices, and costs that may prove to be incorrect over time. Any significant
variance from assumptions could result in the actual future net cash flows being
materially different from the estimates.




PART I


ITEM 1. BUSINESS.

OVERVIEW

The Company is in the business of exploring for, producing and
transporting oil and natural gas in Tennessee and Kansas. The Company leases
producing and non-producing properties with a view toward exploration and
development. Emphasis is also placed on pipeline and other infrastructure
facilities to provide transportation services. The Company utilizes seismic
technology to improve the recovery of reserves.

The Company's activities in the oil and gas business commenced in May
1995

1


with the acquisition of oil and gas leases in Hancock, Claiborne, Knox,
Jefferson and Union counties in Tennessee. The Company's current lease position
in these areas in Tennessee is approximately 28,338 acres.

To date, the Company has drilled primarily on a portion of its
Tennessee leases known as the Swan Creek Field in Hancock County focused within
what is known as the Knox formation, one of the geologic formations in that
field. During 2003, the Company produced an average of approximately 1.075
million cubic feet of natural gas per day and 2,024 barrels of oil per month
from 25 producing gas wells and six producing oil wells in the Swan Creek Field.

In 2001, the Company's wholly-owned subsidiary, Tengasco Pipeline
Corporation ("TPC") completed a 65-mile intrastate pipeline from the Swan Creek
Field to Kingsport, Tennessee. Until the Company's pipeline was completed, the
gas wells that had been drilled in the Swan Creek Field could not be placed into
actual production and the gas transported and sold to the Company's industrial
customers in Kingsport. The Company initially believed that the production of
natural gas from the Swan Creek Field would be significantly higher than the
actually experienced production. The reasons for the lower production volumes
include initial production problems caused by naturally occurring fluids
entering the well bore, slower than anticipated production of the wells due to
underground reservoir characteristics that became apparent only when the wells
were placed into actual production, and the inability of the Company to drill
additional wells due to shortage of available capital. The Company has taken
steps to minimize fluid problems in existing wells by mechanical means and to
avoid them in future wells by drilling and completion techniques. Management
believes, however, that the only way to increase production volumes of gas from
this field is to drill additional wells to drain the underground reservoirs of
the full reserves of gas, and the Company's ability to do so is dependent upon
raising additional capital for drilling. There can be no assurances that the
Company will be able to resolve the difficulties currently preventing it from
obtaining capital for drilling additional wells and increasing production
volumes of natural gas from the Swan Creek Field.

In 1998, the Company acquired from AFG Energy, Inc.("AFG"), a private
company, approximately 32,000 acres of leases in the vicinity of Hays, Kansas
(the "Kansas Properties"). Included in that acquisition were 273 wells,
including 208 working wells, of which 149 were producing oil wells and 59 were
producing gas wells, a related 50-mile pipeline and gathering system, three
compressors and 11 vehicles. The total purchase price of these assets was
approximately $5.5 million. During 2003, the Kansas Properties produced an
average of approximately 648 MMcf of natural gas per day and 10,246 barrels of
oil per month. Gross revenues from the Kansas Properties during 2003 were
$3,721,601.


HISTORY OF THE COMPANY

The Company was initially organized under the laws of the State of Utah
in 1916, under the name "Gold Deposit Mining & Milling Company." The Company
subsequently changed its name to Onasco Companies, Inc. The Company was formed
for the purpose of

2


mining, reducing and smelting mineral ores. In 1972, the Company conveyed to an
unaffiliated entity substantially all of its assets and ceased all business
operations. From approximately 1983 to 1991, the operations of the Company were
limited to seeking out the acquisition of assets, property or businesses.

In 1995, the Company acquired certain oil and gas leases, equipment,
securities and vehicles owned by Industrial Resources Corporation, a Kentucky
corporation, changed its name from Onasco Companies, Inc. to Tengasco, Inc., and
changed the domicile of the Company from the State of Utah to the State of
Tennessee by merging into Tengasco, Inc., a Tennessee corporation, formed by the
Company solely for this purpose.

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


GENERAL


1. THE SWAN CREEK FIELD

Amoco Production Company, during the late 1970's and early 1980's
acquired approximately 50,500 acres of oil and gas leases in the Eastern
Overthrust in the Appalachian Basin, including the area now referred to as the
Swan Creek Field. In 1982, Amoco successfully drilled two natural gas discovery
wells in the Swan Creek Field to the Knox Formation at approximately 5,000 feet
of total depth. These wells, once completed, had a high pressure and apparent
volume of deliverability of natural gas. In the mid-1980's, however, development
of this Field was cost prohibitive due to a substantial decline in worldwide oil
and gas prices which was further exacerbated by the high cost of constructing a
necessary 23-mile pipeline across three rugged mountain ranges and crossing the
environmentally protected Clinch River from Sneedville, Tennessee to deliver gas
from the Swan Creek Field to the closest market in Rogersville, Tennessee. In
1987, Amoco farmed out its leases to Eastern American Energy Company which held
the leases until July 1995. In July 1995, the Company commenced a legal action,
under laws passed by the Tennessee legislature, as to its right to lease Amoco's
prior acreage. In July 1995 pursuant to such action, the Company acquired the
Swan Creek leases. These leases provide for a landowner royalty of 12.5%.

A. SWAN CREEK PIPELINE FACILITIES

In July 1998, the Company completed Phase I of its pipeline from the
Swan Creek Field, a 30-mile pipeline made of six- and eight-inch steel pipe
running from the Swan Creek Field into the main city gate of Rogersville,
Tennessee. With the assistance of the Tennessee Valley Authority ("TVA"), the
Company was successful in utilizing TVA's right-of-way along its main power line
grid from the Swan Creek Field to the Hawkins County Gas Utility District

3


located in Rogersville. The cost of constructing Phase I of the pipeline was
approximately $4,200,000.

In April 2000, construction commenced on Phase II of the Company's
pipeline. This was an additional 35 miles of eight- and 12-inch pipe laid at a
cost of approximately $11.1 million extending the Company's pipeline from a
point near the terminus of Phase I and connecting to an existing pipeline and
meter station at Eastman Chemical Company's chemical plant. The pipeline system
was completed in March 2001. The overall cost was approximately $16.4 million at
December 31, 2003 and the pipeline extends 65 miles from the Company's Swan
Creek Field to Kingsport, Tennessee.


B. SWAN CREEK CONTRACTUAL ARRANGEMENTS

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

In March 2000, the Company signed an amendment to the agreement with
Eastman permitting the Company a further option with respect to the allowable
level of non-hydrocarbons in the delivered gas from the Swan Creek Field. This
amendment gives the Company the further option to tender gas without treatment,
at a minimum volume of 10,000 MMBtu's per day, in consideration of which the
Company agreed to accept a price reduction of five cents per MMBtu for the
volumes per day between 5,000 and 10,000 MMBtu's per day under the pricing
structure in place under the original agreement. To date, to the Company's
knowledge, none of the gas sold by the Company to Eastman exceeds the allowable
level of non-hydrocarbons permitted under the agreement and no such gas requires
treatment.

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

4


agreement with Eastman is for an initial term of twenty years and will be
automatically extended, if the parties agree, for successive terms of one year.
The initial term of the agreement commenced in March 2001.

In January 2000, TPC, signed a franchise agreement to install and
operate new natural gas utility services for residential, commercial and
industrial users in Hancock County, Tennessee for the Powell Valley Utility
District (the "District"). The District had no existing natural gas facilities
and the system to be installed by TPC was initially intended to extend to
schools and small customers and gradually be expanded over time to serve as many
of the 6,900 residents of the County as is economically feasible. TPC purchases
gas from the Company on behalf of the District, which gas is to be resold at an
average retail price of about $8.00 Mcf. Under the franchise agreement, which
has an initial term of ten years and may be renewed by the Company for an
additional ten years, TPC will receive 95% of the gross proceeds of the sale of
gas for its services under the agreement. In June 2000, TPC began installation
of the necessary facilities to begin to serve residential and industrial
consumers in the City of Sneedville, county seat of Hancock County. The
Company's existing eight-inch main line from its Swan Creek Field passes through
the city limits of Sneedville. A one-half mile of interconnecting pipeline from
the Company's existing pipeline was installed, as well as an additional four
miles of pipeline as the initial phase of the distribution system. The
construction was completed and delivery of initial volumes of gas into the
system from the Swan Creek Field occurred in December 2000. The cost of
construction of these facilities was approximately $300,000. Upon enactment of
initial rate schedules by the District, initial sales began in January 2001 to a
small number of residential and small commercial customers.

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

In March 2001, the Company signed a contract to supply natural gas to
BAE Systems Ordnance Systems Inc.("BAE"), operator of the Holston Army
Ammunition Plant in Kingsport, Tennessee for a period of twenty years. Natural
gas is used at the Holston Army ammunition facility to fire boilers and furnaces
for steam production and process operations utilized in the manufacture of
explosives by BAE for the United States military. Under the agreement, BAE's
daily purchases of natural gas may be between 1.8 million and five million cubic
feet, and volume could, although there can be no assurance, increase over the
life of the agreement as BAE conducts additional operations at the Holston
facility. The contract calls for a

5


price based on the monthly published index price for spot sales of gas at the
Henry Hub plus five cents per MMBtu in the same manner as the price is
calculated in the contract between the Company and Eastman.

The Company has the only gas pipeline located on the grounds of the
6,000-acre Holston facility. A portion of the Holston facility is being
developed by BAE as the new Holston Business and Technology Park, which is
expected to serve as a location for additional commercial and industrial
customers. Although there can be no assurance, the Company's presence at the
Holston Business and Technology Park is expected to position it to provide gas
service to those customers and the Company understands that its presence is
considered by BAE to be a favorable factor in the development of the Park.


C. SWAN CREEK PRODUCTION AND DEVELOPMENT

The Company began delivering gas through its pipeline to BAE in April
2001 and to Eastman in May 2001. Daily production in June 2001 averaged 4,936.2
Mcf and in July 2001 daily production averages increased to 5,497 Mcf per day.
Although the Company's gas production in mid-2001 was at anticipated levels, the
Company was unable to maintain those production levels for the remainder of 2001
and since then. This was due primarily to three problems:

o initial fluid problems in some wells;

o natural and expected production declines from the type of
reservoir that exists in the Swan Creek field; and

o the Company's inability to offset expected natural declines in
production by drilling new wells because of inadequate
capital.

As to the first of these problems, the Company experienced the in-flow
of substantially more fluids in the existing wells than had been expected when
they were first brought into continuous production in 2001. These fluids entered
the wells from the boreholes. The fluids obstructed and significantly reduced
the flow of gas from the existing wells in the Swan Creek Field and required
substantial additional work and repairs to increase the production from existing
wells. First, a drip tank system was installed to eliminate the fluids in the
pipeline. Next, mechanical devices were installed in many of the existing wells
to reduce the fluid problems. Many of the existing wells had to be shut down
while the repairs were made. Gas lifts have been installed in 15 of the
Company's existing wells and act as mechanisms to remove the fluids and
stabilize erratic behavior, such as large swings in individual well production.
These measures have had only limited success in increasing production from
existing wells. It is expected that techniques used in addressing these fluid
problems will be applied in future wells in the Swan Creek Field and the Company
anticipates, although there can be no assurance, that this will minimize or
prevent these problems.

6


As to the second problem, the Company experienced an expected and what
it believes is a normal decline in initial production from existing wells in the
newly-producing Swan Creek Field. The Company believes that all types of gas
wells experience some type of decline in the course of initial production. These
declines were expected and do not diminish either the shut-in pressure or the
Company's actual reserves in the Swan Creek Field. The declines, however,
suggest the production rates from some of the Company's smaller wells will
continue to be slower, which may result in such wells lasting longer than it was
originally expected.

As to the third problem, the declines in production have not been
addressed and replaced by additional drilling as the Company had planned. The
Company believes that in order for overall field production to remain steady or
grow in a field such as the Swan Creek Field, new wells must be brought online
to offset the normal production declines in wells as described above. The
Company anticipates, although there can be no assurances, that any new wells it
drills in the Swan Creek Field would experience a similar harmonic (i.e. a
relatively steep initial decline curve followed by longer periods of relatively
flat or stable production) decline as a normal function. Consequently,
continuous drilling is important to maintaining or increasing initial levels of
production. Only two gas wells were added by the Company in 2002 and no new
wells were drilled in the Swan Creek Field in 2003 due to the Company's
inability to raise capital to pay for the costs of such drilling caused by the
Company's dispute with its primary lender, Bank One, N.A. See below, "Item 3 -
Legal Proceedings" and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liuidity and Capital Resources".
The Company anticipates that the natural decline of production from existing
wells is now predictable in the Swan Creek Field, that the total volume of its
reserves remains largely intact, and that these reserves can be extracted
through both existing wells and by drilling of additional wells, subject to the
availability of requisite funding. There can be no assurance that the Company
will have or be able to further raise sufficient capital to fund its proposed
drilling program to successfully increase production from the Swan Creek Field.

Due to natural and expected declines that continue to occur in ongoing
production from any oil and gas well, some additional declines are expected to
occur in production from the Company's existing wells in the Swan Creek Field.
Although there can be no assurance, the Company expects these natural declines
to be less than the decline experienced to date, and that ongoing production
from existing wells will tend to level off. This expectation is based on two
factors:

o first, repairs have been performed on many of the existing
wells, and

o second, the natural production decline from any well is
normally greatest during the initial producing periods, which
initial periods have largely elapsed.

Natural gas production from the Swan Creek Field during 2003 averaged
1.075 million cubic feet per day compared to 1.966 million cubic feet per day in
2002. This production history reflects a combination of natural and expected
decline from initial production from

7


existing wells. During 2003, no wells were added to offset the natural and
expected declines in production from existing wells.

During 2003, the Company had 25 producing gas wells and 6 producing oil
wells in the Swan Creek Field. Miller Petroleum, Inc. and others had a
participating interest in 7 of these wells. See, "Item 2 - Description of
Property - Property Location, Facilities, Size and Nature of Ownership." In
total, the Company has completed 45 wells in the Swan Creek Field. The majority
of these gas wells were drilled prior to the completion of the pipeline system
so only test data was available prior to full production. Of the completed
wells, 12 are shut-in or currently not producing because these wells are either
not presently producing commercial quantities of hydrocarbons, or are awaiting
workover or tie-in to the Company's pipeline. However, certain of these wells
may not be tied in to the Company's pipeline since the expense of connection
over rough terrain may not be justified in view of the expected volumes to be
produced.

The Company was not able to drill additional gas or oil wells at Swan
Creek in 2003 because it did not have sufficient funds to do so. Although the
Company had expected to commence and continue its drilling program in 2003, it
was forced to postpone any further drilling until additional funds are available
and its dispute with Bank One is resolved, as to which there can be no
assurance. Because the Knox formation has been defined by the accumulation of
data from previously drilled wells and seismic data, new locations and new wells
when drilled are expected, although there can be no assurances, to contribute to
achieving increases in production totals. The Company believes, although there
can be no assurance, that new wells can be strategically based on information it
has developed from its existing wells as to the shape and key producing horizons
of the Knox formation. The Company obtained approval from the Tennessee
regulatory authorities with jurisdiction over spacing of wells to drill
additional wells on smaller spacing in the Field, effectively allowing more
wells to be drilled and the reservoir to produce more quickly but with no
decrease in the long term efficiency of production of the maximum amount of
reserves from the reservoir. The Company is hopeful that production from these
new wells will be in line with its more productive existing wells in the Swan
Creek Field and will have a noticeable effect on increasing the total production
from the Field. Although there can be no assurance, it is expected that once
this work is completed and the new wells are drilled production from the Swan
Creek Field will increase. The Company, however, anticipates that even if new
wells were drilled in the Swan Creek Field, the deliverability of natural gas
from the Swan Creek Field will not be sufficient to satisfy the volumes
deliverable under its contracts with Eastman Chemical and BAE in Kingsport,
Tennessee. The Eastman Contract provides that Eastman Chemical will buy a
minimum of the lesser of eighty percent of that customer's daily usage or 10,000
MMBtu per day, and the BAE contract provides that BAE will buy a minimum of all
of that customer's usage or 5,000 MMbtu per day after Eastman's volumes have
been provided. The Company's current production from the Swan Creek field is
approximately 1,000 MMBtu per day. The Company's contracts with these customers
are only for gas produced from the Swan Creek Field. So long as that Field is
not capable of supplying these volumes, the Company is not in breach or
violation of these contracts. No penalty is associated with the inability of the
Field to produce the volumes that the Company could deliver and buyers would be
obligated to buy under these industrial contracts if the volumes were physically
available from the Field. However, in the

8


event that the Company were found to be in breach of its obligations for failure
to deliver any volumes of gas that is produced from the Swan Creek Field to
either of these customers, the agreements limit potential exposure to damages.
Damages are limited to no more than $.40 per MMBtu for any replacement volumes
that are proved in a court proceeding as having been obtained to replace volumes
required to be furnished but not furnished by the Company.

The Company's strategy also includes commencing drilling in other
formations in its Swan Creek Field. To date, drilling in the Swan Creek Field
has focused on production of gas primarily from the Knox formation. Immediately
adjacent to this formation, however, and shallower over these formations, are
other formations that the Company believes, although there can be no assurance,
have a potential for gas production. These other formations hold the possibility
for yielding both oil and gas and have produced some gas to date and have not
been a primary target for gas production. The shallower depths needed for
drilling in these other formations and the moderate gas production from them may
make the production of additional gas feasible. As noted above, the Company can
not proceed with such drilling until such time as funding is available, as to
which there can be no assurance.


D. RELATIONSHIP WITH THE UNIVERSITY OF TENNESSEE

On March 17, 2000, the Company announced that it had entered into an
agreement with the University of Tennessee-Knoxville related to its hydrocarbon
exploration activities in eastern Tennessee. The Agreement provides for
cooperative use of certain instruments, vehicles and equipment that comprise a
vibreosis system for producing seismic reflection images of subsurface geologic
structures. The vibroseis system can be used for educational and research
purposes that are beneficial to the University as an institution of research and
higher learning. The Company uses data from the vibroseis system in the course
of business operations, exploring for structures that may contain gas or oil.
Central to the vibroseis system is the servo-hydraulic vibrator, a
truck-mounted, hydraulically operated engine capable of applying force to the
surface of the earth for the purpose of generating seismic waves. At the present
time, the University possesses one model Y-1100A vibrator manufactured by the
George E. Failing Company. Tengasco currently owns two Y-1100A vibrators. The
equipment covered by this agreement includes the servo-hydraulic vibrators,
electronic controls, radios, geophones, cables, seismograph, and vehicles used
to produce seismic data at remote field locations.


2. THE KANSAS PROPERTIES

In 1998, the Company acquired the Kansas Properties, which presently
include 134 producing oil wells and 51 producing gas wells in the vicinity of
Hays, Kansas and a gathering system including 50 miles of pipeline. The Company
also acquired 37 other wells, which now serve as saltwater disposal wells in the
vicinity of Hays, Kansas. Saltwater wells are used to store saltwater
encountered in the drilling process that would otherwise have to be transported
out of the area. These saltwater disposal wells reduce operating costs by
eliminating the need for

9


transport. The aggregate production for the Kansas Properties in 2003 was 648
Mcf of gas and 342 barrels of oil per day. Revenue for the Kansas Properties in
2003 was approximately $310,133 per month in 2003.

The Company employs a full time geologist in Kansas to oversee
operations of the Kansas Properties. The Company has identified five new
locations for drilling wells in Ellis and Rush Counties, Kansas on its existing
leases in response to drilling activity in the area indicating new areas of
production. The Company did not drill any new wells in Kansas in 2003 due to
lack of funds available for such drilling. The Company is also engaged in
gathering for a fee the gas produced from wells owned by others located in
Kansas adjacent to its wells and near its gathering lines. The Company's plans
for its Kansas Properties include maintaining the current productive capacity of
its existing wells through normal workovers and maintenance of the wells,
performing gathering or sales services for adjacent producers, and expanding the
Company's own production through drilling these additional wells. Such plans are
subject to the availability of funds to finance the work.

In addition, there are several capital development projects that the
Company has considered with respect to the Kansas Properties, including
recompletion of wells and major workovers to increase current production.
Although there can be no assurances, these projects when completed might
increase production in Kansas. Management, however, has made the decision not to
undertake any of these projects, as the Company does not presently have the
necessary funds. It will, however, reconsider its decision if such funds become
available.


3. OTHER AREAS OF DEVELOPMENT

The Company is presently evaluating other geological structures in the
East Tennessee area that are similar to the Swan Creek Field and which the
Company believes have a high probability of producing hydrocarbons. Included in
the evaluation are (1) seismic data available either from third-party sources,
or by the Company conducting its own seismic field studies and (2) drilling
results and geophysical logs from existing wells in the region. Related leasing
activities include both identifying new prospective properties to lease as funds
become available for exploration, and releasing properties previously leased
that have been determined by the Company to have no commercial hydrocarbon
potential. The Company plans continued exploration activities in such areas. In
2002, the Company, in conjunction with Southeast Gas & Oil Corp. of Newport,
Tennessee, drilled an approximately 6,000-foot exploratory well to the Knox
formation in Cocke County, Tennessee, approximately 40 miles southeast of the
Swan Creek Field. This Cocke County well did not result in any commercial
quantities of hydrocarbons.


GOVERNMENTAL REGULATIONS

The Company is subject to numerous state and federal regulations,
environmental

10


and otherwise, that may have a substantial negative effect on its ability to
operate at a profit. For a discussion of the risks involved as a result of such
regulations, see, "Effect of Existing or Probable Governmental Regulations on
Business" and "Costs and Effects of Compliance with Environmental Laws"
hereinafter in this section.


PRINCIPAL PRODUCTS OR SERVICES AND MARKETS

The principal markets for the Company's crude oil are local refining
companies, local utilities and private industry end-users. The principal markets
for the Company's natural gas are local utilities, private industry end-users,
and natural gas marketing companies.

Gas production from the Swan Creek Field can presently be delivered
through the Company's completed pipeline to the Powell Valley Utility District
in Hancock County, Eastman and BAE in Sullivan County, as well as other
industrial customers in the Kingsport area. The Company has acquired all
necessary regulatory approvals and necessary property rights for the pipeline
system. The Company's pipeline can not only provide transportation service for
gas produced from the Company's wells, but could provide transportation of gas
for small independent producers in the local area as well. The Company could,
although there can be no assurance, sell its products to certain local towns,
industries and utility districts.

Natural gas from the Kansas Properties is delivered to Kansas-Nebraska
Energy, Inc. in Bushton, Kansas. At present, crude oil is sold to the National
Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays.
National Cooperative is solely responsible for transportation of the oil it
purchases whether by truck or pipeline.


DRILLING EQUIPMENT

On November 1, 2000, the Company purchased an Ingersoll Rand RD20
drilling rig and related equipment from Ratliff Farms, Inc., an affiliate of
Malcolm E. Ratliff, who at the time was the Company's Chief Executive Officer
and Chairman of the Board of Directors. The purchase price for the drilling rig
and related equipment was $995,000, which was paid by delivery of a convertible
note to Ratliff Farms, Inc. The note was paid in full from the proceeds of the
loan to the Company from Bank One in November 2001. In 2001, the drilling rig
was used to drill and complete four wells in the Swan Creek field. In 2002, the
drilling rig was used to drill two of the four wells the Company drilled that
year. The drilling rig has not been used on a contract drilling basis for any
other operators since it was purchased and was not used in 2003 due to lack of
funds to cover drilling costs, including casing, logging, bits and cementing and
due to the insufficiency of the number of the Company's remaining employees to
conduct drilling operations. It is estimated that the drilling rig was used for
approximately one-third of the Company's drilling activities since the rig was
purchased. The Company also receives contract drilling services from Miller
Petroleum, Inc. and Union Drilling in the Swan Creek Field. The

11


Company has determined that it will sell the drill rig if it receives what
management believes is an appropriate offer for the rig.


DISTRIBUTION METHODS OF PRODUCTS OR SERVICES

Crude oil is normally delivered to refineries in Tennessee and Kansas
by tank truck and natural gas is distributed and transported via pipeline.


COMPETITIVE BUSINESS CONDITIONS, COMPETITIVE POSITION IN THE INDUSTRY
AND METHODS OF COMPETITION

The Company's contemplated oil and gas exploration activities in the
States of Tennessee and Kansas will be undertaken in a highly competitive and
speculative business atmosphere. In seeking any other suitable oil and gas
properties for acquisition, the Company will be competing with a number of other
companies, including large oil and gas companies and other independent operators
with greater financial resources. Management does not believe that the Company's
initial competitive position in the oil and gas industry will be significant.

The Company's principal competitors in the State of Tennessee are Nami
Resources, LLC, Miller Petroleum, Inc., Knox Energy Development and Penn
Virginia Corporation. Nami Resources, Miller Petroleum, and Knox Energy
Development are in the business of exploring for and producing oil and natural
gas in the Kentucky and East Tennessee areas. These companies are in competition
with the Company for lease positions in the known producing areas in which the
Company currently operates, as well as other potential areas of interest. The
Company believes that it is in a favorable position in the area in which its
pipeline is located.

There are numerous producers in the area of the Kansas Properties. Some
are larger with greater technological and financial resources.

Although management does not foresee any difficulties in procuring
drilling rigs or the manpower to run them in the area of its operations, several
factors, including increased competition in the area, may limit the availability
of drilling rigs, rig operators and related personnel and/or equipment in the
future. Such limitations would have a natural adverse impact on the
profitability of the Company's operations.

The Company anticipates no difficulty in procuring well drilling
permits which are obtained from the Tennessee Oil and Gas Board. They are
usually issued within one week of application. The Company generally does not
apply for a permit until it is actually ready to commence drilling operations.

The prices of the Company's products are controlled by the world oil
market and

12


the United States natural gas market. Thus, competitive pricing behaviors are
considered unlikely; however, competition in the oil and gas exploration
industry exists in the form of competition to acquire the most promising acreage
blocks and obtaining the most favorable prices for transporting the product.
Management believes that the Company is well-positioned in these areas because
of the transmission lines that run through and adjacent to the properties leased
by the Company and because the Company holds relatively large acreage blocks in
the Company's areas of current operations.


SOURCES AND AVAILABILITY OF RAW MATERIALS

Excluding the development of oil and gas reserves and the production of
oil and gas, the Company's operations are not dependent on the acquisition of
any raw materials.


DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS

The Company is presently dependent upon a small number of customers for
the sale of gas from the Swan Creek Field, principally Eastman and BAE, and
other industrial customers in the Kingsport area with which the Company may
enter into gas sales contracts.

Natural gas from the Kansas Properties is delivered to Kansas-Nebraska
Energy, Inc. in Bushton, Kansas. At present, crude oil from the Kansas
Properties is being trucked and transported through pipelines to the National
Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays,
Kansas. National Cooperative is solely responsible for transportation of
products whether by truck or pipeline.


PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS,
ROYALTY AGREEMENTS OR LABOR CONTRACTS, INCLUDING DURATION

Royalty agreements relating to oil and gas production are standard in
the industry. The amount of the Company's royalty payments varies from lease to
lease.


NEED FOR GOVERNMENTAL APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES

Although none of the principal products offered by the Company require
governmental approval, permits are required for drilling oil or gas wells.

The transportation service offered by TPC is subject to regulation by
the Tennessee Regulatory Authority to the extent of certain construction,
safety, tariff rates and charges, and nondiscrimination requirements under state
law. These requirements are typical of those imposed

13


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

The City of Kingsport, Tennessee has also enacted an ordinance granting
to TPC a franchise for twenty years to construct, maintain and operate a gas
system to import, transport, and sell natural gas to the City of Kingsport and
its inhabitants, institutions and businesses for domestic, commercial,
industrial and institutional uses. This ordinance and the franchise agreement it
authorizes also require approval of the Tennessee Regulatory Authority under
state law. The Company will not initiate the required approval process for the
ordinance and franchise agreement until such time that it can supply gas to the
City of Kingsport. Although the Company anticipates that regulatory approval
will be granted, there can be no assurances that it will be granted, or that
such approval may be granted in a timely manner, or that such approval may not
be limited in some manner by the Tennessee Regulatory Authority.

TPC presently has all required tariffs and approvals necessary to
transport natural gas to all customers of the Company.


EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON BUSINESS

Exploration and production activities relating to oil and gas leases
are subject to numerous environmental laws, rules and regulations. The Federal
Clean Water Act requires the Company to construct a fresh water containment
barrier between the surface of each drilling site and the underlying water
table. This involves the insertion of a seven-inch diameter steel casing into
each well, with cement on the outside of the casing. The Company has fully
complied with this environmental regulation, the cost of which is approximately
$10,000 per well.

The State of Tennessee also requires the posting of a bond to ensure
that the Company's wells are properly plugged when abandoned. A separate $2,000
bond is required for each well drilled. The Company currently has the requisite
amount of bonds on deposit with the State of Tennessee.

As part of the Company's purchase of the Kansas Properties it acquired
a statewide permit to drill in Kansas. Applications under such permit are
applied for and issued within one to two weeks prior to drilling. At the present
time, the State of Kansas does not require the posting of a bond either for
permitting or to insure that the Company's wells are properly plugged when
abandoned. All of the wells in the Kansas Properties have all permits required
and the Company believes that it is in compliance with the laws of the State of
Kansas.

The Company's exploration, production and marketing operations are
regulated

14


extensively at the federal, state and local levels. The Company has made and
will continue to make expenditures in its efforts to comply with the
requirements of environmental and other regulations. Further, the oil and gas
regulatory environment could change in ways that might substantially increase
these costs. Hydrocarbon-producing states regulate conservation practices and
the protection of correlative rights. These regulations affect the Company's
operations and limit the quantity of hydrocarbons it may produce and sell. In
addition, at the federal level, the Federal Energy Regulatory Commission
regulates interstate transportation of natural gas under the Natural Gas Act.
Other regulated matters include marketing, pricing, transportation and valuation
of royalty payments.

The Company's operations are also subject to numerous and frequently
changing laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. The Company owns
or leases, and has in the past owned or leased, properties that have been used
for the exploration and production of oil and gas and these properties and the
wastes disposed on these properties may be subject to the Comprehensive
Environmental Response, Compensation and Liability Act, the Oil Pollution Act of
1990, the Resource Conservation and Recovery Act, the Federal Water Pollution
Control Act and analogous state laws. Under such laws, the Company could be
required to remove or remediate previously released wastes or property
contamination.

Laws and regulations protecting the environment have generally become
more stringent and, may in some cases, impose "strict liability" for
environmental damage. Strict liability means that the Company may be held liable
for damage without regard to whether it was negligent or otherwise at fault.
Environmental laws and regulations may expose the Company to liability for the
conduct of or conditions caused by others or for acts that were in compliance
with all applicable laws at the time they were performed. Failure to comply with
these laws and regulations may result in the imposition of administrative, civil
and criminal penalties.

While management believes that the Company's operations are in
substantial compliance with existing requirements of governmental bodies, the
Company's ability to conduct continued operations is subject to satisfying
applicable regulatory and permitting controls. The Company's current permits and
authorizations and ability to get future permits and authorizations may be
susceptible, on a going forward basis, to increased scrutiny, greater complexity
resulting in increased costs or delays in receiving appropriate authorizations.

The Company's Board of Directors has adopted resolutions to form an
Environmental Response Policy and Emergency Action Response Policy Program. A
plan was adopted which provides for the erection of signs at each well and at
strategic locations along the pipeline containing telephone numbers of the
Company's office and the home telephone numbers of key personnel. A list is
maintained at the Company's office and at the home of key personnel listing
phone numbers for fire, police, emergency services and Company employees who
will be needed to deal with emergencies.

15


The foregoing is only a brief summary of some of the existing
environmental laws, rules and regulations to which the Company's business
operations are subject, and there are many others, the effects of which could
have an adverse impact on the Company. Future legislation in this area will no
doubt be enacted and revisions will be made in current laws. No assurance can be
given as to what effect these present and future laws, rules and regulations
will have on the Company's current and future operations.


RESEARCH AND DEVELOPMENT

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


NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES

The Company presently has twenty-five full time employees and no
part-time employees.


RISK FACTORS

In addition to the other information in this document, investors in the
Company's common stock should consider carefully the following risks with
respect to the Company's business operations:

THE COMPANY'S AUDITORS HAVE ISSUED THEIR AUDIT REPORT,
WHICH INCLUDES A PARAGRAPH EMPHASIZING SUBSTANTIAL
DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS
A GOING CONCERN FOR ONE YEAR FROM THE BALANCE
SHEET DATE (DECEMBER 31, 2003).

Management has indicated in the Notes to the Company's Consolidated
Financial Statements for the year ended December 31, 2003, that circumstances
raise substantial doubt about the Company's ability to continue as a going
concern, which depends upon the Company's ability to obtain long-term debt or
raise capital to satisfy the Company's cash flow requirements. The Company must
make substantial capital expenditures for the acquisition, exploration and
development of oil and gas reserves. Historically, the Company has paid for
these expenditures with cash from operating activities, proceeds from debt and
equity financings and asset sales. The Company's ability to re-work existing
wells and resume the Company's drilling program in the Swan Creek Field is
dependent upon the Company's ability to fund these expenditures. Although

16


the Company anticipated that by this time the Company would be able to fund the
completion of the Company's drilling program in the Swan Creek Field from
revenues from the sales of gas, the Company is unable to do so. Further, the
availability of additional borrowings under the Company's credit facility with
Bank One has been revoked by Bank One. As a result of Bank One's revocation of
the credit facility and the corresponding demand for repayment, combined with
the fact that the Company is still in the early stages of the Company's oil and
gas operating history, during which time it has a history of losses from
operations and has an accumulated deficit of ($30,755,038) and a working capital
deficit of ($10,710,923) as of December 31, 2003 the Company's public
accountants issued their opinion which emphasized their substantial doubt about
the Company's ability to continue as a going concern as described above.

At the present time and if and until the Company is able to increase
its production and sales of gas, the Company must obtain the necessary funds to
proceed with the Company's drilling program from other sources, such as equity
investments, bank loans or joint ventures with other companies. In addition, the
Company's revenues or cash flows could decline in the future because of a
variety of reasons, including lower oil and gas prices or the inoperability of
some or all of the Company's existing wells. If the Company's revenues or cash
flows decrease or the Company is unable to procure additional financing, the
Company would be required to reduce production over time or would otherwise be
adversely affected, which would adversely impact the Company's ability to
continue in business. Where the Company is not the majority owner or operator of
an oil and gas project, the Company may have no control over the timing or
amount of capital expenditures required with the particular project. If the
Company cannot fund the Company's capital expenditures in such projects, the
Company's interests in such projects may be reduced or forfeited. In addition to
the Company's operational cash requirements, the Company has a significant
amount of loans and other obligations either due or maturing April 4, 2004 and
July 31, 2004. As of the date of the filing of this Report, these loans,
excluding the Company's obligations to Bank One (in the outstanding principal
amount of approximately $4.5 million), include interest-bearing loans in the
aggregate principal amount of approximately $5.2 million plus accrued interest
and past due accounts payable in the aggregate amount of approximately $1.3
million (including preferred dividends in arrears in an aggregate amount in
excess of $600,000). See below, "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and Capital
Resources." The Company can make no assurances that it will be able to obtain
any additional funding required as described above, in which event it may not be
able to continue as a going concern.

DECLINES IN OIL AND GAS PRICES WILL
MATERIALLY ADVERSELY AFFECT THE COMPANY.

The Company's future financial condition and results of operations will
depend in part upon the prices obtainable for the Company's oil and natural gas
production and the costs of finding, acquiring, developing and producing
reserves. Prices for oil and natural gas are subject to fluctuations in response
to relatively minor changes in supply, market uncertainty and a variety of
additional factors that are beyond the Company's control. These factors include
worldwide political instability (especially in the Middle East and other
oil-producing regions), the foreign

17


supply of oil and gas, the price of foreign imports, the level of drilling
activity, the level of consumer product demand, government regulations and
taxes, the price and availability of alternative fuels and the overall economic
environment. A substantial or extended decline in oil and gas prices would have
a material adverse effect on the Company's financial position, results of
operations, quantities of oil and gas that may be economically produced, and
access to capital. Oil and natural gas prices have historically been and are
likely to continue to be volatile. This volatility makes it difficult to
estimate with precision the value of producing properties in acquisitions and to
budget and project the return on exploration and development projects involving
the Company's oil and gas properties. In addition, unusually volatile prices
often disrupt the market for oil and gas properties, as buyers and sellers have
more difficulty agreeing on the purchase price of properties.

THERE ARE RISKS IN RATES OF OIL AND GAS PRODUCTION,
DEVELOPMENT EXPENDITURES, AND CASH FLOWS.

Projecting the effects of commodity prices on production, and timing of
development expenditures include many factors beyond the Company's control. The
future estimates of net cash flows from the Company's proved reserves and their
present value are based upon various assumptions about future production levels,
prices, and costs that may prove to be incorrect over time. Any significant
variance from assumptions could result in the actual future net cash flows being
materially different from the estimates.

OIL AND GAS OPERATIONS INVOLVE SUBSTANTIAL COSTS
AND ARE SUBJECT TO VARIOUS ECONOMIC RISKS.

The Company's oil and gas operations are subject to the economic risks
typically associated with exploration, development and production activities,
including the necessity of significant expenditures to locate and acquire
producing properties and to drill exploratory wells. In conducting exploration
and development activities, the presence of unanticipated pressure or
irregularities in formations, miscalculations or accidents may cause the
Company's exploration, development and production activities to be unsuccessful.
This could result in a total loss of the Company's investment. In addition, the
cost and timing of drilling, completing and operating wells is often uncertain.

THE COMPANY HAS SIGNIFICANT COSTS TO CONFORM TO
GOVERNMENT REGULATION OF THE OIL AND GAS INDUSTRY.

The Company's exploration, production and marketing operations are
regulated extensively at the federal, state and local levels. The Company has
made and will continue to make large expenditures in its efforts to comply with
the requirements of environmental and other regulations. Further, the oil and
gas regulatory environment could change in ways that might substantially
increase these costs. Hydrocarbon-producing states regulate conservation
practices and the protection of correlative rights. These regulations affect the
Company's operations and

18


limit the quantity of hydrocarbons it may produce and sell. In addition, at the
federal level, the Federal Energy Regulatory Commission regulates interstate
transportation of natural gas under the Natural Gas Act. Other regulated matters
include marketing, pricing, transportation and valuation of royalty payments.

THE COMPANY HAS SIGNIFICANT COSTS RELATED TO ENVIRONMENTAL MATTERS.

The Company's operations are subject to numerous and frequently
changing laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. The Company owns
or leases, and has in the past owned or leased, properties that have been leased
for the exploration and production of oil and gas and these properties and the
wastes disposed on these properties may be subject to the Comprehensive
Environmental Response, Compensation and Liability Act, the Oil Pollution Act of
1990, the Resource Conservation and Recovery Act, the Federal Water Pollution
Control Act and analogous state laws. Under such laws, the Company could be
required to remove or remediate previously released wastes or property
contamination.

Laws and regulations protecting the environment have generally become
more stringent and, may in some cases, impose "strict liability" for
environmental damage. Strict liability means that the Company may be held liable
for damage without regard to whether it was negligent or otherwise at fault.
Environmental laws and regulations may expose the Company to liability for the
conduct of or conditions caused by others or for acts that were in compliance
with all applicable laws at the time they were performed. Failure to comply with
these laws and regulations may result in the imposition of administrative, civil
and criminal penalties.

The Company's ability to conduct continued operations is subject to
satisfying applicable regulatory and permitting controls. The Company's current
permits and authorizations and ability to get future permits and authorizations
may be susceptible, on a going forward basis, to increased scrutiny, greater
complexity resulting in increased costs or delays in receiving appropriate
authorizations.

INSURANCE DOES NOT COVER ALL RISKS.

Exploration for and production of oil and natural gas can be hazardous,
involving unforeseen occurrences such as blowouts, cratering, fires and loss of
well control, which can result in damage to or destruction of wells or
production facilities, injury to persons, loss of life, or damage to property or
the environment. Although the Company maintains insurance against certain losses
or liabilities arising from its operations in accordance with customary industry
practices and in amounts that management believes to be prudent, insurance is
not available to the Company against all operational risks.

19


THE COMPANY IS NOT COMPETITIVE WITH
RESPECT TO ACQUISITIONS OR PERSONNEL.

The oil and gas business is highly competitive. In addition, the
Company is presently in a weak financial condition. In seeking any suitable oil
and gas properties for acquisition, or drilling rig operators and related
personnel and equipment, the Company is not able to compete with most other
companies, including large oil and gas companies and other independent operators
with greater financial and technical resources and longer history and experience
in property acquisition and operation.

THE COMPANY DEPENDS ON KEY PERSONNEL,
WHOM IT MAY NOT BE ABLE TO RETAIN OR RECRUIT.

Members of present management and certain Company employees have
substantial expertise in the areas of endeavor presently conducted and to be
engaged in by the Company. To the extent that their services become unavailable,
the Company would be required to retain other qualified personnel. The Company
does not know whether it would be able to recruit and hire qualified persons
upon acceptable terms. The Company does not maintain "Key Person" insurance for
any of the Company's key employees.

GENERAL ECONOMIC CONDITIONS.

Virtually all of the Company's operations are subject to the risks and
uncertainties of adverse changes in general economic conditions, the outcome of
pending and/or potential legal or regulatory proceedings, changes in
environmental, tax, labor and other laws and regulations to which the Company is
subject, and the condition of the capital markets utilized by the Company to
finance its operations.


AVAILABLE INFORMATION

The Company is a reporting company, as that term is defined under the
Securities Acts, and therefore, files reports, including Quarterly Reports on
Form 10-Q and Annual Reports on Form 10-K such as this Report, proxy information
statements and other materials with the Securities and Exchange Commission
("SEC"). You may read and copy any materials the Company files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549
upon payment of the prescribed fees. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

In addition, the Company is an electronic filer and files its Reports
and information with the SEC through the SEC's Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR"). The SEC maintains a Web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically through EDGAR with

20


the SEC, including all of the Company's filings with the SEC. The address of
such site is (http://WWW.SEC.GOV).
-------------------

The Company's website is located at http://www.tengasco.com.
Under the "Finance" section of the website, you may access, free of charge the
Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, Section 16 filings (Form 3, 4 and 5) and any amendments to
those reports as reasonably practicable after the Company electronically files
such reports with the SEC. The information contained on the Company's website is
not part of this Report or any other report filed with the SEC.




ITEM 2. PROPERTIES


PROPERTY LOCATION, FACILITIES, SIZE AND NATURE OF OWNERSHIP

SWAN CREEK FIELD

The Company's Swan Creek Leases are on approximately 28,338 acres in
Hancock, Claiborne, Knox, Jefferson, Morgan and Union Counties in Tennessee. The
initial terms of these leases vary from one to five years. Some of them will
terminate unless the Company has commenced drilling. In 2002, the Company
reduced the acreage comprising the Swan Creek Field from approximately 50,500
acres to 41,088 acres. In 2003, the acreage in the Swan Creek Field was again
further reduced to the present 28,338 acres. These reductions in acreage were a
result of the Company having a better understanding of the geological and
geophysical makeup of the Swan Creek Field. Management believes the acreage
eliminated from the Field does not have the potential to produce commercial
quantities of oil or gas and that the reduction of this acreage does not affect
the reserves of the Swan Creek Field. Further, the elimination of the leases for
this acreage will result in beneficial cost savings to the Company.

Morita Properties, Inc., an affiliate of Shigemi Morita, a former
Director of the Company, currently has a 25% overriding royalty in nine of the
Company's existing wells, and a 50% overriding royalty and 6% overriding
royalty, respectively, in two of the Company's other existing wells. All of
these wells are located in the Swan Creek Field and all but two are presently
producing wells. In addition, to those interests, Morita Properties, Inc.
previously owned a 25% working interest in three of the Company's other existing
wells and 12.5% working interest in another of the Company's wells which it
subsequently sold.

An individual who is not an affiliate of the Company purchased 25%
working interests in two other wells, the Stephen Lawson No. 1 and the Patton
No. 1. Both of these wells are located in the Swan Creek Field and are presently
producing wells.

21


Another individual has a 29% revenue interest in the Laura Jean Lawson
No. 3 well by virtue of having contributed her unleased acreage to the drilling
unit and paying her proportionate share of the drilling costs of the well. The
Company was obligated to allow that individual to participate on that basis in
accordance with both customary industry practice and the requirements of the
procedures of the Tennessee Oil and Gas Board in a forced pooling action brought
by the Company to require the acreage to be included in the unit so that the
well could be drilled. The forced pooling procedure was concluded by her
contribution of acreage and agreement to pay her proportionate share of drilling
costs.

The Company also entered into a farmout agreement with Miller
Petroleum, Inc. ("Miller") for ten wells to be drilled in the Swan Creek Field
with the Company having an option to award up to an additional ten future wells.
All locations were to be mutually agreed upon. Net revenues, as defined, are to
be 81.25% to Miller. The Company's subsidiary TPC will transport Miller's gas.
The Company reserved all offset locations to wells drilled under the farmout
agreement. All ten wells have been drilled under the farmout agreement. The
Company acquired back from Miller a 50% working interest from Miller in nine of
those ten wells in addition to its rights under the farmout agreement. In
addition, the Company and Miller have drilled two additional wells on a 50-50
basis, although the Company declined to exercise its option for a ten- well
extension of the farmout agreement. Of the wells in which Miller owns an
interest, six are presently producing.

Other than the working interests described or referred to in this Item,
the Company retains all other working interests in wells drilled or to be
drilled in the Swan Creek Field.

Other working interest owners in oil and gas wells in which the Company
has working interests are entitled to market their respective shares of
production to purchasers other than purchasers with whom the Company has
contracted. Absent such contractual arrangements being made by the working
interest owners, the Company is authorized but is not required to provide a
market for oil or gas attributable to working interest owners' production. At
this time, the Company has not agreed to market gas for any working interest
owner to customers other than customers of the Company. If the Company were to
agree to market gas for working interest owners to customers other than the
Company's customers, the Company would have to agree, at that time, to the terms
of such marketing arrangements and it is possible that as a result of such
arrangements, the Company's revenues from such production may be correspondingly
reduced. If the working interest owners make their own arrangements to market
their natural gas to other end users along the Company's pipeline such gas would
be transported by TPC at published tariff rates. The current published tariff
rate is for firm transportation at a demand or "reservation" charge of five
cents per MMBtu per day plus a commodity charge of $0.80 per MMBtu. If the
working interest owners do not market their production, either independently or
through the Company, then their interest will be treated as not yet produced and
will be balanced either when marketing arrangements are made by such working
interest owners or when the well ceases to produce in accordance with customary
industry practice.

22


KANSAS PROPERTIES

The Kansas Properties contain 138 leases totaling 32,158 acres in the
vicinity of Hays, Kansas. The original terms on these leases were from 1 to 10
years and in most cases have expired. Most of these leases, however, are still
in effect because they are being held by production. The Company maintains a
100% working interest in most wells. The leases provide for a landowner royalty
of 12.5%. Some wells are subject to an overriding royalty interest from 0.5% to
9%.

Although the Company does not pay taxes on its Swan Creek leases, it
pays ad valorem taxes on its Kansas Properties. The Company has general
liability insurance for the Kansas Properties and the Swan Creek Field.

The Company leases its principal executive offices, consisting of
approximately 5,647 square feet located at 603 Main Avenue, Suite 500,
Knoxville, Tennessee at a rental of $4,705.83 per month and an office in Hays,
Kansas at a rental of $500 per month. During 2002 and the first quarter of 2003,
the Company closed a field office in Sneedville, Tennessee and an office in New
York City it had previously leased at an aggregate rental of $3,100 per month.


RESERVE ANALYSES

Ryder Scott Company, L.P. of Houston, Texas ("Ryder Scott") has
performed reserve analyses of all the Company's productive leases. Ryder Scott
and its employees and its registered petroleum engineers have no interest in the
Company, and performed these services at their standard rates. The net reserve
values used hereafter were obtained from a reserve report dated February 10,
2004 (the "Report") prepared by Ryder Scott as of December 31, 2003.

The Report indicates the Company's "TOTAL PROVEN ALL CATEGORIES"
reserves for the Company to be as follows: net production volumes of 1,371,134
barrels of oil and 14,344.703MMCF of gas. The pre-tax present value discounted
at 10% (PV10) is stated to be $26,362,906. The Report indicates the "proven
developed producing" reserved for the Company to be as follows: net production
volumes of 1,059,038 barrels of oil and 5,167.832 MMCF of gas. The pre-tax
present value discounted at 10% (PV10) is stated to be $12,224,953.

In substance, the Report used estimates of oil and gas reserves based
upon standard petroleum engineering methods which include production data,
decline curve analysis, volumetric calculations, pressure history, analogy,
various correlations and technical factors. Information for this purpose was
obtained from owners of interests in the areas involved, state regulatory
agencies, commercial services, outside operators and files of Ryder Scott. The
net reserve values in the Report were adjusted to take into account the working
interests that have been sold by the Company in various wells in the Swan Creek
Field.

23


The Company believes that the reserve analysis reports prepared by
Ryder Scott for the Company for the Swan Creek Field and Kansas Properties
provide an essential basis for review and consideration of the Company's
producing properties by all potential industry partners and all financial
institutions across the country. It is standard in the industry for reserve
analyses such as these to be used as a basis for financing of drilling costs.

The Company has not filed the reserve analysis reports prepared by
Ryder Scott or any other reserve reports with any Federal authority or agency
other than the SEC. The Company, however, has filed the information in the
Report of the Company's reserves with the Energy Information Service of the
Department of Energy in compliance with that agency's statutory function of
surveying oil and gas reserves nationwide.

The term "Proved Oil and Gas Reserves" is defined in Rule 4-10(a)(2) of
Regulation S-X promulgated by the SEC as follows:

2. Proved oil and gas reserves. Proved oil and gas reserves are the
estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions, i.e., prices and costs as
of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements,
but not on escalations based upon future conditions.

i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by gas-oil and/or oil- water
contacts, if any, and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically productive
on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.

ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in
the proved classification when successful testing by a pilot project,
or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program
was based.

24


iii. Estimates of proved reserves do not include the following: (A) Oil
that may become available from known reservoirs but is classified
separately as indicated additional reserves; (B) crude oil, natural
gas, and natural gas liquids, the recovery of which is subject to
reasonable doubt because of uncertainty as to geology, reservoir
characteristics, or economic factors; (C) crude oil, natural gas, and
natural gas liquids, that may occur in undrilled prospects; and (D)
crude oil, natural gas, and natural gas liquids, that may be recovered
from oil shales, coal, gilsonite and other such sources.


PRODUCTION

The following tables summarize for the past three fiscal years the
volumes of oil and gas produced to the Company's interests, the Company's
operating costs and the Company's average sales prices for its oil and gas. The
information does not include volumes produced to royalty interests or other
working interests.




- --------------------------------------------------------------------------------------------------------------------
TENNESSEE
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED PRODUCTION COST OF AVERAGE SALES PRICE
DECEMBER PRODUCTION
31 (PER BOE)(1)
- --------------------------------------------------------------------------------------------------------------------
OIL GAS OIL GAS
(BBL) (MCF) (BBL) (PER MCF)
- --------------------------------------------------------------------------------------------------------------------

2003 19,277.00 384,426.00 $7.62 $26.87 $5.38
- --------------------------------------------------------------------------------------------------------------------
2002 15,111.54 521,834.35 $4.10(2) $21.85 $3.22
- --------------------------------------------------------------------------------------------------------------------
2001 22,776.21 703,073.56 $0.31 $16.05 $2.55
- --------------------------------------------------------------------------------------------------------------------



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

(1) A "BOE" is a barrel of oil equivalent. A barrel of oil contains
approximately 6 Mcf of natural gas by heating content. The volumes of gas
produced have been converted into "barrels of oil equivalent" for the purposes
of calculating costs of production.

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

25





- --------------------------------------------------------------------------------------------------------------------
KANSAS
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED PRODUCTION COST OF AVERAGE SALES PRICE
DECEMBER PRODUCTION
31 (PER BOE)
- --------------------------------------------------------------------------------------------------------------------
OIL GAS OIL GAS
(BBL) (MCF) (BBL) (PER MCF)
- --------------------------------------------------------------------------------------------------------------------

2003 104,511.00 206,194.00 $15.65 $29.00 $4.73
- --------------------------------------------------------------------------------------------------------------------
2002 105,473.54 246,510.98 $ 8.71 $23.89 $2.96
- --------------------------------------------------------------------------------------------------------------------
2001 112,495.88 278,884.66 $10.72 $23.50 $4.12
- --------------------------------------------------------------------------------------------------------------------





OIL AND GAS DRILLING ACTIVITIES

The Company's oil and gas developmental drilling for the past three
fiscal years are as set forth in the following tables. During 2003, due to the
Company's inability to raise capital because of its dispute with Bank One the
Company did not have sufficient funds to drill any new wells. During the past
three fiscal years, the Company drilled one exploratory well in 2002 in Cocke
County, Tennessee which did not result in finding commercial quantities of
hydrocarbons. The information should not be considered indicative of future
performance, nor should it be assumed that there is necessarily any correlation
between the number of wells drilled, quantities of reserves found or economic
value.


GROSS AND NET WELLS

The following tables set forth for the fiscal years ending December 31,
2001, 2002, and 2003 the number of gross and net development wells drilled by
the Company. The dry hole set forth in the table below is the Cocke County well
referred to above. The term gross wells means the total number of wells in which
the Company owns an interest, while the term net wells means the sum of the
fractional working interests the Company owns in gross wells.

26





- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
GROSS NET GROSS NET GROSS NET
- --------------------------------------------------------------------------------------------------------------------

TENNESSEE
- --------------------------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS 0 0 3 2.625 19 11.42
- --------------------------------------------------------------------------------------------------------------------
DRY HOLES 0 0 1 .50 0 0
- --------------------------------------------------------------------------------------------------------------------
KANSAS
- --------------------------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS 0 0 0 0 3 2.594
- --------------------------------------------------------------------------------------------------------------------
DRY HOLES 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------



PRODUCTIVE WELLS

The following table sets information regarding the number of productive
wells in which the Company held a working interest as of December 31, 2003.
Productive wells are either producing wells or wells capable of commercial
production although currently shut-in. One or more completions in the same bore
hole are counted as one well.

- --------------------------------------------------------------------------------
GAS OIL
- --------------------------------------------------------------------------------
GROSS NET GROSS NET
- --------------------------------------------------------------------------------
TENNESSEE 26 16 6 5
- --------------------------------------------------------------------------------
KANSAS 51 43 132 114
- --------------------------------------------------------------------------------


DEVELOPED AND UNDEVELOPED OIL AND GAS ACREAGE

As of December 31, 2003, the Company owned working interests in the
following developed and undeveloped oil and gas acreage. Net acres refers to the
Company's interest less the interest of royalty and other working interest
owners.

27


- --------------------------------------------------------------------------------
DEVELOPED UNDEVELOPED
- --------------------------------------------------------------------------------
GROSS ACRES NET ACRES GROSS ACRES NET ACRES
- --------------------------------------------------------------------------------
TENNESSEE 1,280 742 28,338 24,839
- --------------------------------------------------------------------------------
KANSAS 9,666 8,080 22,711 18,995
- --------------------------------------------------------------------------------


ITEM 3. - LEGAL PROCEEDINGS

Except as described hereafter, the Company is not a party to any
pending material legal proceeding. To the knowledge of management, no federal,
state or local governmental agency is presently contemplating any proceeding
against the Company which would have a result materially adverse to the Company.
To the knowledge of management, no director, executive officer or affiliate of
the Company or owner of record or beneficially of more than 5% of the Company's
common stock is a party adverse to the Company or has a material interest
adverse to the Company in any proceeding.

1. TENGASCO, INC., TENGASCO LAND AND MINERAL CORPORATION AND TENGASCO
PIPELINE CORPORATION V. BANK ONE, NA, Docket No. 2:02-CV-118 in the Eastern
District of Tennessee, Northeastern Division at Greeneville.

On November 8, 2001, the Company signed a credit facility with Bank
One, N.A. in Houston, Texas whereby Bank One extended to the Company a revolving
line of credit of up to $35 million. The initial borrowing base under the
facility was $10 million.

On April 5, 2002, the Company received a notice from Bank One stating
that it had redetermined and reduced the then-existing borrowing base under the
Credit Agreement by $6,000,000 to $3,101,777. Bank One demanded that the Company
pay the $6,000,000 within thirty days. On May 2, 2002, the Company filed suit in
federal court to restrain Bank One from taking any steps pursuant to its Credit
Agreement to enforce its demand that the Company reduce its loan obligation or
else be deemed in default and for damages resulting from the wrongful demand. It
is the position of the Company that Bank One's demand that the Company reduce
its loan from $9,101,777 to $3,101,777 within thirty days, coming only four
months after the loan was made, in the absence of any change in the Company's
production of oil and gas from the time the loan was closed or the condition of
the Company's assets, without warning and prior to the receipt of a December
2002 reserve report, without any basis or explanation, is a violation of the
Credit Agreement and an act of bad faith. The Company is seeking a jury trial
and actual damages sustained by it as a result of the wrongful demand, in the
amount of $51,000,000 plus punitive damages in the amount of $100 million.

28


On July 1, 2002, Bank One filed its answer and counterclaim, alleging
that its actions were proper under the terms of the Credit Agreement, and in the
counterclaim, seeking to recover all amounts it alleges to be owed under the
Credit Agreement, including principal, accrued interest, expenses and attorney's
fees in the approximate amount of $9 million. The Company has continued to pay
the sum of $200,000 per month of principal due under the original terms of the
Credit Agreement, plus interest, and has reduced the principal outstanding as of
March 1, 2004 to approximately $4.5 million. Although the parties commenced
discussions with regard to settlement of all outstanding issues, and continued
such discussions for an extended period, no settlement has been concluded. A
procedural schedule has been set by the Court leading toward a trial date of
December 7, 2004 in the event a settlement is not concluded. Discovery has
commenced according to the procedural schedule set by the Court.

2. PAUL MILLER V. M. E. RATLIFF AND TENGASCO, INC., Docket Number
3:02-CV-644 in the United States District Court for the Eastern District of
Tennessee, Knoxville.

This action commenced in November 2002 seeks certification of a class
action to recover on behalf of a class of all persons who purchased shares of
the Company's common stock between August 1, 2001 and April 23, 2002, damages in
an amount not specified which were allegedly caused by violations of the federal
securities laws, specifically Rule 10b-5 issued under the Securities Exchange
Act of 1934 as to the Company and Malcolm E. Ratliff, the Company's former Chief
Executive Officer and a Director, and Section 20(a) the Securities Exchange Act
of 1934 as to Mr. Ratliff. The complaint alleges that documents and statements
made to the investing public by the Company and Mr. Ratliff misrepresented
material facts regarding the business and finances of the Company. As of January
30, 2004, a written stipulation of settlement documenting the settlement terms
was signed by counsel for all parties. The stipulation of settlement was
presented to the Court on February 27, 2004 for a determination of initial
fairness and initiation of other procedures leading to a final hearing. At the
hearing, the Court granted initial approval of the settlement as proposed, and
established periods for determination of the class and dates for a final
settlement hearing approving disbursement of settlement funds to any class
members. The settlement remains subject to court approval before becoming final.
Under the settlement, the Company has paid into a settlement fund the amount of
$37,500 to include all costs of administration, and has also contributed 150,000
shares of stock of Miller Petroleum, Inc. that is currently owned by the Company
that had been accepted in payment of an obligation owed to the Company by Miller
Petroleum. The Company also contributed to the settlement fund the Company's
agreement to issue 300,000 warrants to purchase a share of the Company's common
stock for a period of three years from date of issue at $1 per share. The number
or price of the warrants is to be adjusted to account for the additional shares
sold pursuant to the rights offering made by the Company or other stated events.
All expenses including attorneys' fees as are awarded by the court on final
hearing are to be paid out of the settlement funds. The parties have stipulated
the existence of a class for settlement purposes only, and the existing lawsuit
will be dismissed, and the class members fully release their claims, when the
settlement becomes final upon subsequent order of the Court.

29


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

None during the fourth quarter of 2003.




PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES


MARKET INFORMATION

The Company's common stock is listed on the American Stock Exchange
("AMEX") under the symbol TGC. The range of high and low closing prices for
shares of common stock of the Company during the fiscal years ended December 31,
2002 and December 31, 2003 are set forth below.

High Low
---- ---
For the Quarters Ending

March 31, 2003 2.00 1.00

June 30, 2003 1.23 0.36

September 30, 2003 1.28 0.65

December 31, 2003 0.94 0.63



March 31, 2002 8.19 5.80

June 30, 2002 6.49 2.71

September 30, 2002 3.45 2.20

December 31, 2002 2.90 1.05



30


HOLDERS

As of March 16, 2004 the number of shareholders of record of the
Company's common stock was 375 and management believes that there are
approximately 2,899 beneficial owners of the Company's common stock.


DIVIDENDS

The Company under its credit agreement with Bank One is presently
restricted from paying dividends without Bank One's consent. The Company did not
pay any dividends with respect to the Company's common stock in 2003 and has no
present plans to declare any further dividends with respect to its common stock.


RECENT SALES OF UNREGISTERED SECURITIES

Except as previously reported in Quarterly Reports on Form 10-Q filed
by the Company, no other equity securities that were not registered under the
Securities Act of 1933, as amended, were sold or issued by the Company during
2003.

Management believes that all of the persons who were sold or issued
common stock or preferred stock during 2003 that was not registered under the
Securities Act of 1933, as amended, were either "accredited investors" as that
term is defined under applicable federal and state securities laws, rules and
regulations, or were persons who by virtue of background, education and
experience who could accurately evaluate the risks and merits attendant to an
investment in the securities of the Company. Further, all such persons were
provided with access to all material information regarding the Company, prior to
the offer or sale of these securities, and each had an opportunity to ask of and
receive answers from directors, executive officers, attorneys and accountants
for the Company. The offers and sales of such securities during 2003 are
believed to have been exempt from the registration requirements of Section 5 of
the 1933 Act, as amended, pursuant to Section 4(2) thereof, and from similar
state securities laws, rules and regulations covering the offer and sale of
securities by available state exemptions from such registration.


PURCHASES OF EQUITY SECURITIES BY THE COMPANY
AND AFFILIATED PURCHASERS

Neither the Company or any of its affiliates repurchased any of the
Company's equity securities during 2003.

31


THE RIGHTS OFFERING

On October 17, 2003, the Company filed a Registration Statement on Form
S-1 with the SEC for a rights offering of the Company's common stock (the
"Rights Offering"). On December 29, 2003; February 11, 2004; and February 13,
2004, the Company filed amendments to the Registration Statement. On February
13, 2004, the SEC deemed effective the Registration Statement on Form S-1 as
amended.

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

The record date for the Rights Offering was set as of February 27,
2004. The offering expired at 5:00 p.m., New York City time, on March 18, 2004.

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

As of March 30, 2004, Management intends that the net proceeds of the
Rights Offering will be used initially to pay non-bank indebtedness in the
aggregate amount of up to approximately $6 million (including up to $3,850,000
in principal amount plus accrued interest owed by the Company to Dolphin
Offshore Partners, L.P., the general partner of which is Peter E. Salas a
Director of the Company), with the balance of the net proceeds to be used to
repay bank indebtedness and/or for working capital purposes, including the
drilling of additional wells. See, "Item 13 -"Certain Relationships and Related
Transactions."

At the time the Rights Offering closed on March 18, 2004 all 36.3
million shares offered had been subscribed for and, as a result the Company
raised approximately $9.1 million. The total number of shares subscribed for
actually exceeded the 36.3 million shares available for issuance under the
offering. Consequently, all shares subscribed for under the basic privilege were
issued and the number shares issued under the over subscription privilege was
proportionately reduced to equal the number of remaining shares. The allocation
and issuance of the oversubscribed shares was made by Mellon Investor Services,
the Company's subscription agent who also returned payments for those
oversubscribed shares that were not available.

32


Pursuant to the Rights Offering, 7,029,604 rights were exercised
pursuant to the basic subscription privilege, resulting in the purchase of
21,088,812 shares at $0.25 per share for gross proceeds to the Company of
$5,272,203. A total of 15,211,188 shares were purchased pursuant to the
oversubscription privilege, resulting in additional gross proceeds to the
Company of $3,802,797. See, Item 13 - Certain Relationships and Related
Transactions" for a complete list of the shares purchased pursuant to the Rights
Offering by Directors and Officers of the Company and entities controlled by
such persons.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data has been derived from the
Company's financial statements, and should be read in conjunction with those
financial statements, including the related footnotes.

Years Ended December 31(3),



- ---------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------

INCOME STATEMENT DATA:
- ---------------------------------------------------------------------------------------------------------------------
Oil and Gas Revenues $ 6,040,872 $ 5,437,723 $ 6,656,758 $ 5,241,076 $ 3,017,252
- ---------------------------------------------------------------------------------------------------------------------
Production Costs and Taxes $ 3,412,201 $ 3,094,731 $ 2,951,746 $ 2,614,414 $ 2,564,932
- ---------------------------------------------------------------------------------------------------------------------
General and Administrative $ 1,486,280 $ 1,868,141 $ 2,957,871 $ 2,602,311 $ 1,961,348
- ---------------------------------------------------------------------------------------------------------------------
Interest Expense $ 1,357,963 $ 578,039 $ 850,965 $ 415,376 $ 417,497
- ---------------------------------------------------------------------------------------------------------------------
Net Loss $(3,442,647) $(3,154,555) $(2,262,787) $(1,541,884) $(2,671,923)
- ---------------------------------------------------------------------------------------------------------------------
Net Loss Attributable to
Common Stockholders $(2,815,119) $(3,661,334) $(2,653,970) $(1,799,441) $(2,791,270)
- ---------------------------------------------------------------------------------------------------------------------
Net Loss Attributable to
Common Stockholders Per
Share $ (0.24) $ (0.33) $ (0.26) $ (0.19) $ (0.33)
- ---------------------------------------------------------------------------------------------------------------------



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

(3) All references in this table to common stock and per share data have been
retroactively adjusted to reflect the 5% stock dividend declared by the Company
effective as of September 4, 2001.

33


As of December 31 (4)(5)(6),



- ------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA:
- ------------------------------------------------------------------------------------------------------------------------
Working Capital Deficit $(10,710,923) $(7,998,835) $(6,326,204) $ (708,317) $(1,406,263)
- ------------------------------------------------------------------------------------------------------------------------
Oil and Gas Properties, Net $ 12,989,443 $13,864,321 $13,269,930 $ 9,790,047 $ 8,444,036
- ------------------------------------------------------------------------------------------------------------------------
Pipeline Facilities, Net $ 15,139,789 $15,372,843 $15,039,762 $11,047,038 $ 4,212,842
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 30,604,240 $32,584,391 $32,128,245 $25,224,724 $15,182,712
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 5,732,151 $ 2,006,209 $ 3,902,757 $ 7,108,599 $ 3,119,293
- ------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock $ -0- $ 6,762,218 $ 5,459,050 $ 3,938,900 $ 1,988,900
- ------------------------------------------------------------------------------------------------------------------------
Stockholders Equity $ 11,888,332 $14,210,623 $14,991,847 $10,864,202 $ 7,453,930
- ------------------------------------------------------------------------------------------------------------------------




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


RESULTS OF OPERATIONS

The Company incurred a net loss to holders of common stock of
$2,815,119 ($0.24 per share) in 2003 compared to a net loss of $3,661,344 ($0.33
per share) in 2002 and compared to a net loss of $2,653,970 ($0.26 per share) in
2001.

During 2003, the Company implemented Statement of Financial Accounting
Standard No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"), resulting in a
gain on a cumulative effect from a change in accounting principle of $1,247,121.
Additionally, the Company implemented Statement of Financial Accounting Standard
No. 143, "Asset Retirement Obligations" in July 1, 2003, resulting

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

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

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

(6) On July 1, 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 150 under which mandatorily redeemable
preferred stock shall be reclassified at estimated fair value to a liability.
Thus, in 2003, it was determined that each of the Company's series of preferred
stock qualifies as shares subject to mandatory redemption and should be
classified as a liability. Also, see Note 9 to the Consolidated Financial
Statements in Item 8 of this Report.

34


in a loss on a cumulative effect from a change in accounting principle of
($351,204). See notes to the consolidated financial statements in Item 8 of this
Report.

The Company realized oil and gas revenues of $6,040,872 in 2003 as
compared to $5,437,723 in 2002 and as compared to $6,656,758 in 2001. The
increase in revenues in 2003 from 2002 was due to an increase in prices in 2003.
Gas prices for gas produced from the Swan Creek Field averaged $5.38 per MCF in
2003 as compared to $3.22 per MCF in 2002. Oil prices for oil produced from the
Swan Creek Field averaged $26.87 per barrel in 2003 as compared to $21.85 in
2002. Gas prices for gas produced from the Kansas Properties averaged $4.73 per
MCF in 2003 compared to $2.96 per MCF in 2002. Oil prices for oil produced from
the Kansas Properties averaged $29.00 per barrel in 2003 compared to $23.89 per
barrel in 2002. The increase in prices was partially offset by a reduction in
volumes produced. The Company sold 1,004,899 MCF of natural gas from Swan Creek
and Kansas in 2002 compared to 620,873 MCF in 2003. The Company also sold
147,243 barrels of oil from Swan Creek and Kansas in 2003, compared to 157,973
barrels in 2002. The reason for the decrease in volumes produced in 2003 was the
Company's dispute with Bank One which significantly limited the Company's
ability to drill new wells and to work over under-producing wells in Kansas.

The Company's subsidiary, TPC, had pipeline transportation revenues of
$163,393 in 2003, a decrease compared to of $259,677 in 2002 and $296,331 in
2001, resulting from the decrease in volumes of gas produced from the Swan Creek
Field.

The Company's production costs and taxes have increased each year from
2001 to 2003 as additional costs have been incurred to maintain the Kansas
Properties and to begin production from the Swan Creek Field in 2001. The
production costs and taxes increased in 2003 to $3,412,201 from $3,094,731 in
2002 and from $2,951,746 in 2001. This increase was due to the fact that the
Company's field personnel cost was capitalized as the Company was drilling new
wells in 2001 and 2002, compared to 2003 when all employees were working to
maintain production and these costs, including 2003 field salaries in Swan Creek
in the amount of $279,000, were expensed. The remaining increase is due to
increased property taxes on the pipeline because it has been assessed at a
higher value after completion.

Depletion, depreciation, and amortization remained consistent in 2003
at $2,315,767 compared to $2,413,597 in 2002. Depletion, depreciation, and
amortization in 2001 was $1,849,963. The primary increase in 2003 and 2002
levels from 2001 was due to a change in the estimate of proved reserves as set
forth in the 2002 Ryder Scott report.

The Company reduced its general administrative costs to $1,486,280 in
2003 from $1,868,141 in 2002 and $2,957,871 in 2001. Management has made a
significant effort to control costs in every aspect of its operations. Some of
these cost reductions include the reduction of personnel from 2002 and 2001
levels and utilization of existing employees to perform drafting and file
preparation services previously performed by third parties at additional cost.
The Company also closed its New York office in late 2002 and a field office in
Tennessee in 2003


35


The Company recorded an impairment loss of $459,000 relating to an oil
rig in 2003.

Interest expense for 2003 increased significantly over 2002 levels due
to the adoption of Financial Accounting Standards Board Statement of Financial
Accounting Standards ("SFAS") No. 143 which deals with asset retirement
obligations and SFAS No.150 regarding preferred stock and dividends on preferred
stock being recognized as interest expense in 2003. See, "Recent Accounting
Pronouncements" below. Interest expense in 2003 was $1,357,963 compared to
$578,039 in 2002 and $850,965 in 2001.

Public relations costs were significantly reduced in 2003 to $31,183
compared to $193,229 in 2002 and $293,448 in 2001 as the Company applied cost
saving methods in the preparation of the Annual Report and in publishing of
press releases.

Professional fees in 2003 were $549,503 compared to $707,926 in 2002
and $355,480 in 2001. These fees remained at a high level due to legal and
accounting services primarily related to the Bank One litigation and new
accounting regulations.

Dividends on preferred stock decreased to $268,389 in 2003 from
$506,789 in 2002 and from $391,183 in 2001 as a result of SFAS No.150 effective
July 1, 2003. The 2003 amount reflects dividends for the first six months of
2003. The remaining dividends were charged to interest expense. See, "Recent
Accounting Pronouncements" below and Note 9 to the Company's Financial
Statements for more information.


LIQUIDITY AND CAPITAL RESOURCES

In November 2001, Bank One extended to the Company a line of credit of
up to $35 million. The initial borrowing base under such credit agreement was
$10 million. In April 2002, the Company received a notice from Bank One stating
that it had redetermined and reduced the borrowing base under the credit
agreement to approximately $3.1 million and requiring a $6 million reduction of
the outstanding loan. The schedule of reserve reports required by the Credit
Agreement upon which such redeterminations were to be based specifically
established a procedure involving an automatic monthly principal payment of
$200,000 commencing February 1, 2002. As of March 1, 2004, the outstanding
principal balance under the credit agreement was approximately $4.5 million.

As a result of Bank One's unexpected reduction of the borrowing base
and the corresponding demand for payment of $6 million, combined with the fact
that the Company is still in the early stages of its oil and gas operating
history during which time the Company has had a history of losses from
operations and has an accumulated deficit of ($30,755,038) and a working capital
deficit of ($10,710,923) as of December 31, 2003, the Company's independent
auditors issued their opinion which emphasized their substantial doubt about the
Company's ability to continue as a going concern on the Company's consolidated
financial statements for the year ended December 31, 2003. The Company's ability
to continue as a going concern depends upon


36


its ability to obtain long-term debt or raise capital and satisfy its cash flow
requirements.

In May 2002, the Company filed suit against Bank One in Federal court
in the Eastern District of Tennessee, Northeastern Division at Greeneville,
Tennessee to restrain Bank One from taking any steps pursuant to the credit
agreement to enforce its demand that the Company reduce its loan obligation or
else be deemed in default and for actual and punitive damages resulting from the
demand. See "Item 3 - Legal Proceedings" for a discussion of this action.
Although the parties may continue to consider settlement of all outstanding
issues, no settlement discussions are presently occurring and no settlement has
been reached. The Court has adjusted the procedural schedule so that the trial
of this action is scheduled to commence on December 7, 2004 in the event
settlement is not concluded. Even if the Company concludes a settlement with
Bank One, the Company does not anticipate that the Company will be able to
either increase the borrowing base under the Bank One credit agreement or borrow
any additional sums from Bank One. To fund additional drilling and to provide
additional working capital, the Company is required to pursue other options.
Although the Company intends to apply the net proceeds of its Rights Offering
initially to repay outstanding non-bank indebtedness and to apply the balance of
such proceeds, if any, to repay bank indebtedness to some extent and/or to fund
the drilling of additional wells, there can be no assurances that such net
proceeds will be sufficient for such purposes or that the Company will be able
to resolve the difficulties currently preventing it from drilling additional
wells and increasing production volumes of natural gas from the Swan Creek Field
and to perform work necessary to maintain production from its Kansas Properties.

As of December 31, 2003, the Company had total stockholders' equity of
$11,888,332 and total assets of $30,604,240. The Company had a net working
capital deficiency at December 31, 2003 of ($10,710,923) compared to a net
deficiency of ($7,998,835) at December 31, 2002.

Net cash provided by operating activities for 2003 was $314,004 as
compared to net cash used in operating activities of $566,017 in 2002. The
Company's net loss in 2003 increased to $3,442,647 from $3,154,555 in 2002. The
impact on cash provided by operating activities was due to the net loss for 2003
and was primarily offset by non-cash depletion, depreciation, and amortization
of $2,315,767, non-cash compensation and services paid by insurance of equity
instruments of $93,313, loss on impairment of long-term assets of $495,000,
accretion of liabilities of $454,939 and cumulative unpaid dividends of
$350,453. Cash flow from working capital items in 2003 was $60,282 as compared
to $126,321 in 2002. This resulted from decreases in 2003 from 2002 in accounts
payable of $320,813 and in accounts receivable of $222,289 and an increase in
accrued interest payable in 2003 from 2002 of $173,179.

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


37


other current assets of $58,000, partially offset by an increase in 2002 from
2001 in accounts receivable of $69,192 and an increase in inventory of $103,384.

Net cash used in investing activities amounted to $63,046 for 2003
compared to $2,889,937 for 2002. The decrease in net cash used for investing
activities during 2003 was primarily attributable to the fact that in 2003
additions to oil and gas properties was $133,501 compared to $1,982,529 in 2002.
In 2003 there was a reduction in expenditures used for the construction of Phase
II of the pipeline system from $841,750 in 2002 to $5,775 and in 2003 the
Company did not make any expenditures for additions to other property and
equipment whereas in 2002 the Company expended $214,897 for these items.

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

Net cash used in financing activities amounted to $122,422 in 2003
compared to net cash provided by financing activities of $3,246,633 in 2002. The
primary sources of financing include proceeds from borrowings of $3,256,171 in
2003 compared to $2,063,139 in 2002, private placements of common stock of
$250,000 in 2003 compared to $2,677,000 in 2002, convertible redeemable
preferred stock of $1,303,168 in 2002 compared to none in 2003 and proceeds from
the exercise of options of $47,000 in 2003 compared to none in 2002. The primary
use of cash in financing activities was the repayment of borrowings of
$3,432,470 in 2003 compared to $2,378,273 in 2002.

Net cash provided by financing activities decreased to $3,246,633 in
2002 from $8,419,336 in 2001. This was due to the Company's inability to enter
into new financing arrangements in 2002 as a result of its dispute with Bank One
as discussed above. In 2001 the primary sources of financing included proceeds
from borrowings of $10,442,068 as compared to $2,063,139 in 2002, private
placements of common stock of $3,900,000 in 2001 as compared to $2,677,000 in
2002, convertible redeemable preferred stock of $l,591,150 in 2001 as compared
to $1,303,168 in 2002 and proceeds from exercise of options of $2,341,000 in
2001 as compared to none in 2002 as the market price of the Company's stock fell
below the exercise price of the earlier granted options. The primary use of cash
in financing activities in 2001 was the use of the funds received from Bank One
to repay the Company's prior borrowings of $8,833,325 as compared to 2002 when
cash from financing activities of $2,378,273 was used primarily to make payments
to Bank One in 2002 and for working capital.

The Company must make substantial capital expenditures for the
acquisition, exploration and development of oil and gas reserves. The Company is
presently unable to fund the resumption of its drilling program in the Swan
Creek Field. At the present time and until the Company is able to increase its
production and sales of gas and to resolve its dispute with Bank One, the
Company must obtain the necessary funds to proceed with its drilling program
from



38


other sources, such as the Rights Offering as well as equity investment, bank
loan or a joint venture with other companies, as to which there can be no
assurances. In addition to its operational cash requirements and indebtedness to
Bank One, the Company also has a significant amount of loans and other
obligations which will either become due or mature on April 4, 2004 and July 31,
2004, including unsecured and convertible notes in the principal amount of
approximately $1,247,000 and secured promissory notes due to Dolphin Offshore
Partners, L.P. and Jeffrey N. Bailey, a Director of the Company, as of the date
of this Report in the principal amount of $3,709,000 plus interest thereon. See,
"Item 13 - Certain Relationships and Related Transactions". Although the Company
intends to apply the net proceeds from the Rights Offering initially to repay
non-bank indebtedness and to apply the balance of such proceeds, if any, to
repay in part bank indebtedness and/or other working capital purposes, including
the drilling of additional wells, there can be no assurances that such net
proceeds will be sufficient for such purposes or that the Company will be able
to resolve the financial difficulties currently preventing it from drilling
wells and increasing production volumes of natural gas from the Swan Creek
Field. In addition, the Company's revenues or cash flows could be reduced
because of a variety of reasons, including lower oil and gas prices or the
inoperability of some or all of our existing wells, as to which there can be no
assurances. The Company does not know that it will be able to obtain additional
funding.


CRITICAL ACCOUNTING POLICIES

The Company's accounting policies are described in the Notes to
Consolidated Financial Statements in Item 8 of this Report. The Company prepares
its Consolidated Financial Statements in conformity with accounting principles
generally accepted in the United States of America, which requires the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates. The Company
considers the following policies to be the most critical in understanding the
judgments that are involved in preparing the Company's financial statements and
the uncertainties that could impact the Company's results of operations,
financial condition and cash flows.

REVENUE RECOGNITION

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

FULL COST METHOD OF ACCOUNTING

The Company follows the full cost method of accounting for oil and gas
property acquisition, exploration and development activities. Under this method,
all productive and non- productive costs incurred in connection with the
acquisition of, exploration for and development


39


of oil and gas reserves for each cost center are capitalized. Capitalized costs
include lease acquisitions, geological and geophysical work, daily rentals and
the costs of drilling, completing and equipping oil and gas wells. The Company
capitalized $480,421, $1,982,529 and $4,821,883 of these costs in 2003, 2002 and
2001, respectively. Costs, however, associated with production and general
corporate activities are expensed in the period incurred. Interest costs related
to unproved properties and properties under development are also capitalized to
oil and gas properties. Gains or losses are recognized only upon sales or
dispositions of significant amounts of oil and gas reserves representing an
entire cost center. Proceeds from all other sales or dispositions are treated as
reductions to capitalized costs. The capitalized oil and gas property, less
accumulated depreciation, depletion and amortization and related deferred income
taxes, if any, are generally limited to an amount (the ceiling limitation) equal
to the sum of: (a) the present value of estimated future net revenues computed
by applying current prices in effect as of the balance sheet date (with
consideration of price changes only to the extent provided by contractual
arrangements) to estimated future production of proved oil and gas reserves,
less estimated future expenditures (based on current costs) to be incurred in
developing and producing the reserves using a discount factor of 10% and
assuming continuation of existing economic conditions; and (b) the cost of
investments in unevaluated properties excluded from the costs being amortized.
No ceiling write-downs were recorded in 2003, 2002 or 2001.


OIL AND GAS RESERVES/DEPLETION DEPRECIATION
AND AMORTIZATION OF OIL AND GAS PROPERTIES

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

The Company's proved oil and gas reserves as at December 31, 2003 were
estimated by Ryder Scott, L.P., Petroleum Consultants. Projecting the effects of
commodity prices on production, and timing of development expenditures include
many factors beyond the Company's control. The future estimates of net cash
flows from the Company's proved reserves and their present value are based upon
various assumptions about future production levels, prices, and costs that may
prove to be incorrect over time. Any significant variance from assumptions could
result in the actual future net cash flows being materially different from the
estimates.


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 12%. Quarterly, management accretes the 12% discount into the
liability and makes other adjustments to the liability for well retirements
incurred during the period.


40


CONTINGENCIES

The Company accounts for contingencies in accordance with SFAS No. 5,
"Accounting Contingencies" which requires that the Company record an estimated
loss from a loss contingency when information available prior to the issuance of
the Company's financial statements indicate that it is probable an asset has
been impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as environmental, legal and income tax matters requires
management of the Company to use its judgment. While management of the Company
believes that the Company's accrual for these matters are adequate, if the
actual loss from a loss contingency is significantly different from the
estimated loss, the Company's results of operations may be over or understated.
The primary area in which the Company has to estimate contingent liabilities is
with respect to legal actions brought against the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

A reporting issue has arisen regarding the application on certain
provisions of Statement of Financial Accounting Standard No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142") to companies in the extracting industries
including oil and gas companies. The issue is whether SFAS 142 requires the
registrants to classify the cost of mineral rights held under lease or other
contractual arrangements associated with extracting oil and gas as intangible
assets in the balance sheet, apart from other capitalized oil and gas properties
owned and provide specific footnote disclosures. Historically, the Company had
included the cost of such mineral rights associated with extracting oil and gas
as a component of oil and gas properties. If it is ultimately determined that
SFAS 142 requires oil and gas companies to classify cost of mineral rights held
under lease or other contractual arrangement associated with extracting oil and
gas as a separate intangible asset line item on the balance sheet, the Company
would be required to reclassify approximately $484,000 at December 31, 2003 and
$346,000 at December 31, 2002, out of oil and gas properties and into a separate
intangible asset line item. The Company's consolidated statements of net loss
and cash flows would not be affected since such intangible assets would continue
to be depleted and amortized for impairment in accordance with full cost
accounting rules. Further, the Company does not believe the classification of
the cost of mineral rights associated with extracting oil and gas as intangible
assets would have any impact on compliance with covenants under its debt
agreement.

In 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No.143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement
requires companies to record the present value of obligations associated with
the retirement of tangible long-lived assets in the period in which it is
incurred. The liability is capitalized as part of the related long-lived asset's
carrying amount. Over time, accretion of the liability is recognized as an
operating expense and the capitalized cost is depreciated over the expected
useful life of the related asset. The Company's asset retirement obligations
relate primarily to the plugging


41


dismantlement, removal, site reclamation and similar activities of its oil and
gas properties. Prior to adoption of this statement, such obligations were
accrued ratably over the productive lives of the assets through its
depreciation, depletion and amortization for oil and gas properties without
recording a separate liability for such amounts. The Company has adopted SFAS
143 beginning on January 1, 2003, recording a cumulative loss as a result of the
adoption of this statement of approximately ($351,000). During 2003, the Company
recorded $73,368 in accretion cost (using a 12% accretion factor) on the asset
retirement obligation. These accretion costs are included in the interest
expense at December 31, 2003.

Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), addresses accounting
and reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets" and for Long-Lived Assets to be Disposed
Of. SFAS 144 establishes a single accounting model for long- lived assets to be
disposed of by sale and expands guidance with respect to cash flow estimations.
SFAS 144 became effective for the Company's fiscal year beginning January 1,
2002. The adoption of this standard did not have a material impact on the
Company's financial position or results of operations.

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

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others", an interpretation of FASB
Statements No.5, 57 and 107 and a rescission of FASB Interpretation No. 34 ("FIN
45"). FIN 45 addresses the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees issued.
The disclosure requirements in FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The effect of this
statement did not have a material impact on the Company.

During December 2003, the FASB issued Interpretation No. 46R,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires the
consolidation of certain entities that are determined to be variable interest
entities ("VIE's"). An entity is considered to be a VIE when either (i) the
entity lacks sufficient equity to carry on its principal operations, (ii) the
equity owners of the entity cannot make decisions about the entity's activities
or (iii) the entity's equity neither absorbs losses or benefits from gains. The
Company owns no interests in variable interest entities, and therefore this new
interpretation has not affected Company's consolidated financial


42


statements.

In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for
how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity and it requires that an issuer classify a financial instrument that is
within its scope as a liability. SFAS 150 was effective for financial
instruments entered into or modified after May 31, 2003 for public companies.
Restatement is not permitted. Adoption of this standard during 2003, resulted in
a reclassification (to a liability) and restatement (to fair value) of the
Company's Series A, B and C preferred stock subject to mandatory redemption.
Accordingly, for the year ended December 31, 2003, the Company recognized
cumulative gain from a change in accounting principle of approximately
$1,247,000. This cumulative gain results from the difference between the
carrying amount of the preferred shares and the fair value of the shares after
adoption. Accretion totaling $354,735 has been recognized as interest expense
for the period from July 1, 2003 through December 31, 2003.


CONTRACTUAL OBLIGATIONS




Payments Due By Period
------------------------------------------------------------------------------


Contractual Obligations Total Less than 1-3 3-5 More than
1 year years years 5 years

Long-Term Debt Obligations(7) $10,057,925 $9,836,290 $221,635 $-0- $-0-
Capital Lease Obligations $-0- $-0- $-0- $-0- $-0-
Operating Lease Obligations(8) $112,940 $56,470 $56,470 $-0- $-0-
Purchase Obligations $-0- $-0- $-0- $-0- $-0-
Other Long-Term Liabilities(9) $6,059,860 $716,975 $5,342,885 $-0- $-0-
Total $16,230,725 $10,609,735 $5,620,990 $-0- $-0-



- -------------------------
(7) See, Note 7 to Consolidated Financial Statements in Item 8 of this Report.

(8) See, Note 8 to Consolidated Financial Statements in Item 8 of this Report.

(9) See, Note 9 to Consolidated Financial Statements in Item 8 of this Report.

43


ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS


COMMODITY RISK

The Company's major market risk exposure is in the pricing applicable
to its oil and gas production. Realized pricing is primarily driven by the
prevailing worldwide price for crude oil and spot prices applicable to natural
gas production. Historically, prices received for oil and gas production have
been volatile and unpredictable and price volatility is expected to continue.
Monthly oil price realizations ranged from a low of $23.44 per barrel to a high
of $33.60 per barrel during 2003. Gas price realizations ranged from a monthly
low of $3.69 per Mcf to a monthly high of $9.11 per Mcf during the same period.
The Company did not enter into any hedging agreements in 2003 to limit exposure
to oil and gas price fluctuations.


INTEREST RATE RISK

At December 31, 2003, the Company had debt outstanding of approximately
$16.1 million including, as of that date, $5.1 million owed on its revolving
credit facility with Bank One. The interest rate on the Bank One revolving
credit facility is variable based on the financial institution's prime rate plus
0.25%. The Company's remaining debt of $11 million has fixed interest rates
ranging from 6% to 12%. As a result, the Company's annual interest costs in 2003
fluctuated based on short-term interest rates on approximately 32% of its total
debt outstanding at December 31, 2003. The impact on interest expense and the
Company's cash flows of a 10 percent increase in Bank One's prime rate
(approximately 0.5 basis points) would be approximately $22,000, assuming
borrowed amounts under the Bank One credit facility remained at the same amount
owed as of December 31, 2003. The Company did not have any open derivative
contracts relating to interest rates at December 31, 2003.


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

44


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

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9A CONTROLS AND PROCEDURES


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934, as amended, including this
Report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.

The Company's management, including its Chief Executive Officer and
Chief Financial Officer, has conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as
amended as of the date of this Report. Based on that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective to ensure that material
information was accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure in the Company's filings
with the SEC.


CHANGES IN INTERNAL CONTROLS

There have been no change to the Company's system of internal control
over financial reporting during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of controls over financial reporting.

45


PART III


ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names of all current directors and
executive officers of the Company. These persons will serve until the next
annual meeting of stockholders (to be held at such time as the Board of
Directors shall determine) or until their successors are elected or appointed
and qualified, or their prior resignations or terminations.

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

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

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

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

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

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

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

46


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

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

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

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

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

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


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

In fiscal 2003, Peter E. Salas, a Director of the Company, failed to
timely file one Form 4 Report involving one transaction. Charles M. Stivers, a
Director of the Company, and Robert M. Carter, President of TPC, recently each
filed a Form 5 Report which indicated they each failed to file one Form 4 Report
for fiscal 2003 involving six transactions and one transaction, respectively.

During 2003 , Malcolm E. Ratliff, the Company's former Chief Executive
Officer and Chairman, owned more than 10% of the Company's outstanding stock.
During 2003, it is believed that Mr. Ratliff entered into transactions with
respect to the acquisition and/or disposition of the Company's stock that he
owned or controlled directly or indirectly. However, the Company is not aware of
the exact nature of these transactions since Mr. Ratliff, to the Company's
knowledge, neither filed any reports on Form 4 or Form 5 disclosing these
transactions, nor communicated the nature or extent of such transactions to the
Company. Thus, the Company is not able to specify the number of Forms 4 and 5
that Mr. Ratliff failed to file, timely or otherwise, or the number of
transactions not reported.

47


BUSINESS EXPERIENCE

DIRECTORS

Stephen W. Akos is 49 years old. He has over twenty years experience in
the financial services industry with an expertise in fixed income securities.
Since August of 2000, he has been First Vice President, Institutional Fixed
Income Sales, Robert W. Baird & Co., St. Louis, Missouri. Prior to 2000, he held
executive positions with Mercantile Bank and Mark Twain Bank since 1993. Before
1993 he was a broker and held a series of executive positions at brokerage firms
Dean Witter, Shearson Lehman Hutton, Drexel Burnham Lambert, and Kidder Peabody
in St. Louis. He received an MBA in Finance from Washington University in 1979,
and a B.S. in Business Administration, Accounting, from Washington University in
1976. He was elected as a Director of the Company on February 28, 2003.

Joseph Earl Armstrong is 47 years old and a resident of Knoxville,
Tennessee. He is a graduate of the University of Tennessee and Morristown
College where he received a Bachelor of Science Degree in Business
Administration. From 1988 to the present, he has been an elected State
Representative for Legislative District 15 in Tennessee. From 1994 to the
present he has been in charge of government relations for the Atlanta Life
Insurance Co. From 1981 to 1994 he was a District Manager for the Atlanta Life
Insurance Co. He has served as a Director of the Company since 1997.

Jeffrey R. Bailey is 46 years old. He graduated in 1980 from New Mexico
Institute of Mining and Technology with a B.S. degree in Geological Engineering.
Upon graduation he joined Gearhart Industries as a field engineer working in
Texas, New Mexico, Kansas, Oklahoma and Arkansas. Gearhart Industries later
merged with Halliburton Company. In 1993 after 13 years working in various field
operations and management roles primarily focused on reservoir evaluation, log
analysis and log data acquisition he assumed a global role with Halliburton as a
Petrophysics instructor in Fort Worth, Texas. His duties were to teach
Halliburton personnel and customers around the world log analysis and
competition technology and to review analytical reservoir problems. In this role
Mr. Bailey had the opportunity to review reservoirs in Europe, Latin America,
Asia Pacific and the Middle East developing a special expertise in carbonate
reservoirs. In 1997 he became technical manager for Halliburton in Mexico
focusing on finding engineering solutions to the production challenges of large
carbonate reservoirs in Mexico. He joined the Company as its Chief Geological
Engineer on March 1, 2002. He was elected as President of the Company on July
17, 2002 and as a Director on February 28, 2003.

Dr. John A. Clendening is 72 years old. He received B.S. (1958), M.S.
(1960) and Ph. D. (1970) degrees in geology from West Virginia University. He
was employed as a Palynologist-Coal Geologist at the West Virginia Geological
Survey from 1960 until 1968. He joined Amoco in 1968 and remained with Amoco as
a senior geological associate until 1972. Dr. Clendening has served as President
and other offices of the American Association of Stratigraphic Palynologists and
the Society of Organic Petrologists. From 1992 - 1998 he was engaged in
association with Laird Exploration Co., Inc. of Houston, Texas, directing
exploration and

48


production in south central Kentucky. In 1999 he purchased all the assets of
Laird Exploration in south central Kentucky and operates independently. While
with Amoco Dr. Clendening was instrumental in Amoco's acquisition in the early
1970's of large land acreage holdings in Northeast Tennessee, based upon his
geological studies and recommendations. His work led directly to the discovery
of what is now the Company's Paul Reed # 1 well. He further recognized the area
to have significant oil and gas potential and is credited with discovery of the
field which is now known as the Company's Swan Creek Field. Dr. Clendening
previously served as a Director of the Company from September 1998 to August
2000. He was again elected as a Director of the Company on February 28, 2003.

Robert L. Devereux is 44 years old. He graduated in 1982 from St. Louis
University with a Bachelor's Degree in Business Administration with a major in
finance. He received his law degree from St. Louis University in 1985. For the
past eighteen years, Mr. Devereux has been actively engaged in the practice of
law, specializing in commercial litigation. Since 1994, he has been a principal
in the law firm of Devereux Murphy LLC located in St. Louis, Missouri. For the
past eight years Mr. Devereux has also been a principal of and has served as the
Chief Executive Officer of Gateway Title Company, Inc. He was elected as a
Director of the Company on February 28, 2003.

Bill L. Harbert is 80 years old. He earned a B.S. degree in civil
engineering from Auburn University in 1948. In 1949 he was one of the founders
of Harbert Construction Company. He managed that company's construction
operations, both domestic and foreign, and served as its Executive
Vice-President until 1979. From 1979 until July, 1990 he served as President and
Chief Operating Officer and from July 1990 through December 1991 he served as
Vice Chairman of the Board of Harbert International, Inc. He then purchased a
majority of the international operations of Harbert International, Inc. and
formed Bill Harbert International Construction, Inc. He served as Chairman and
Chief Executive Officer of that corporation until retiring from the company in
2000. Mr. Harbert's companies built pipeline projects in the United States and
throughout the world. They also built many other projects including bridges,
commercial buildings, waste water treatment plants, airports, including an air
base in Negev, Israel and embassies for the United States government in, among
other places, Tel Aviv, Hong Kong, and Baku. Mr. Harbert has also served as
president (1979) and Director (1980) of the Pipe Line Contractors Association,
USA and for seven years as Director, Second Vice-President and First
Vice-President (2001-2002) of the International Pipe Line Contractors
Association. Mr. Harbert has been active in service to a variety of business
associations, charities and the arts in the Birmingham area for many years. He
was elected as a Director of the Company on April 2, 2002.

Peter E. Salas is 49 years old. He has been President of Dolphin Asset
Management Corp. and its related companies since he founded it in 1988. Prior to
establishing Dolphin, he was with J.P. Morgan Investment Management, Inc. for
ten years, becoming Co- manager, Small Company Fund and Director-Small Cap
Research. He received an A.B. degree in Economics from Harvard in 1976. Mr.
Salas was elected to the Board of Directors on October 8, 2002.


49


Charles M. Stivers is 41 years old. He is a Certified Public Accountant
with 18 years accounting experience. In 1984 he received a B.S. degree in
accounting from Eastern Kentucky University. From 1983 through July 1986 he
served as Treasurer and CEO for Clay Resource Company. From August 1986 through
August 1989 he served as a senior tax and audit specialist for Gallaher and
Company. From September 1989 to date he has owned and operated Charles M.
Stivers, C.P.A., a regional accounting firm. Mr. Stiver's firm specializes in
the oil and gas industry and has clients in eight states. The oil and gas work
performed by his firm includes all forms of SEC audit work, SEC quarterly
financial statement filings, oil and gas consulting work and income tax
services. Mr. Stiver's firm has also represented oil and gas companies with
respect to Federal and State income tax disputes in 15 states over the past 12
years. In September 2001, he was elected as a director of the Company and is the
chairman of the Company's audit committee.

Dr. Richard T. Williams is 53 years old. He has been a member of the
faculty of the Department of Geological Sciences at The University of Tennessee
in Knoxville, Tennessee, since 1987, after holding faculty positions at West
Virginia University and the University of South Carolina since 1979. He has been
engaged in reflection seismology and geophysical studies in the Appalachian
Overthrust since 1980. He earned his Ph.D. in Geophysics from Virginia Tech in
1979. Dr. Williams was elected to the Board of Directors of the Company
effective June 28, 2002. He was appointed Chief Operating Officer of the Company
on January 10, 2003, and on February 3, 2003, he was elected Chief Executive
Officer of the Company.


OFFICERS

Mark A. Ruth is 45 years old. He is a certified public accountant with
21 years accounting experience. He received a B.S. degree in accounting with
honors from the University of Tennessee at Knoxville. He has served as a project
controls engineer for Bechtel Jacobs Company, LLC; business manager and finance
officer for Lockheed Martin Energy Systems; settlement department head and
senior accountant for the Federal Deposit Insurance Corporation; senior
financial analyst/internal auditor for Phillips Consumer Electronics
Corporation; and, as an auditor for Arthur Andersen and Company. From December
14, 1998 to August 31, 1999 he served as the Company's Chief Financial Officer.
On August 31, 1999 he was elected as a Vice- President of the Company and on
November 8, 1999 he was again appointed as the Company's Chief Financial
Officer.

Robert M. Carter is 67 years old. He attended Tennessee Wesleyan
College and Middle Tennessee State College between 1954 and 1957. For 35 years
he was an owner of Carter Lumber & Building Supply Company and Carter Warehouse
in Loudon County, Tennessee. He has been with the Company since 1995 and during
that time has been involved in all phases of the Company's business including
pipeline construction, leasing, financing, and the negotiation of acquisitions.
Mr. Carter was elected Vice-President of the Company in March, 1996, as
Executive Vice-President in April 1997 and on March 13, 1998 he was elected as
President of the Company. He served as President of the Company until he
resigned from that position on October 19, 1999.

50


On August 8, 2000 he again was elected as President of the Company and served in
that capacity until July 31, 2001. He has served as President of Tengasco
Pipeline Corporation, a wholly owned subsidiary of the Company, from June 1,
1998 to the present.

Cary V. Sorensen is 55 years old. He is a 1976 graduate of the
University of Texas School of Law and has undergraduate and graduate degrees
form North Texas State University and Catholic University in Washington, D.C.
Prior to joining the Company in July, 1999, he had been continuously engaged in
the practice of law in Houston, Texas relating to the energy industry since
1977, both in private law firms and a corporate law department, most recently
serving for seven years as senior counsel with the litigation department of
Enron Corp. before entering private practice in June, 1996. He has represented
virtually all of the major oil companies headquartered in Houston and all of the
operating subsidiaries of Enron Corp., as well as local distribution companies
and electric utilities in a variety of litigated and administrative cases before
state and federal courts and agencies in five states. These matters involved gas
contracts, gas marketing, exploration and production disputes involving
royalties or operating interests, land titles, oil pipelines and gas pipeline
tariff matters at the state and federal levels, and general operation and
regulation of interstate and intrastate gas pipelines. He has served as General
Counsel of the Company since July 9, 1999.

Sheila F. Sloan is 48 years old. She graduated from South Lake High
School located in St. Clair Shores, Michigan in 1972. From 1981 to 1985 she
worked as a purchasing agent for Sequoyah Land Company located in Madisonville,
Tennessee. From 1990 to 1995 she managed the Form U-3 Weight Loss Centers in
Knoxville, Tennessee. She has been with the Company since January 1996. On
December 4, 1996 she was elected as the Company's Treasurer.


COMMITTEES

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


FAMILY RELATIONSHIPS

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

51


INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

To the knowledge of management, during the past five years, no present
or former director, executive officer, affiliate or person nominated to become a
director or an executive officer of the Company:

(1) Filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by a court for the business or property of such person, or
any partnership in which he or she was a general partner at or within
two years before the time of such filing, or any corporation or
business association of which he or she was an executive officer at or
within two years before the time of such filing;

(2) Was convicted in a criminal proceeding or named the subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);

(3) Was the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him or her from or otherwise
limiting his or her involvement in any type of business, commodities,
securities or banking activities;

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


CODE OF ETHICS

The Company's Board of Directors has adopted a Code of Ethics that
applies to the Company's Chief Executive Officer, financial officers and
executive officers, including its President and Chief Financial Officer. A copy
of this Code of Ethics can be found at the Company's internet website at
www.Tengasco.com. The Company intends to disclose any amendments to its Code of
Ethics, and any waiver from a provision of the Code of Ethics granted to the
Company's Chief Executive Officer, President, Chief Financial Officer, or
persons performing similar functions, on the Company's Internet website within
five business days following such amendment or waiver. The information contained
on or connected to the Company's Internet website is not incorporated by
reference into this Form 10-K and should not be considered part of this or any
other report that the Company files with or furnishes to the SEC.

52


ITEM 11 EXECUTIVE COMPENSATION

The following table sets forth a summary of all compensation awarded
to, earned or paid to, the Company's Chief Executive Officer during fiscal years
ended December 31, 2003, December 31, 2002 and December 31, 2001. None of the
Company's other executive officers earned compensation in excess of $100,000 per
annum for services rendered to the Company in any capacity during those periods.

SUMMARY COMPENSATION TABLE




-----------LONG TERM AWARDS-----

ANNUAL COMPENSATION -----------AWARDS----
PAYOUTS
====================================================================================================================================
Name and YEAR SALARY ($) BONUS ($) OTHER RESTRICTED SECURITIES PAYOUTS ALL OTHER
Principal Position ANNUAL STOCK UNDERLYING COMPEN-
COMPENSA- AWARDS($) OPTIONS SATION
TION($) /SARS(#)
- ------------------------------------------------------------------------------------------------------------------------------------

Richard T. Williams, 2003 $ 80,000 $-0- $-0- -0- 60,000 -0- -0-
Chief Executive Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Malcolm E. Ratliff, 2002 $ 80,000 $-0- $1,000 -0- 52,500(11) -0- -0-
Chief Executive Officer(10) 2001 $ 80,000 $-0- $1,000 -0- 52,500 -0- -0-
====================================================================================================================================





OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUALIZED GRANTS

================================================================================
NAME NUMBER OF PERCENT OF TOTAL EXERCISE EXPIRATION
SECURITIES OPTIONS/SARS OR BASE DATE
UNDERLYING GRANTED TO PRICE
OPTIONS/SARS EMPLOYEES IN ($/SH)
GRANTED (#) FISCAL 2003
- --------------------------------------------------------------------------------
Richard T. Williams 60,000 13.8% $0.50 05/06/06
================================================================================

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

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

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

53


None of the Company's other executive officers earned
compensation in excess of $100,000 per annum for services rendered to
the Company in any capacity during the fiscal year ended December 31,
2003.


AGGREGATE OPTION EXERCISES FOR FISCAL 2003
AND YEAR END OPTION VALUES



========================================================
NUMBER OF SECURITIES VALUE(12) of Unexercised
UNDERLYING UNEXERCISED In-the-Money Options/SARs at
OPTIONS/SARS AT December 31, 2003
DECEMBER 31, 2003
===========================================================
NAME SHARES ACQUIRED VALUE ($) EXERCISABLE/ EXERCISABLE/
ON EXERCISE REALIZED(13) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------------

Richard T. Williams 10000 $7,000 50,000/-0- $12,500/-0-
====================================================================================================================



None of the Company's other executive officers earned compensation in
excess of $100,000 per annum for services rendered to the Company in any
capacity.

The Company adopted an employee health insurance plan in August 2001.
The Company does not presently have a pension or similar plan for its directors,
executive officers or employees. Management is considering adopting a 401(k)
plan and full liability insurance for directors and executive officers. However,
there are no immediate plans to do so at this time.


COMPENSATION OF DIRECTORS

The Board of Directors has resolved to compensate members of the Board
of Directors for

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

(12) Unexercised options are in-the-money if the fair market value of the
underlying securities exceeds the exercise price of the option. The fair market
value of the Common Stock was $0.75 per share on December 31, 2003, as reported
by The American Stock Exchange. The exercise price of the unexercised option
granted to Richard T. Williams, the Chief Executive Officer of the Company, in
2003 was $0.50. Prior to his becoming Chief Executive Officer of the Company.
Dr. Williams on August 5, 2002 was granted an option to purchase 13,125 shares
of the Company's common stock at a price of $2.69 per shares. That option
expires on August 4, 2005. Since the exercise price of shares underlying that
option had a negative value as of December 31, 2003 they are not included in
this chart.

(13) Value realized in dollars is based upon the difference between the fair
market value of the underlying securities on the date of exercise, and the
exercise price of the option. On June 18, 2003, Dr. Williams exercised his
option to the extent of purchasing 10,000 shares of the Company's common stock
at $0.50 per share. The closing price of the Company's common stock on June 18,
2003 as reported on by the American Stock Exchange was $1.20 per share.

54


attendance at meetings at the rate of $250 per day, together with direct
out-of-pocket expenses incurred in attendance at the meetings, including travel.
The Directors, however, have waived such fees due to them as of this date for
prior meetings.

Members of the Board of Directors may also be requested to perform
consulting or other professional services for the Company from time to time. The
Board of Directors has reserved to itself the right to review all directors'
claims for compensation on an ad hoc basis.

Directors who are on the Company's Audit, Compensation and Stock Option
Committees are independent and therefore, do not receive any consulting,
advisory or compensatory fees from the Company. However, such Board members may
receive fees from the Company for their services on those committees. The
Company intends to implement a plan for the payment of those committee members
for their services on an annual basis.


EMPLOYMENT CONTRACTS

The Company has entered into an employment contract with its Chief
Executive Officer, Richard T. Williams for a period of two years through
December 31, 2004 at an annual salary of $80,000. There are presently no other
employment contracts relating to any member of management. However, depending
upon the Company's operations and requirements, the Company may offer long term
contracts to directors, executive officers or key employees in the future.


COMPENSATION COMMITTEE INTERLOCKING
AND INSIDER PARTICIPATION

There are no interlocking relationships between any member of the
Company's Compensation Committee and any member of the compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. No member of the Compensation Committee is or was formerly an officer or
an employee of the Company.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following tables set forth the share holdings of the Company's
directors and executive officers and those persons who own more than 5% of the
Company's common stock as of March 25, 2004 with these computations being based
upon 48,677,828 shares of common stock being outstanding

55


as of that date and as to each shareholder, as it may pertain, assumes the
exercise of options or warrants or the conversion of preferred stock granted or
held by such shareholder as of March 25, 2003.

FIVE PERCENT STOCKHOLDERS(14)
-------------------------



NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS TITLE BENEFICIALLY OWNED CLASS
- ---------------- ----- ------------------ -----
Dolphin Offshore Stockholder 16,540,140(15) 33.9%
Partners, L.P.
129 East 17th Street
New York, NY 10003

SC Fundamental Value Stockholder 4,767,800(16) 9.79%
Fund, L.P.
747 Third Avenue, 27th Fl.
New York, NY 10017

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

(14) Unless otherwise stated, all shares of Common Stock are directly held
with sole voting and dispositive power. The shares set forth in the table are as
of March 25, 2004 and reflect the results of the Company's Rights Offering (See,
Item 5 above) to the extent known as of March 30, 2004, the date of the filing
of this Report. Because the Rights Offering closed on March 18, 2004, and the
shares issued thereunder were issued only days before the filing of this Report,
shareholders acquiring shares under the Rights Offering may not have had
sufficient time to receive either the shares or notification of the number of
shares they were to receive pursuant to the basic and oversubscription
privileges contained in the Rights Offering. Thus, shareholders may not have had
sufficient time prior to the filing of this Report to file any forms required as
a result of being or becoming a holder of as much as 5% of the Company's shares,
or to inform the Company of such an occurrence. However, the Company is unaware
at the time of this filing of any specific person that is or may be a five
percent stockholder that is not listed in this section.

(15) Consists of 16,244,452 shares held directly by Dolphin Offshore
Partners, L.P. ("Dolphin") of which Peter E. Salas, a Director of the Company,
is the general partner and controlling person; a warrant held by Dolphin to
purchase 10,500 shares at $7.98 per share; 117,188 shares underlying 9,000
shares of the Company's Series B 8% Cumulative Convertible Preferred Stock held
directly by Dolphin; and, 168,000 shares held directly by Peter E. Salas.

(16) Ownership of shares reported on Schedule 13G filed with the SEC by a
group consisting of SC Fundamental Value Fund , L.P., SC Fundamental LLC, SC-BVI
Partners, PMC-BVI, Inc., SC Fundamental Value BVI, Inc., Peter M. Collery and
Neil H. Koffler.

56


Malcolm E. Ratliff Stockholder UNKNOWN(17) UNKNOWN
1200 Scott Lane
Knoxville, TN 37922



DIRECTORS AND OFFICERS(18)


NUMBER OF SHARES PERCENT
NAME AND ADDRESS TITLE BENEFICIALLY OWNED OF CLASS

Stephen W. Akos Director 71,949(19) Less than 1%
8000 Maryland Avenue
St. Louis, MO 63105

Joseph Earl Armstrong Director 39,450(20) Less than 1%
4708 Hilldale Drive
Knoxville, TN 37914

Jeffrey R. Bailey Director; 149,412(21) Less than 1%
2306 West Gallaher Ferry President
Knoxville, TN 37932

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

(17) For the reasons stated below, it is not possible for the Company to
determine whether the number of shares held as of March 25,2004 by Malcolm E.
Ratliff does, or does not, exceed five percent of the Company's stock. Mr.
Ratliff, formerly the Company's Chief Executive Officer and Chairman of the
Board of Directors and a former Director of the Company, has previously reported
that he is the sole shareholder and President of Industrial Resources
Corporation (" IRC"); that Malcolm E. Ratliff's wife, Linda Ratliff, is the
Secretary of IRC; and that accordingly, IRC may be deemed to be an affiliate of
the Company. Mr. Ratliff also previously reported that although his father,
James Ratliff, is the sole shareholder and President of Ratliff Farms, Inc., he
is the Vice- President/Secretary of Ratliff Farms and has voting control of the
shares of the Company owned by Ratliff Farms, Inc. Accordingly, Ratliff Farms,
Inc. may also be deemed to be an affiliate of the Company. As a result of this
information, Mr. Ratliff was reported by the Company to own more than 10% of the
Company's common stock. Although the Company believes there may have been
changes with respect to the information previously reported, it is not able to
accurately disclose this information because it is not aware of any Forms 4 or 5
that to the Company's knowledge have been filed by Mr. Ratliff, IRC, or Ratliff
Farms. See " Item 10 - Section 16(a) Beneficial Ownership Reporting Compliance"
set forth above.

(18) Unless otherwise stated, all shares of Common Stock are directly held
with sole voting and dispositive power. The shares set forth in the table are as
of March 25, 2004 and reflect the results of the Company's recent Rights
Offering to shareholders of record February 27, 2004.

(19) Consists of 71,949 shares held directly (certain of which are jointly
owned with spouse).

(20) Consists of 4,950 shares held directly and options to purchase 34,500
shares.

(21) Consists of 76,287 shares held directly and an option to purchase 73,125
shares.

57





John A. Clendening Director 100,000(22) Less than 1%
1031 Saint Johns Drive
Maryville, TN 37801

Robert L. Devereux Director 477,834(23) Less than 1%
10 South Brentwood Blvd.
St. Louis, MO 63105

Bill L. Harbert Director 1,513,496(24) 3.1%
820 Shaders Creek Pkwy.
Birmingham, AL 35209

Peter E. Salas Director 16,540,140(25) 33.9%
129 East 17th Street
New York, NY 10003

Charles M. Stivers Director 13,125(26) Less than 1%
420 Richmond Road
Manchester, KY 40962

Richard T. Williams Director; 263,125(27) Less than 1%
4477 Deer Run Drive Chief Executive
Louisville, TN Officer

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

(22) Consists of shares held directly.

(23) Consists of 410,574 shares held directly with his spouse and 67,260
shares owned by a limited liability company. Shares owned by the limited
liability company have been adjusted to reflect Mr. Devereux's ownership
interest in the shares owned by the limited liability company.

(24) Consists of 1,428,942 shares held directly, 71,429 shares underlying
5,000 shares of the Company's Series A 8% Cumulative Convertible Preferred Stock
held directly and an option to purchase 13,125 shares.

(25) Consists of 168,000 shares held directly, 16,244,452 shares held
directly by Dolphin Offshore Partners, L.P. ("Dolphin") of which Peter E. Salas
is the general partner and controlling person; a warrant held by Dolphin to
purchase 10,500 shares at $7.98 per share; and, 117,188 shares underlying 9,000
shares of the Company's Series B 8% Cumulative Convertible Preferred Stock held
by Dolphin which is convertible into the Company's Common Stock.

(26) Consists of shares underlying an option.

(27) Consists of 250,000 shares held directly and options to purchase 13,125
shares.

58




Robert M. Carter President 20,921(28) Less than 1%
760 Prince Georges Parish Tengasco Pipeline
Knoxville, TN 37922 Corporation

Mark A. Ruth Chief Financial 69,287(29) Less than 1%
9400 Hickory Knoll Lane Officer
Knoxville, TN 37931

Cary V. Sorensen General Counsel; 47,875(30) Less than 1%
509 Bretton Woods Dr. Secretary
Knoxville, TN 37919

Sheila F. Sloan Treasurer 6,037(31) Less than 1%
121 Oostanali Way
Loudon, TN 37774

All Officers and 19,312,651(32) 39.3%
Directors as a group


CHANGES IN CONTROL

Except as indicated below, to the knowledge of the Company's
management, there are no present arrangements or pledges of the Company's
securities which may result in a change in control of the Company.




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

(28) Consists of 7,796 shares held directly and options to purchase 13,125
shares.

(29) Consists of 100 shares held directly and options to purchase 69,187
shares.

(30) Consists of shares underlying options.

(31) Consists of 2,100 shares held directly and options to purchase 3,937
shares.

(32) Consists of shares held directly and indirectly by management, shares
held by Dolphin, 281,124 shares underlying options, 10,500 shares underlying
warrants and 188,617 shares underlying convertible preferred stock.

59


ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


TRANSACTIONS WITH MANAGEMENT AND OTHERS

Except as set forth hereafter, there have been no material
transactions, series of similar transactions or currently proposed transactions
during 2003, to which the Company or any of its subsidiaries was or is to be a
party, in which the amount involved exceeds $60,000 and in which any director or
executive officer or any security holder who is known to the Company to own of
record or beneficially more than 5% of the Company's common stock, or any member
of the immediate family of any of the foregoing persons, had a material
interest.

The Company's Board of Directors has not adopted any general policy
with respect to these transactions, many of which were effected on behalf of the
Company by senior management prior to consideration of the transaction by the
Board of Directors in light of senior management's perceived urgency of the
funding requirements, the availability of alternative sources and the terms of
such transactions, which senior management viewed as at least as favorable to
the Company as could have been obtained through arms-length negotiations with
unaffiliated third parties. In each of the loans to the Company by Dolphin
Offshore Partners, L.P. ("Dolphin), which owns more than ten percent of the
Company's outstanding Common Stock and whose general partner, Peter E. Salas, is
a Director of the Company, Mr. Salas negotiated with on behalf of Dolphin with
senior management of the Company as to the terms thereof and did not participate
in any Board action with respect thereto.

On January 8, 2003, Bill Harbert, who at the time owned more than ten
percent of the Company's outstanding Common Stock and is a Director of the
Company, purchased 227,275 shares of the Company's Common Stock from the Company
in a private placement at a price of $1.10 per share. The proceeds from this
sale were used by the Company to pay the principal and interest due to Bank One
for January, 2003 and to provide working capital for the Company's operations.
The market price of the Company's common stock as measured by the closing price
on the American Stock Exchange on January 7, 2003, the date of the transaction,
was $1.20 per share. Management believes that this sale was made on terms at
least as favorable to the Company as could have been obtained through
arms-length negotiations with unaffiliated third parties.

On February 3, 2003 and February 28, 2003, Dolphin loaned the Company
the sum of $250,000 on each such date which the Company used to pay the
principal and interest due to Bank One for February and March 2003 and for
working capital. Each of these loans is evidenced by a separate promissory note
each bearing interest at the rate of 12% per annum, with payments of interest
only payable quarterly and the principal balance payable due on January 4, 2004.
The obligations under these loans are secured by an undivided 10% interest in
the Company's Tennessee and Kansas pipelines.

On May 20, 2003, Dolphin loaned the Company the sum of $750,000 and
Jeffrey R. Bailey, the President and a Director of the Company, loaned the
Company $84,000, which aggregate amount of $834,000 was used to pay the
principal and interest due to Bank One for June 2003 and for

60


working capital. These loans are evidenced by separate promissory notes bearing
interest at the rate of 12% per annum, with payments of interest only payable
quarterly and the principal balance due on January 4, 2004. The obligations
under the loans are secured by an undivided 30% and 3.36% interest,
respectively, in the Company's Tennessee and Kansas pipelines.

On August 6, 2003, Dolphin loaned the Company the sum of $150,000,
which was used for working capital. This loan is evidenced by a separate
promissory note bearing interest at the rate of 12% per annum, with payments of
interest only payable quarterly and the principal balance due on January 4,
2004. The obligations under the loan are secured by an undivided 6% interest in
the Company's Tennessee and Kansas pipelines

From December 2002 through December 9, 2003, Dolphin acquired a total
of an 85% undivided interest in the Company's Tennessee and Kansas pipelines as
collateral for a series of seven loans. In the first five of these transactions,
Peter E. Salas, a Director and the general partner and controlling person of
Dolphin, negotiated the terms of the loans directly with management, which terms
were approved by management in view of the Company's immediate needs, financial
condition and prospective alternatives and under circumstances in which Dolphin
was not generally engaged in the business of lending money. These loans were
made on terms that management believes were at least as favorable to the Company
as it could have obtained through arms-length negotiations with unaffiliated
third parties. The Company's Board approved the sixth and seventh loans on
December 3 and 9, 2003, in the amounts of $225,000 and $250,000, respectively,
with no participation by Mr. Salas in the meeting or the vote, which was
unanimous by the seven other Directors present at the meeting. In addition, the
Company has entered into a continuing security agreement, which was approved by
the Board with no participation by Mr. Salas in the meeting or vote, which was
unanimous by the seven other Directors present at the meeting, providing the
terms of Dolphin's security interest collateralizing all of its loans.

On December 24, 2003, Dolphin loaned the sum of $1,000,000 which was
used for working capital and to pay all interest and principal in full of the
1998 convertible loan to the Company refereed to as the Lutheran note then being
held by several persons. This loan is evidenced by a separate promissory note
bearing interest at the rate of 12% per annum, with payments of interest only
payable quarterly and the principal balance payable on April 4, 2004. The
obligations under the loan are secured by an undivided interest in the Company's
Tennessee and Kansas pipelines and the security agreement referred to above.

On February 2, 2004, Dolphin loaned the Company the sum of $225,000
which was used for making payment of principal and interest to Bank One for
February, 2004. This loan is evidenced by a separate promissory note bearing
interest at the rate of 12% per annum, with payments of interest only payable
quarterly and the principal balance payable on April 4, 2004. The obligations
under the loan are secured by an undivided interest in the Company's Tennessee
and Kansas pipelines and the security agreement referred to above.

From April 1 through June 30, 2003, the Company issued 10,363 shares of
its common stock to holders of the Company's Series A 8% Cumulative Convertible
Preferred Stock in lieu of cash quarterly interest payments due to those
holders, with such shares valued at the market price thereof.

61


Also during that period, certain members of the Company's Board of Directors
exercised options granted to them pursuant to the Tengasco, Inc. Stock Incentive
Plan and purchased the following number of shares of the Company's common stock
at the exercise price of $0.50 per share. Richard T. Williams - 10,000 shares,
Bill L. Harbert - 24,000 shares and John A. Clendening - 24,000 shares.

The following table sets forth the number of shares of Common Stock
purchased in connection with the Rights Offering by the Company's Directors,
Officers and owners of more than ten percent of the Company's outstanding Common
Stock. See, "Item 5 - Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities - The Rights Offering"




Name Position Shares Purchased


Stephen W. Akos Director 48,868

Jeffrey R. Bailey Director; President 66,287

Robert L. Devereux Director 412,457(33)

Richard T. Williams Director; Chief Executive Officer 190,000

Dolphin Offshore Partners, L.P.(34) 14,248,732(35)




INDEBTEDNESS OF MANAGEMENT

No officer, director or security holder known to the Company to own of
record or beneficially more than 5% of the Company's common stock or any member
of the immediate family of any of the foregoing persons is indebted to the
Company.


PARENT OF THE ISSUER

The Company has no parent.

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

(33) Consists of 352,012 shares purchased directly with his spouse and 60,445
shares purchased by a limited liability company. The shares purchased by the
limited liability company have been adjusted to reflect Mr. Devereux's
beneficial ownership interest in the shares purchased by the limited liability
company.

(34) Peter E. Salas, a Director of the Company, is the general partner and
controlling person of Dolphin Offshore Partners, L.P.

(35) Consists of 14,104,732 shares purchased directly by Dolphin Offshore
Partners, L.P. and 144,000 shares purchased by Peter E. Salas.

62


ITEM 14 PRINCIPAL ACCOUNTANTS FEES AND SERVICES

The following table presents the fees for professional audit services
rendered by BDO Seidman, LLP for the audit of the Company's annual consolidated
financial statements for the fiscal years ended December 31, 2003 and December
31, 2002, and fees for other services rendered by BDO Seidman, LLP during those
periods:

Fee Category Fiscal 2003 Fiscal 2002

Audit Fees $209,310 $160,530

Audit-Related Fees $0 $0

Tax Fees $0 $0

All Other Fees $7,250 $8,950

Total Fees $216,560 $189,480


Audit fees include fees related to the services rendered in connection
with the annual audit of the Company's consolidated financial statements, the
quarterly reviews of the Company's quarterly reports on Form 10-Q and the
reviews of and other services related to registration statements and other
offering memoranda.

Audit-related fees are for assurance and related services by the
principal accountants that are reasonably related to the performance of the
audit or review of the Company's financial statements.

Tax Fees include (i) tax compliance, (ii) tax advice, (iii) tax
planning and (iv) tax reporting.

All Other Fees includes fees for all other services provided by the
principal accountants not covered in the other categories such as litigation
support, etc. In 2003, the amount of fees in this category were significantly
higher than in 2002 primarily due to the inclusion of fees for services
performed by BDO Seidman, LLP in connection with the Company's filling of a
registration statement on Form S-1 with the SEC for the Rights Offering.

All of the services for 2002 and 2003 were performed by the full-time,
permanent employees of BDO Seidman, LLP

All of the 2003 services described above were approved by the Audit
Committee pursuant to the SEC rule that requires audit committee pre-approval of
audit and non-audit services provided by the Company's independent auditors to
the extent that rule was applicable during fiscal year 2003. The Audit Committee
has considered whether the provisions of such services, including non-audit
services,

63


by BDO Seidman, LLP is compatible with maintaining BDO Seidman, LLP's
independence and has concluded that it is.




PART IV

ITEM 15 EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K

A. The following documents are filed as part of this Report:


1. Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

2. Financial Schedules:

Schedules have been omitted because the information required to be set
forth therein is not applicable or is included in the Consolidated Financial
Statements or notes thereto.

3. Exhibits.

The following exhibits are filed with, or incorporated by reference
into this Report:

Exhibit Number Description
- -------------- -----------
3.1 Charter (Incorporated by reference to Exhibit 3.7 to the
registrant's registration statement on Form 10-SB filed
August 7, 1997 (the "Form 10-SB"))

3.2 Articles of Merger and Plan of Merger (taking into
account the formation of the Tennessee wholly-owned
subsidiary for the purpose of changing the Company's
domicile and effecting reverse split) (Incorporated by
reference to Exhibit 3.8 to the Form 10-SB)

3.3 Articles of Amendment to the Charter dated June 24, 1998
(Incorporated by reference to Exhibit 3.9 to the
registrant's annual report on Form 10-KSB filed April
15, 1999 (the "1998 Form 10-KSB"))

3.4 Articles of Amendment to the Charter dated October 30,
1998 (Incorporated by reference to Exhibit 3.10 to the
1998 Form 10-KSB)


64


3.5 Articles of Amendment to the Charter filed March 17,
2000 (Incorporated by reference to Exhibit 3.11 to the
registrant's annual report on Form 10-KSB filed April
14, 2000 (the "1999 Form 10-KSB"))

3.6 By-laws (Incorporated by reference to Exhibit 3.2 to the
Form 10-SB)

4.1 Form of Rights Certificate Incorporated by reference to
registrant's statement on Form S-1 filed February 13,
2004 Registration File No. 333-109784 (the "Form S- 1")

10.1 Purchase Agreement with IRC (Incorporated by reference
to Exhibit 10.1(a) to the Form 10-SB)

10.2 Amendment to Purchase Agreement with IRC (Incorporated
by reference to Exhibit 10.1(b) to the Form 10-SB)

10.3 General Bill of Sale and Promissory Note (Incorporated
by reference to Exhibit 10.1(c) to the Form 10-SB)

10.4 Compensation Agreement - M.E. Ratliff (Incorporated by
reference to Exhibit 10.2(a) to the Form 10-SB)

10.5 Compensation Agreement - Jeffrey D. Jenson (Incorporated
by reference to Exhibit 10.2(b) to the Form 10-SB)

10.6 Compensation Agreement - Leonard W. Burningham
(Incorporated by reference to Exhibit 10.2(c) to the
Form 10-SB)

10.7 Agreement with the Natural Gas Utility District of
Hawkins County, Tennessee (Incorporated by reference to
Exhibit 10.3 to the Form 10-SB)

10.8 Agreement with Powell Valley Electric Cooperative, Inc.
(Incorporated by reference to Exhibit 10.4 to the Form
10-SB)

10.9 Agreement with Enserch Energy Services, Inc.
(Incorporated by reference to Exhibit 10.5 to the Form
10-SB)

10.10 Amendment Agreement dated October 19, 1999 between
Tengasco, Inc. and the Natural Gas Utility District of
Hawkins County, Tennessee (Incorporated by reference to
Exhibit 10.9 to the registrant's current report on Form
8-K filed October 25, 1999)

10.11 Natural Gas Sales Agreement dated November 18, 1999
between Tengasco, Inc. and Eastman Chemical Company
(Incorporated by reference to Exhibit 10.10 to the
registrant's current report on Form 8-K filed November
23, 1999)

10.12 Agreement between A.M. Partners LLC and Tengasco, Inc.
dated October 6, 1999 (Incorporated by reference to
Exhibit 10.11 to the registrant's 1999 Form 10-KSB)
10.13 Agreement between Southcoast Capital LLC and
Tengasco, Inc. dated February 25, 2000 (Incorporated by
reference to Exhibit 10.12 to the registrant's 1999 Form
10- KSB)

10.14 Franchise Agreement between Powell Valley Utility
District and Tengasco, Inc. dated January 25, 2000
(Incorporated by reference to Exhibit 10.13 to the
registrant's 1999 Form 10-KSB)

10.15 Amendment Agreement between Eastman Chemical Company and
Tengasco, Inc. dated March 27, 2000 (Incorporated by
reference to Exhibit 10.14 to the registrant's 1999 Form
10-KSB)

10.16 Loan Agreement between Tengasco Pipeline Corporation and
Morita Properties, Inc. dated August 16, 2000
(Incorporated by reference to Exhibit 10.15 to the
registrant's current report on Form 8-K dated August 22,
2000 (the "2000 8-K"))

10.17 Promissory note made by Tengasco Pipeline Corporation
and Morita Properties, dated August 16, 2000
(Incorporated by reference to Exhibit 10.15(a) to the
2000 8- K)

10.18 Throughput Agreement between Tengasco Pipeline
Corporation and Morita Properties, dated August 16, 2000
(Incorporated by reference to Exhibit 10.15(b) to the
2000 8-K)


65


10.19 Loan Agreement between Tengasco Pipeline Corporation and
Edward W.T. Gray III dated August 16, 2000 (Incorporated
by reference to Exhibit 10.16 to the 2000 8-K) 10.20
Promissory note made by Tengasco Pipeline Corporation
and Edward W.T. Gray III dated August 16, 2000
(Incorporated by reference to Exhibit 10.16(a) to the
2000 8- K)

10.21 Throughput Agreement between Tengasco Pipeline
Corporation and Edward W.T. Gray III dated August 16,
2000 (Incorporated by reference to Exhibit 10.16(b) to
the 2000 8-K)

10.22 Loan Agreement between Tengasco Pipeline Corporation and
Malcolm E. Ratliff dated August 16, 2000 (Incorporated
by reference to Exhibit 10.17 to the 2000 8-K)

10.23 Promissory note made by Tengasco Pipeline Corporation
and Malcolm E. Ratliff dated August 16, 2000
(Incorporated by reference to Exhibit 10.17(a) to the
2000 8- K)

10.24 Throughput Agreement between Tengasco Pipeline
Corporation and Malcolm E. Ratliff dated August 16, 2000
(Incorporated by reference to Exhibit 10.17(b) to the
2000 8-K)

10.25 Loan Agreement between Tengasco Pipeline Corporation and
Charles F. Smithers, Jr. dated August 16, 2000
(Incorporated by reference to Exhibit 10.18 to the 2000
8- K)

10.26 Promissory note made by Tengasco Pipeline Corporation
and Charles F. Smithers, Jr. dated August 16, 2000
(Incorporated by reference to Exhibit 10.18(a) to the
2000 8-K)

10.27 Throughput Agreement between Tengasco Pipeline
Corporation and Charles F. Smithers, Jr. dated August
16, 2000 (Incorporated by reference to Exhibit 10.18(b)
to the 2000 8-K)

10.28 Loan Agreement between Tengasco Pipeline Corporation and
Nick Nishiwaki dated August 16, 2000 (Incorporated by
reference to Exhibit 10.19 to the 2000 8-K)

10.29 Promissory note made by Tengasco Pipeline Corporation
and Nick Nishiwaki dated August 16, 2000 (Incorporated
by reference to Exhibit 10.19(a) to the 2000 8-K) 10.30
Throughput Agreement between Tengasco Pipeline
Corporation and Nick Nishiwaki dated August 16, 2000
(Incorporated by reference to Exhibit 10.19(b) to the
2000 8- K)

10.31 Memorandum Agreement between Tengasco, Inc. and the
University of Tennessee dated February 13, 2001
(Incorporated by reference to Exhibit 10.19 to the
registrant's annual report on Form 10-KSB filed April
10, 2001 (the "2000 Form 10- KSB"))

10.32 Natural Gas Sales Agreement between Tengasco, Inc. and
BAE SYSTEMS Ordnance Systems Inc. dated March 30, 2001
(Incorporated by reference to Exhibit 10.20 to the 2000
Form 10-KSB)

10.33 Reducing and Revolving Line of Credit Up to $35,000,000
from Bank One, N.A. to Tengasco, Inc. Tennessee Land &
Mineral Corporation and Tengasco Pipeline Corporation
dated November 8, 2001 (Incorporated by reference to
Exhibit 10.21 to the registrant's quarterly report on
Form 10-Q filed November 14, 2001)

10.34 Tengasco, Inc. Incentive Stock Plan (Incorporated by
reference to Exhibit 4.1 to the registrant's
registration statement on Form S-8 filed October 26,
2000)

10.35 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated October 7, 2002 in the principal amount of
$500,000 (Incorporated by reference to Exhibit 10.35 to
the Form S-1)

10.36 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated December 4, 2002 in the principal amount of
$250,000 (Incorporated by reference to Exhibit 10.36 to
the Form S-1)

10.37 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to

66


Dolphin Offshore Partners, LP dated February 3, 2003 in
the principal amount of $250,000 (Incorporated by
reference to Exhibit 10.37 to the Form S-1)

10.38 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated February 28, 2003 in the principal amount of
$250,000 (Incorporated by reference to Exhibit 10.38 to
the Form S-1)

10.39 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated May 20, 2003 in the principal amount of $750,000
(Incorporated by reference to Exhibit 10.39 to the Form
S-1)

10.4 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated August 6, 2003 in the principal amount of $150,000
(Incorporated by reference to Exhibit 10.40 to the Form
S-1)

10.41 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Jeffrey R. Bailey dated May 20,
2003 in the principal amount of $84,000 (Incorporated by
reference to Exhibit 10.41 to the Form S-1)

10.42 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated December 3, 2003 in the principal amount of
$225,000 (Incorporated by reference to Exhibit 10.42 to
the registrant's current report on Form 8-K dated
December 3, 2003 (the "2003 Form 8-K")

10.43 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated December 9, 2003 in the principal amount of
$250,000 (Incorporated by reference to Exhibit 10.43 to
the 2003 Form 8-K)

10.44 Continuing Security Agreement dated December 3, 2003 by
the Company and Tengasco Pipeline Corporation as
Obligors and Dolphin Offshore Partners, LP as Secured
Party (Incorporated by reference to Exhibit 10.44 to the
2003 Form 8-K)

10.45 Promissory Note made by Tengasco, Inc. and Tengasco
Pipeline Corporation to Dolphin Offshore Partners, LP
dated December 24, 2003 in the principal amount of
$1,000,000 (Incorporated by reference to Exhibit 10.45
to the Form S-1) 10.46 Promissory Note made by Tengasco,
Inc. and Tengasco Pipeline Corporation to Jeffrey R.
Bailey dated February 2, 2004 in the principal amount of
$225,000 (Incorporated by reference to Exhibit 10.46 to
the Form S-1)

14* Code of Ethics

21 List of subsidiaries (Incorporated by reference to
Exhibit 21 to the registrant's annual report on Form
10-K filed March 31, 2003 (the "2002 Form 10-KSB"))

23.1* Consent of Ryder Scott Company, L.P.

31.1* Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a)

31.2* Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a)

32.1* Certification of 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

* Exhibit filed with this Report


B. Reports on Form 8-K:

During the fourth quarter of 2003 the Company filed or furnished the
following Current

67


Reports on Form 8-K.

(1) A report filed October, 2003 which included, under Item 5, an
announcement that on October 17, 2003 the Company had filed a registration
statement with the Securities and Exchange Commission with respect to a proposed
rights offering to shareholders of the Company.

(2) A report filed December 19, 2003 which included, under Item 2, an
announcement that the Company's Board of Directors authorized management to
execute additional promissory notes to consolidate and extend $1.65 million of
existing indebtedness payable to Dolphin and to borrow up to $1.7 million in
additional funds from Dolphin.

68


SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 30, 2004

TENGASCO, INC.
(Registrant)

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



By: s/Mark A. Ruth
---------------
Mark A. Ruth,
Principal Financial and Accounting Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in their capacities and on the dates indicated.

SIGNATURE TITLE DATE

s/Stephen W. Akos Director March 30, 2004
- -----------------
Stephen W. Akos

s/Joseph Earl Armstrong Director March 30, 2004
- -----------------------
Joseph Earl Armstrong

s/Jeffrey R. Bailey Director; March 30, 2004
- -------------------
Jeffrey R. Bailey President

s/John A. Clendening Director March 30, 2004
- --------------------
John A. Clendening

s/Robert L. Devereux Director March 30, 2004
- --------------------
Robert L. Devereux

69


s/Bill L. Harbert Director March 30, 2004
- -----------------
Bill L. Harbert

Director
- ----------------
Peter E. Salas

s/Charles M. Stivers Director March 30, 2004
- --------------------
Charles M. Stivers

s/Richard T. Williams Director; March 30, 2004
- --------------------- Chief Executive Officer
Richard T. Williams

s/Mark A. Ruth Principal Financial March 30, 2004
- -------------- and Accounting Officer
Mark A. Ruth



70









TENGASCO, INC.
AND SUBSIDIARIES







CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

















TENGASCO, INC.
AND SUBSIDIARIES





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


CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001






TENGASCO, INC. AND SUBSIDIARIES

CONTENTS

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



INDEPENDENT AUDITORS' REPORT F-2


CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance sheets F-3-F-4

Consolidated Statements of loss F-5

Consolidated Statements of stockholders' equity F-6

Consolidated Statements of cash flows F-7-F-8

Notes to consolidated financial statements F-9-F-38




BDO Seidman, LLP Letterhead

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Tengasco, Inc.
and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of loss, stockholders' equity and comprehensive loss and cash flows
for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tengasco, Inc. and
Subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and, at December 31, 2003, has an accumulated deficit of $30,755,038 and a
working capital deficit of $10,710,923. Additionally, during 2002 the Company's
primary lender classified the remaining outstanding balance as immediately due
and payable. The working capital deficiency has resulted in the Company's
inability to pay cumulative dividends and mandatory redemption requirements on
the Company's shares subject to mandatory redemption. Such matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

As discussed in Notes 9 & 10 to the consolidated financial statements, the
Company implemented the provisions of Statement of Financial Accounting Series
No. 143, "Asset Retirement Obligations" on January 1, 2003 and the provisions of
Statement of Financial Accounting Series No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" on
July 1, 2003.


/s/ BDO Seidman, LLP

Atlanta, Georgia
February 27, 2004, except for Note 14, which is as of March 27, 2004



F-2


TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



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



DECEMBER 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------------

ASSETS (Note 1)

CURRENT
Cash and cash equivalents $ 312,666 $ 184,130

Investments 60,000 34,500
Accounts receivable 508,378 730,667
Participant receivables 68,402 70,605
Inventory 280,693 262,748
Current portion of loan fees, net of accumulated
amortization of $367,032 and $194,312, respectively (Note 7) 151,136 323,856
Other current assets (Note 14) 223,003 -
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,604,278 1,606,506

OIL AND GAS PROPERTIES, net (on the basis
of full cost accounting) (Notes 4, 7 and 16) 12,989,443 13,864,321

PIPELINE FACILITIES, net of accumulated
depreciation of $1,265,003 and $729,043, respectively
(Notes 5 and 7) 15,139,789 15,372,843

OTHER PROPERTY AND EQUIPMENT, net (Notes 6 and 7) 870,730 1,685,950

LOAN FEES, net of accumulated amortization of
$53,542 and $13,384, respectively - 40,158

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




$ 30,604,240 $ 32,584,391
=======================================================================================================================



F-3


TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



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



DECEMBER 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Current maturities of long-term debt (Notes 1 and 7) $ 6,127,290 $ 7,861,245

Accounts payable - trade 1,075,948 1,396,761
Accrued interest payable (Note 9) 835,059 61,141
Accrued dividends payable (Note 9) - 254,389
Notes payable to related parties (Note 7) 3,709,000 -
Other accrued liabilities 18,561 31,805
Current shares subject to mandatory redemption (Note 9) 549,344 -
- -----------------------------------------------------------------------------------------------------------------------

TOTAL CURRENT LIABILITIES 12,315,201 9,605,341

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

SHARES SUBJECT TO MANDATORY REDEMPTION (Note 9) 5,510,516 -

ASSET RETIREMENT OBLIGATIONS (Notes 4 and 10) 668,556 -

LONG TERM DEBT, less current maturities (Note 7) 221,635 1,256,209
- -----------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES 18,715,908 11,611,550
- -----------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 7, 8, 10, and 11)

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

TOTAL PREFERRED STOCK - 6,762,218
- -----------------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY (Note 11)
Common stock, $.001 par value; authorized 50,000,000 shares;
12,064,977 and 11,459,279 shares issued, respectively 12,080 11,460
Additional paid-in capital 42,721,290 42,237,276
Accumulated deficit (30,755,038) (27,776,726)
Accumulated other comprehensive loss (90,000) (115,500)
Treasury stock, at cost, 14,500 shares - (145,887)
- -----------------------------------------------------------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY 11,888,332 14,210,623
- -----------------------------------------------------------------------------------------------------------------------
$ 30,604,240 $ 32,584,391
=======================================================================================================================



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4



TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS



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



YEARS ENDED DECEMBER 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------

REVENUES AND OTHER INCOME
Oil and gas revenues $ 6,040,872 $ 5,437,723 $ 6,656,758
Pipeline transportation revenues 163,393 259,677 296,331
Interest Income 985 3,078 43,597
- -----------------------------------------------------------------------------------------------------------------------------

Total revenues and other income 6,205,250 5,700,478 6,996,686
- -----------------------------------------------------------------------------------------------------------------------------

COSTS AND EXPENSES
Production costs and taxes 3,412,201 3,094,731 2,951,746
Depreciation, depletion and amortization
(Notes 4, 5 and 6) 2,315,767 2,413,597 1,849,963
General and administrative 1,486,280 1,868,141 2,957,871
Interest expense (Notes 9 and 10) 1,357,963 578,039 850,965
Public relations 31,183 193,229 293,448
Professional fees 549,503 707,296 355,480
Loss on impairment of long-lived asset 495,000 - -
- -----------------------------------------------------------------------------------------------------------------------------

Total costs and expenses 9,647,897 8,855,033 9,259,473
- -----------------------------------------------------------------------------------------------------------------------------

NET LOSS (3,442,647) (3,154,555) (2,262,787)

Dividends on preferred stock (Note 9) (268,389) (506,789) (391,183)
- -----------------------------------------------------------------------------------------------------------------------------

Net loss attributable to common stockholders before
cumulative effects of changes in accounting principle (3,711,036) (3,661,344) (2,653,970)

Cumulative effect of a change in accounting principle (Note 10) (351,204) - -
Cumulative effect of a change in accounting principle (Note 9) 1,247,121 - -
- -----------------------------------------------------------------------------------------------------------------------------

Net loss attributable to common stockholders $(2,815,119) $(3,661,344) $(2,653,970)
=============================================================================================================================

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARES Basic and diluted:
Operations $ (0.31) $ (0.33) $ (0.26)
Cumulative effect of a change in accounting principle (Note 10) (0.03) - -
Cumulative effect of a change in accounting principle (Note 9) 0.10 - -
- -----------------------------------------------------------------------------------------------------------------------------

Total $ (0.24) $ (0.33) $ (0.26)
=============================================================================================================================

Weighted average shares outstanding 11,956,135 11,062,436 10,235,253
=============================================================================================================================



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-5




COMMON STOCK
----------------------------- PAID-IN
SHARES AMOUNT CAPITAL
- --------------------------------------------------------------------------------------------------------------------------

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

BALANCE, December 31, 2001 10,560,605 10,561 39,242,555
Net loss - - -
Comprehensive loss:
Net loss - - -
Other comprehensive loss - - -

2002 comprehensive loss - - -

Common stock issued in private placements, net of
related expenses 850,000 850 2,676,150
Common stock issued on conversion of debt 20,592 20 119,980
Common stock issued in purchase of equipment 19,582 20 149,980
Common stock issued for services 8,500 9 48,611
Dividends on convertible redeemable preferred stock - - -
- --------------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2002 11,459,279 11,460 42,237,276
Net loss - - -
Cumulative effects of changes in accounting principles - - -
Comprehensive loss:
Net loss - - -
Other comprehensive gain - - -

2003 comprehensive loss - - -

Common stock issued in private placements, net of
related expenses 227,275 227 249,773
Common stock issued on conversion of debt 60,528 61 69,538
Common stock issued for charity 3,571 4 5,710
Common stock issued for services 55,500 70 (64,458)
Common stock issued for exercised options 94,000 94 46,906
Common Stock issued for preferred dividends in arrears 154,824 154 170,155
Common stock issued for litigation settlement 10,000 10 6,390
Accretion of issue cost on preferred stock- series B & C - - -
Dividends on convertible redeemable preferred stock - - -
- --------------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2003 12,064,977 $ 12,080 $ 42,721,290
==========================================================================================================================



F-6



TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSSES



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


ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE COMPREHENSIVE
DEFICIT LOSS INCOME (LOSS)
- ------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2000 (15,086,803) - -
Net loss (2,262,787) - -
Common stock issued with 5% stock dividend (Note 10) (6,374,609) - -
Common stock issued on conversion of debt - - -
Common stock issued for exercised options - - -
Common stock issued on conversion of preferred stock - - -
Common stock issued for services - - -
Common stock issued in private placements, net of related
expense - - -
Common stock issued as a charitable donation - - -
Treasury stock purchased - - -
Dividends on convertible redeemable preferred stock (391,183) - -
- ----------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2001 (24,115,382) -
Net loss (3,154,555) - -
Comprehensive loss:
Net loss - (3,661,334) -
Other comprehensive loss - (115,500) (115,500)
-----------
2002 comprehensive loss - (3,776,844) -
-----------
Common stock issued in private placements, net of
related expenses - - -
Common stock issued on conversion of debt - - -
Common stock issued in purchase of equipment - - -
Common stock issued for services - - -
Dividends on convertible redeemable preferred stock (506,789) - -
- ----------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2002 (27,776,726) - (115,500)
Net loss (3,442,647) - -
Cumulative effects of changes in accounting principles 895,917 - -
Comprehensive loss:
Net loss - (2,815,119) -
Other comprehensive gain - 25,500 25,500
-----------
2003 comprehensive loss - (2,789,619) -
-----------
Common stock issued in private placements, net of
related expenses - - -
Common stock issued on conversion of debt - - -
Common stock issued for charity - - -
Common stock issued for services - - -
Common stock issued for exercised options - - -
Common Stock issued for preferred dividends in arrears - - -
Common stock issued for litigation settlement - - -
Accretion of issue cost on preferred stock- series B & C (163,193) - -
Dividends on convertible redeemable preferred stock (268,389) - -
- ----------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2003 $ (30,755,038) $ - $ (90,000)
======================================================================================================================







TREASURY STOCK
------------------------------
SHARES AMOUNT TOTAL
- -------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2000 - - 10,864,202
Net loss - - (2,262,787)
Common stock issued with 5% stock dividend (Note 10) - - -
Common stock issued on conversion of debt - - 523,250
Common stock issued for exercised options - - 2,341,000
Common stock issued on conversion of preferred stock - - 71,001
Common stock issued for services - - 70,000
Common stock issued in private placements, net of related
expense - - 3,899,998
Common stock issued as a charitable donation - - 22,253
Treasury stock purchased 14,500 (145,887)
Dividends on convertible redeemable preferred stock - -
- -------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2001 14,500 (145,887) 14,991,847
Net loss - - (3,154,555)
Comprehensive loss:
Net loss - - -
Other comprehensive loss - - (115,500)

2002 comprehensive loss - - -

Common stock issued in private placements, net of
related expenses - - 2,677,000
Common stock issued on conversion of debt - - 120,000
Common stock issued in purchase of equipment - - 150,000
Common stock issued for services - - 48,620
Dividends on convertible redeemable preferred stock - - (506,789)
- -------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2002 14,500 (145,887) 14,210,623
Net loss - - (3,442,647)
Cumulative effects of changes in accounting principles - - 895,917
Comprehensive loss:
Net loss - - -
Other comprehensive gain - - 25,500

2003 comprehensive loss - - -

Common stock issued in private placements, net of
related expenses - - 250,000
Common stock issued on conversion of debt - - 69,599
Common stock issued for charity - - 5,714
Common stock issued for services (14,500) 145,887 81,499
Common stock issued for exercised options - - 47,000
Common Stock issued for preferred dividends in arrears - - 170,309
Common stock issued for litigation settlement - - 6,400
Accretion of issue cost on preferred stock- series B & C - - (163,193)
Dividends on convertible redeemable preferred stock - - (268,389)
- -------------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 2003 - $ - $ 11,888,332
===================================================================================================================



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-7


TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS




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




YEARS ENDED DECEMBER 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
Net loss $ (3,442,647) $ (3,154,555) $ (2,262,787)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 2,315,767 2,413,597 1,849,963
Compensation and services paid in stock options, stock
warrants, and common stock 93,313 48,620 92,253
Loss on impairment of long-lived assets 495,000 - -
Accretions of liabilities 454,939 - -
Cumulative dividends on redeemable shares 350,453 - -
Gain on sale of equipment (13,103) - (132,943)
Changes in assets and liabilities:
Accounts receivable 222,289 (69,192) 3,814
Participant receivables 2,203 13,492 -
Inventory (17,945) (103,384) 91,981
Other assets 14,613 58,000 -
Accounts payable - trade (320,813) 188,597 191,702
Accrued interest payable 173,179 7,003 (2,519)
Other accrued liabilities (13,244) 31,805 (52,640)
- -------------------------------------------------------------------------------------------------------------------------

Net cash provided by (used in) operating activities 314,004 (566,017) (221,176)
- -------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Additions to other property and equipment - (214,897) (285,722)
Net additions to oil and gas properties (133,501) (1,982,529) (4,821,883)
Additions/ deletions to pipeline facilities (5,775) (841,750) (4,213,095)
Decrease (increase) in restricted cash - 120,872 (120,872)
Other 76,230 28,367 32,888
- -------------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities (63,046) (2,889,937) (9,408,684)
- -------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Proceeds from exercise of options 47,000 - 2,341,000
Proceeds from borrowings 3,256,171 2,063,139 10,442,068
Repayments of borrowings (3,432,470) (2,378,273) (8,833,325)
Net proceeds from issuance of common stock 250,000 2,677,000 3,900,000
Proceeds from private placements of convertible
redeemable preferred stock, net - 1,303,168 1,591,150
Dividends on convertible redeemable preferred stock (20,120) (364,858) (357,503)
Purchase of treasury stock - - (145,887)
Payment of loan and offering fees (223,003) (53,543) (518,167)
- --------------------------------------------------------------------------------------------------------------------------

Net cash provided by (used in) financing activities (122,422) 3,246,633 8,419,336
- --------------------------------------------------------------------------------------------------------------------------



F-8


TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS




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




2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------

NET CHANGE IN CASH AND CASH EQUIVALENTS 128,536 (209,321) (1,210,524)

CASH AND CASH EQUIVALENTS, beginning of year 184,130 393,451 1,603,975
- -----------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of year $ 312,666 $ 184,130 $ 393,451
=======================================================================================================================

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
During 2001, the Company issued a 5%
stock dividend of 498,016 shares - - $ 6,374,609
During 2001 and 2000, the Company converted
preferred stock to common stock. - - $ 71,000
During 2003, 2002 and 2001, respectively,
the Company issued common stock on
conversion of debt. $ 69,549 $ 120,000 $ 523,250
During 2003, 2002 and 2001, respectively, the
Company issued common stock and stock options
for services received and charitable contributions
made. $ 93,313 $ 48,620 $ 92,253
During 2001, the Company sold equipment
for equity investments. - - $ 150,000
During 2002, the Company purchased equipment
by issuing common stock - $ 150,000 -
During 2003, The Company capitalized a lawsuit settlement
relating to the pipeline $ 297,171 - -
On January 1, 2003, The Company capitalized future asset
retirement obligations to oil and gas properties $ 346,922 - -
=======================================================================================================================



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-9


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

1. GOING CONCERN The accompanying consolidated financial
UNCERTAINTY statements have been prepared in conformity
with accounting principles generally accepted
in the United States of America, which
contemplate continuation of the Company as a
going concern and assume realization of
assets and the satisfaction of liabilities in
the normal course of business. The Company
continues to be in the early stages of its
oil and gas related operating history as it
endeavors to expand its operations through
the continuation of its drilling program in
the Tennessee Swan Creek Field. Accordingly,
the Company has incurred continuous losses
through these operating stages and has an
accumulated deficit of $30,755,038 and a
working capital deficit of $10,710,923 as of
December 31, 2003. During 2002, the Company
was informed by its primary lender that the
entire amount of its outstanding credit
facility was immediately due and payable, as
provided for in the Credit Agreement (see
Note 7). The Company has disputed its
obligation to make this payment and is
attempting to resolve the dispute or to
obtain alternative refinancing arrangements
to repay this current obligation. Although
the Company has been paying $200,000 per
month plus accrued interest since April 2002.
The Company is still considered to be in
default by the bank. Accordingly, these
$200,000 payments have put a strain on the
Company's ability to pay other obligations as
they become due and have hampered the
Company's ability to continue its
acquisition, exploration and development
program. In October 2003, the Company was
unable to begin the scheduled Redemption
payment of $143,395 per quarter of the Series
A shares and as accrued on cumulative
dividends totaling $600,738 on the Series A,
B and C preferred stock. These circumstances
raise substantial doubt about the Company's
ability to continue as a going concern.

Management's plans with regards to this
uncertainty primarily relate to the issuance
of additional common stock and to acquire
access to other forms of lender financing. On
February 13, 2004, the Company filed an
amended Form S-1 with the Securities and
Exchange Commission issuing rights to
existing shareholders to purchase up to 3
shares (for each share owned) of the
Company's common stock for $0.25 per share.
See Note 14 to the Company's Consolidated
Financial Statements which summarizes the
results of the Rights Offering. Additionally,
management is continuing to explore other
avenues of lender financing at more favorable
terms in order to reduce financing
expenditures in the future. With the
anticipation of the rights offering proceeds
and more favorable debt positions, management
hopes to obtain sufficient cash flows in the
future to recommence their drilling program
in order to maximize sales of oil and gas
volumes to their customers.

F-10


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

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

The Company changed its domicile from the
State of Utah to the State of Tennessee on
May 5, 1995 and its name was changed from
"Onasco Companies, Inc." to "Tengasco, Inc."

The Company's principal business consists of
oil and gas exploration, production and
related property management in the
Appalachian region of eastern Tennessee and
in the state of Kansas. The Company's
corporate offices are in Knoxville,
Tennessee. The Company operates as one
reportable business segment, based on the
similarity of activities.

During 1996, the Company formed Tengasco
Pipeline Corporation ("TPC"), a wholly-owned
subsidiary, to manage the construction and
operation of a 65-mile gas pipeline as well
as other pipelines planned for the future.
During 2001, TPC began transmission of
natural gas through its pipeline to customers
of Tengasco.

BASIS OF PRESENTATION

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

USE OF ESTIMATES

The accompanying financial statements are
prepared in conformity with accounting
principles generally accepted in the United
States of America which require management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported amounts
of revenues and expenses during the reporting
period. The actual results could differ from
those estimates.

F-11


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

REVENUE RECOGNITION

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


CASH AND CASH EQUIVALENTS

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

INVESTMENT SECURITIES

Investment securities available for sale are
reported at fair value, with unrealized gains
and losses, when material, reported as a
separate component of stockholders' equity,
net of the related tax effect. Other
comprehensive income/(losses) of $25,500 and
($115,500) were recorded during the years
ended December 31, 2003 and 2002,
respectively resulting from a decrease in the
fair value of the securities. Accumulated
other comprehensive losses were ($90,000) and
($115,500) at December 31, 2003 and 2002,
respectively.

INVENTORY

Inventory consists primarily of crude oil in
tanks and is carried at market value.

OIL AND GAS PROPERTIES

The Company follows the full cost method of
accounting for oil and gas property
acquisition, exploration and development
activities. Under this method, all productive
and nonproductive costs incurred in
connection with the acquisition of,
exploration for and development of oil and
gas reserves for each cost center are
capitalized. Capitalized costs include lease
acquisitions, geological and geophysical
work, delay rentals and the costs of
drilling, completing equipping and closing
oil and gas wells. Gains or losses are
recognized only upon sales or dispositions of
significant amounts of oil and gas reserves
representing an entire cost center. Proceeds
from all other sales or dispositions are
treated as reductions to capitalized costs.

F-12


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

The capitalized costs of oil and gas
properties, plus estimated future development
costs relating to proved reserves and
estimated costs of plugging and abandonment,
net of estimated salvage value, are amortized
on the unit-of-production method based on
total proved reserves. The costs of unproved
properties are excluded from amortization
until the properties are evaluated, subject
to an annual assessment of whether impairment
has occurred. These reserves were estimated
by Ryder Scott Company, Petroleum Consultants
in 2001, 2002 and 2003.

The capitalized oil and gas property, less
accumulated depreciation, depletion and
amortization and related deferred income
taxes, if any, are generally limited to an
amount (the ceiling limitation) equal to the
sum of: (a) the present value of estimated
future net revenues computed by applying
current prices in effect as of the balance
sheet date (with consideration of price
changes only to the extent provided by
contractual arrangements) to estimated future
production of proved oil and gas reserves,
less estimated future expenditures (based on
current costs) to be incurred in developing
and producing the reserves using a discount
factor of 10% and assuming continuation of
existing economic conditions; and (b) the
cost of investments in unevaluated properties
excluded from the costs being amortized. No
ceiling write-downs were recorded in 2003,
2002 or 2001.

PIPELINE FACILITIES

Phase I of the pipeline was completed during
1999. Phase II of the pipeline was completed
on March 8, 2001. Both phases of the pipeline
were placed into service upon completion of
Phase II. The pipeline is being depreciated
over its estimated useful life of 30 years;
beginning at the time it was placed in
service.

OTHER PROPERTY AND EQUIPMENT AND LONG - LIVED
ASSETS

Other property and equipment are carried at
cost. The Company provides for depreciation
of other property and equipment using the
straight-line method over the estimated
useful lives of the assets which range from
five to ten years. Long-lived assets (other
than oil and gas properties) are reviewed for
impairment whenever events or changes in
circumstances indicate that the carrying
amount may not be recoverable. When evidence
indicates that operations will not produce
sufficient cash flows to cover the carrying
amount of the related asset, a permanent
impairment is recorded to adjust the asset to
fair value. At December 31, 2003, management
believes that carrying amounts of all of the
Company's long-lived assets will be fully

F-13


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

recovered over the course of the Company's
normal future operations.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), was implemented
in January 1996. As permitted by SFAS 123,
the Company has continued to account for
stock compensation to employees by applying
the provisions of Accounting Principles Board
Opinion No. 25. If the accounting provisions
of SFAS 123 had been adopted, net loss and
loss per share would have been as follows for
the years ended December 31, 2003, 2002 and
2001.

2003 2002 2001
- --------------------------------------------------------------------------------

Net loss attributable to common
shareholders
As reported $ (2,815,119) $ (3,661,344) $ (2,653,970)
Stock based compensation (22,650) (77,821) (257,328)
Pro forma $ (2,837,769) $ (3,739,165) $ (2,911,298)
================================================================================

Basic and diluted loss per share
As reported $ (0.24) $ (0.33) $ (0.26)
Pro forma (0.24) (0.34) (0.28)
================================================================================

ACCOUNTS RECEIVABLE

Senior management reviews accounts receivable
on a monthly basis to determine if any
receivables will potentially be
uncollectible. Management includes any
accounts receivable balances that are
determined to be uncollectible, along with a
general reserve, in the overall allowance for
doubtful accounts. After all attempts to
collect a receivable have failed, the
receivable is written off against the
allowance. Based on the information available
to us, the Company believes no allowance for
doubtful accounts as of December 31, 2003 and
2002 is necessary. However, actual write-offs
may occur.

F-14


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

INCOME TAXES

The Company accounts for income taxes using
the "asset and liability method."
Accordingly, deferred tax liabilities and
assets are determined based on the temporary
differences between the financial reporting
and tax bases of assets and liabilities,
using enacted tax rates in effect for the
year in which the differences are expected to
reverse. Deferred tax assets arise primarily
from net operating loss carryforwards.
Management evaluates the likelihood of
realization of such assets at year-end
reserving any such amounts not likely to be
recovered in future periods.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially
subject the Company to concentrations of
credit risk consist principally of cash and
accounts receivable. At times, such cash in
banks is in excess of the FDIC insurance
limit.

The Company's primary business activities
include oil and gas sales to several
customers in the states of Tennessee and
Kansas. The related trade receivables subject
the Company to a concentration of credit risk
within the oil and gas industry.

The Company has entered into contracts to
supply two manufacturers with natural gas
from the Swan Creek field through the
Company's pipeline. These customers are the
Company's primary customers of natural gas
sales. Additionally, the Company sells a
majority of its crude oil primarily to two
customers, one each in Tennessee and Kansas.
Although management believes that customers
could be replaced in the ordinary course of
business, if the present customers were to
discontinue business with the Company, it
could have a significant adverse effect on
the Company's projected results of
operations.

LOSS PER COMMON SHARE

Basic loss per share is computed by dividing
loss available to common shareholders by the
weighted average number of shares outstanding
during each year. Shares issued during the
year are weighted for the portion of the year
that they were outstanding. Diluted loss per
share does not differ from basic loss per
share since the effect of all common stock
equivalents is anti-dilutive. Basic and
diluted loss per share are based upon
11,956,135 weighted overage common shares
outstanding for the year ended December 31,
2003, 11,062,436

F-15


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

weighted overage common shares outstanding
for the year ended December 31, 2002, and
10,235,253 weighted overage common shares
outstanding for the year ended December 31,
2001. Diluted loss per share does not
consider approximately 390,278, 1,473,000,
and 943,000 potential weighted average common
shares for 2003, 2002, and 2001 related
primarily to common stock options and
convertible preferred stock and debt. These
shares were not included in the computation
of the diluted loss per share amount because
the Company was in a net loss position and,
thus, any potential common shares were
anti-dilutive. All share and per share
amounts have been adjusted to reflect the 5%
stock dividend declared in September 2001.

FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair values of cash and cash equivalents,
investments and short-term debt approximate
their carrying values due to the short period
of time to maturity. Fair values of long-term
debt are based on quoted market prices or
pricing models using current market rates,
which approximate carrying values.

RECENT ACCOUNTING PRONOUNCEMENTS

A reporting issue has arisen regarding the
application on certain provisions of
Statement of Financial Accounting Standard
No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") to companies in the
extracting industries including oil and gas
companies. The issue is whether SFAS 142
requires the registrants to classify the cost
of mineral rights held under lease or other
contractual arrangements associated with
extracting oil and gas as intangible assets
in the balance sheet, apart from other
capitalized oil and gas properties owned and
provide specific footnote disclosures.
Historically, the Company had included the
cost of such mineral rights associated with
extracting oil and gas as a component of oil
and gas properties. If it is ultimately
determined that SFAS 142 requires oil and gas
companies to classify cost of mineral rights
held under lease or other contractual
arrangements associated with extracting oil
and gas as a separate intangible asset line
item on the balance sheet, the Company would
be required to reclassify approximately
$484,000 at December 31, 2003 and $346,000 at
December 31, 2002, out of oil and gas
properties and into a separate intangible
asset line item. The Company's consolidated
statements of net loss and cash flows would
not be affected since such intangible assets
would continue to be depleted and amortized
for impairment in accordance with full cost
accounting rules. Further, the Company does
not believe the classification of the cost of
mineral rights associated with extracting oil
and gas as intangible assets would

F-16


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

have any impact on compliance with covenants
under its debt agreements.

In 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standard No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143").
SFAS 143 addresses financial accounting and
reporting for obligations associated with the
retirement of tangible long-lived assets and
the associated asset retirement costs. This
statement requires companies to record the
present value of obligations associated with
the retirement of tangible long-lived assets
in the period in which it is incurred. The
liability is capitalized as part of the
related long-lived asset's carrying amount.
Over time, accretion of the liability is
recognized as an operating expense and the
capitalized cost is depreciated over the
expected useful life of the related asset.
The Company's asset retirement obligations
relate primarily to the plugging,
dismantlement, removal, site reclamation and
similar activities of its oil and gas
properties. Prior to adoption of this
statement, such obligations were accrued
ratably over the productive lives of the
assets through its depreciation, depletion
and amortization for oil and gas properties
without recording a separate liability for
such amounts. The Company adopted SFAS 143
beginning on January 1, 2003 and recorded a
cumulative loss from adoption of this
statement of approximately ($351,000). During
2003 the Company recorded $73,368 in
accretion cost (using a 12% accretion factor)
on the asset retirement obligation. These
accretion costs are included in interest
expense at December 31, 2003.

Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144")
addresses accounting and reporting for the
impairment or disposal of long-lived assets.
SFAS 144 supersedes Statement of Financial
Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets" and for
Long-Lived Assets to be Disposed Of. SFAS 144
establishes a single accounting model for
long-lived assets to be disposed of by sale
and expands guidance with respect to cash
flow estimations. SFAS 144 became effective
for the Company's fiscal year beginning
January 1, 2002. The adoption of this
standard did not have a material impact on
the Company's financial position or results
of operations.

The FASB issued Statement of Financial
Accounting Standard No. 146, "Accounting for
Costs Associated with Exit or Disposal
Activities, ("SFAS 146") in June 2002. SFAS
146 addresses financial accounting and
reporting for costs associated with exit or
disposal

F-17


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including
Certain Costs incurred in a Restructuring)."
SFAS 146 applies to costs incurred in an
"exit activity", which includes, but is not
limited to, a restructuring, or a "disposal
activity" covered by SFAS 144. The effect of
this statement did not have a material impact
on the Company.

In November 2002, the FASB issued FASB
Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34
("FIN 45"). FIN 45 addresses the disclosures
to be made by a guarantor in its interim and
annual financial statements about its
obligations under guarantees issued. The
disclosure requirements in FIN 45 are
effective for financial statements of interim
or annual periods ending after December 15,
2002. The effect of this statement did not
have a material impact on the Company.

During December 2003, the FASB issued
Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46"), which
requires the consolidation of certain
entities that are determined to be variable
interest entities ("VIE's"). An entity is
considered to be a VIE when either (i) the
entity lacks sufficient equity to carry on
its principal operations, (ii) the equity
owners of the entity cannot make decisions
about the entity's activities or (iii) the
entity's equity neither absorbs losses or
benefits from gains. The Company owns no
interests in variable interest entities, and
therefore this new interpretation has not
affected Company's consolidated financial
statements.

In May 2003, the FASB issued Statement of
Financial Accounting Standard No. 150,
"Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes
standards for how an issuer classifies and
measures in its statement of financial
position certain financial instruments with
characteristics of both liabilities and
equity and it requires that an issuer
classify a financial instrument within its
scope as a liability. SFAS 150 was effective
for financial instruments entered into or
modified after May 31, 2003 for public
companies. Restatement is not permitted.
Adoption of this standard during 2003,
resulted in a reclassification to a liability
and restatement of the Company's amounts to
estimated fair value of the Company's Series
A, B and C preferred stock subject to
mandatory redemption. Accordingly, for the
year ended December 31, 2003, the Company
recognized cumulative gain from a change in
accounting

F-18


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

principle of approximately $1,247,000. This
cumulative gain results from the difference
between the carrying amount of the preferred
shares and the fair value of the shares after
adoption. Accretion totaling $354,735 has
been recognized as interest expense for the
period from July 1, 2003 through December 31,
2003.

RECLASSIFICATIONS

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


3. RELATED PARTY During 2003 and 2002, the Company received
TRANSACTIONS debt financing from Directors totaling
$2,959,000 and $750,000 respectively, to fund
operating cash flow needs and to finance
continued development of the Swan Creek
field. Interest incurred on this debt was
approximately $206,000 and $15,000 for the
years ended December 31, 2003 and 2002,
respectively. See Note 7.

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

During 2001, the Company repaid all principal
and interest due at that time to related
parties, using the proceeds from the line of
credit with Bank One. Interest incurred to
related parties was approximately $546,000
for the year ended December 31, 2001.

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


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

DECEMBER 31, 2003 2002
--------------------------------------------------------------------

Oil and gas properties, at cost $17,580,174 $17,099,753
Accumulation depreciation,
depletion and amortization (4,590,731) (3,235,432)
--------------------------------------------------------------------
Oil and gas properties, net $12,989,443 $13,864,321
====================================================================

F-19


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

During the years ended December 31, 2003,
2002 and 2001, the Company recorded depletion
expense of approximately $1,355,000, $1, 388,
000 and $1,342,000, respectively.


5. PIPELINE FACILITIES In 1996, the Company began construction of a
65-mile gas pipeline (1) connecting the Swan
Creek development project to a gas purchaser
and (2) enabling the Company to develop gas
distribution business opportunities in the
future. Phase I, a 30-mile portion of the
pipeline, was completed in 1998. Phase II of
the pipeline, the remaining 35 miles, was
completed in March 2001. The estimated useful
life of the pipeline for depreciation
purposes is 30 years. The Company recorded
approximately $536,000, $509,000 and
$220,000; respectively in depreciation
expense related to the pipeline for the years
ended December 31, 2003, 2002 and 2001,
respectively.

In January 1997, the Company entered into an
agreement with the Tennessee Valley Authority
("TVA") whereby the TVA allows the Company to
bury the pipeline within the TVA's
transmission line rights-of-way. In return
for this right, the Company paid $35,000 and
agreed to annual payments of approximately
$6,200 for 20 years. This agreement expires
in 2017 at which time the parties may renew
the agreement for another 20-year term in
consideration of similar inflation-adjusted
payment terms.


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

DECEMBER 31, 2003 2002
-------------------------------------------------------------------
Machinery and equipment $ 1,392,190 $1,887,190
Vehicles 490,367 675,411
Other 63,734 63,734
-------------------------------------------------------------------
1,946,291 2,626,335

Less accumulated depreciation (1,075,561) (940,385)
-------------------------------------------------------------------

Other property and equipment - net $ 870,730 $1,685,950
===================================================================

For the year ended December 31, 2003, the
Company recorded an impairment loss on
equipment totaling $495,000.

F-20


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

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

DECEMBER 31, 2003 2002
- -----------------------------------------------------------------------------

Revolving line of credit with a bank,
due November 2004. The loan agreement
provides for increases or decreases to
the borrowing base as changes in proved
oil and gas reserves or other production
levels arise. Borrowings bear interest
at the bank's prime rate plus 0.25%
(4.25% at December 31, 2003).
Collateralized by the oil and gas
properties and the related operations
and revenues. See Note 1. $5,101,777 $7,501,777

Unsecured note payable to an institution
with $65,000 principal payments due
quarterly beginning January 1, 2000;
remaining balance due October 2004; with
interest payable monthly at 8% per
annum. - 480,000

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

Term loan payable to a Company; due
May 1, 2004. Interest is payable at
4.75%. Unsecured 297,171 -
- -----------------------------------------------------------------------------

Balance carried forward $6,048,948 $8,631,777
- -----------------------------------------------------------------------------

F-21


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

DECEMBER 31, 2003 2002
- -----------------------------------------------------------------------------


Balance brought forward $6,048,948 $ 8,631,777
- -----------------------------------------------------------------------------

Note payable to a financial institution,
with $1,773 principal payments due
monthly beginning January 7, 2002
through December 7, 2006. Interest is
payable monthly commencing on January 7,
2002 at 7.5% per annum. Note is
guaranteed by a major shareholder and is
collateralized by certain assets of the
Company. 57,004 73,335

Installment notes bearing interest at
the rate of 3.9% to 11.95% per annum
collateralized by vehicles and equipment
with monthly payments including interest
of approximately $10,000 due various
periods through 2006. 242,973 412,342
- -----------------------------------------------------------------------------

Total long term debt 6,348,925 9,117,454

Less current maturities (6,127,290) (7,861,245)
- -----------------------------------------------------------------------------

Long term debt, less current
maturities $ 221,635 $ 1,256,209
=============================================================================

F-22


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

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

DECEMBER 31, 2003 2002
- -----------------------------------------------------------------------------

Unsecured note payable to a director due
January 2004, with interest payable
quarterly at 8% per annum. Note is
convertible into common stock of the
Company at a rate of $2.88 per share of
common stock. $ 500,000 $500,000



Notes payable to Directors due January
2004, with interest payable quarterly at
12% per annum. Notes are secured by the
pipeline. 3,209,000 250,000
- -----------------------------------------------------------------------------
Total long term debt to related
parties 3,709,000 750,000

Less current maturities (3,709,000) -
- -----------------------------------------------------------------------------


Long term debt to related parties,
less current maturities $ - $750,000
=============================================================================


8. COMMITMENTS The Company is a party to lawsuits in the
AND CONTINGENCIES ordinary course of its business. While the
damages sought in some of these actions are
material, the Company does not believe that
it is probable that the outcome of any
individual action will have a material
adverse effect, or that it is likely that
adverse outcomes of individually
insignificant actions will be significant
enough, in number or magnitude, to have a
material adverse effect in the aggregate on
its financial statements.

F-23


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

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

Year Amount
---------------------------------------------
2004 $ 56,470
2005 56,470
---------------------------------------------
$112,940
=============================================

Office rent expense was approximately
$78,830, $84,000 and $91,000 for each of the
three years ended December 31, 2003,
respectively.


9. CUMULATIVE The Company is authorized to create and has
CONVERTIBLE issued various classes of preferred stock
REDEEMABLE (Series A, Series B and Series C). Shares of
PREFERRED STOCK both Series A and B of Preferred Stock are
immediately convertible into shares of Common
Stock. Each $100 liquidation preference share
of preferred stock is convertible at a rate
of $7.00 for the Series A per share of common
stock. For the Series B, the conversion rate
is the average market price of the Company's
common stock for 30 days before the sale of
the Series B preferred stock with a minimum
conversion price of $9.00 per share. The
conversion rate is subject to downward
adjustment for certain events. The conversion
prices have been adjusted prospectively for
stock dividends and splits.

The holders of both the Series A and Series B
Preferred Stock are entitled to a cumulative
dividend of 8% per quarter. However, the
payment of the dividends on the Series B
Preferred Stock is subordinate to that of the
Series A Preferred Stock. In the event that
the Company does not make any two of six
consecutive quarterly dividend payments, the
holders of the Series A Preferred Stock have
the right to appoint those directors which
would constitute of majority of the Board of
Directors. In such a scenario, the holders of
the Preferred Shares would be entitled to
elect a majority of the Board of Directors
until all accrued and unpaid dividends have
been paid.

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

F-24


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

The Company may redeem both of the Series A
and B Preferred Shares upon payment of $100
per share plus any accrued and unpaid
dividends. Further, with respect to the
Series A Preferred Stock, commencing on
October 1, 2003 and at each quarterly date
thereafter while the Series A Preferred Stock
is outstanding, the Company is required to
redeem one-twentieth of the maximum number of
Series A Preferred Stock outstanding. With
respect to the Series B Preferred Stock, on
the fifth anniversary after issuance (March
2005), the Company is required to redeem all
outstanding Series B Preferred Stock.

During 2002, the Board of Directors
authorized the sale of up to 50,000 shares of
Series C Preferred Stock at $100 per share.
The Company issued 14,491 shares, resulting
in net proceeds after commissions of
$1,303,168. The Series C Preferred Stock
accrues a 6% cumulative dividend on the
outstanding balance, payable quarterly. These
dividends are subordinate to the dividends
payable to the Series A and Series B
Preferred Stock holders. This stock is
convertible into the Company's common stock
at the average stock trading price 30 days
prior to the closing of the sales of all the
Series C Preferred Stock being offered or
$5.00 per share, whichever is greater. The
Company is required to redeem any remaining
Series C Preferred Stock and any accrued and
unpaid dividends in July 2006.

The Company adopted the provisions of SFAS
150 on July 1, 2003. Under SFAS 150,
mandatorily redeemable preferred stock shall
be reclassified at fair value to a liability.
The Company has determined that each of the
Series A, Series B and Series C preferred
stock qualifies as shares subject to
mandatory redemption, and as such, were
reclassified as a liability upon adoption of
SFAS 150. Accordingly, the difference between
the carrying amount at the date of adoption
and the fair value of the shares (discounted
at 12%) was recognized as a cumulative effect
of a change in accounting principle
approximately $1,247,000 on July 1, 2003. The
difference between the carrying amount of
shares subject to mandatory redemption
liability and the face value amount of
preferred stock are being accreted at 12%
into interest expense and the shares
liability until conversion or redemption of
the shares. Accretion associated with these
shares subject to mandatory redemption from
July 1, 2003 through December 31, 2003 was
$354,735.

Additionally, upon adoption of SFAS 150,
cumulative dividends stated in the agreements
shall be recognized as a portion of interest
cost prospectively. During the year ended
December 31, 2003, the Company incurred
$536,778 in dividends, of which $268,389 and

F-25


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

$268,389 has been recognized as dividends on
preferred stock and interest expense,
respectively.

Future mandatory redemption requirements as
of December 31, 2003 are as follows:

Year Amount
----------------------------------------------------------
2003 (in arrears and past due) $ 143,395
2004 573,580
2005 3,328,580
2006 2,022,680
2007 573,580
2008 430,185
----------------------------------------------------------

Subtotal 7,072,000
Less accretion cost included above (1,012,140)
----------------------------------------------------------

Shares subject to mandatory redemption $ 6,059,860
==========================================================


10. ASSET RETIREMENT Effective January 1, 2003, the Company
OBLIGATION implemented 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 operation expense and the capitalized cost
is depleted over the estimated useful life of
the related asset. Additionally, SFAS No. 143
requires 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
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.

Using a credit-adjusted risk fee rate of 12%,
an estimated useful life of wells ranging
from 30-40 years, and estimated plugging and
abandonment cost ranging from $5,000 per well
to $10,000 per well, the Company has recorded
a non-cash charge related to the cumulative
effect of a change in accounting principle of
$351,204 in the consolidated statements of
loss. Oil and gas properties were increased
by $260,191, which represents the present
value of all future obligations to retire the
wells at January 1, 2003, net of accumulated

F-26


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

depletion on this cost through that date. A
corresponding obligation totaling $611,395
has also been recorded as of January 1, 2003.

For the period ended December 31, 2003, the
Company recorded accretion and depletion
expenses of $73,368 associated with this
liability and its corresponding asset. These
expenses are included in interest expense in
the consolidated statements of loss. Had the
provisions of this statement been reflected
in the financial statements for the year
ended December 31, 2002 and 2001, asset
retirement obligations of $532,269 and
$477,919 would have been recorded as of
January 1, 2002 and 2001, respectively.

Pro-forma net loss for the years ended
December 31, 2001 and 2002 is as follows:

2002 2001
- -----------------------------------------------------------------------------
Net loss:
As reported $(3,661,344) $(2,653,970)
Accretion (79,126) (54,350)
- -----------------------------------------------------------------------------
Pro-forma net loss $(3,740,470) $(2,708,320)
=============================================================================


The following is a roll-forward of
activity impacting the asset retirement
obligation for the year ended December
31, 2003.

Balance, January 1, 2003: $ 611,395
Accretion expense through December 31, 2003 73,368
Liabilities Settled (16,207)
- ------------------------------------------------------------------------------

Balance, December 31, 2003 $ 668,556
==============================================================================


11. STOCK OPTIONS In October 2000, the Company approved a Stock
Incentive Plan. The Plan is effective for a
ten-year period commencing on October 25,
2000 and ending on October 24, 2010. The
aggregate number of shares of Common Stock as
to which options and Stock Appreciation
Rights may be granted to Employees under the
plan shall not exceed 1,000,000. Options are
not transferable, fully vest after two years
of employment with the Company, are
exercisable for 3 months after voluntary
resignation from the Company, and terminate
immediately upon involuntary termination from
the Company. The purchase price of shares
subject to this Nonqualified Stock Option
Plan shall be determined at the time the
options are granted, but are not permitted to

F-27


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

be less than 85% of the Fair Market Value of
such shares on the date of grant.
Furthermore, an employee in the plan may not,
immediately prior to the grant of an
Incentive Stock Option hereunder, own stock
in the Company representing more than ten
percent of the total voting power of all
classes of stock of the Company unless the
per share option price specified by the Board
for the Incentive Stock Options granted such
an Employee is at least 110% of the Fair
Market Value of the Company's stock on the
date of grant and such option, by its terms,
is not exercisable after the expiration of 5
years from the date such stock option is
granted.

Stock option activity in 2003, 2002 and 2001
is summarized below:




2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------------------------------------------------------------------------------------------

OUTSTANDING,
beginning of
year 676,770 $7.71 516,028 $9.23 1,017,450 $ 8.54
Granted 436,000 0.50 160,742 2.86 78,750 12.39
Exercised (94,000) 0.50 - - (256,772) 8.69
Expired/canceled (557,180) 8.57 - - (323,400) 7.85
OUTSTANDING,
end of year 461,590 1.32 676,770 7.71 516,028 9.23
- ---------------------------------------------------------------------------------------------------------------------

Exercisable,
end of year 461,590 $1.32 676,770 $7.71 474,889 $ 9.21
=====================================================================================================================



F-28


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

The share information disclosed above has
been adjusted to reflect a 5% stock dividend
declared during 2001.

The following table summarizes information
about stock options outstanding at December
31, 2003:


OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
----------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
EXERCISE CONTRACTUAL
PRICE SHARES LIFE (YEARS) SHARES
----------------------------------------------------------------
$ 0.50 342,000 2.33 342,000


$ 2.86 109,590 1.67 109,590

$12.70 10,000 0.67 10,000
-------------- --------------

Total 461,590 461,590
================================================================

The weighted average fair value per share of
options granted during 2003, 2002 and 2001 is
$0.16, $1.45 and $3.62, respectively,
calculated using the Black-Scholes
Option-Pricing model.

No compensation expense related to stock
options was recognized in 2003, 2002 or 2001.

For employees, the fair value of stock
options used to compute pro forma net loss
and loss per share disclosures is the
estimated present value at grant date using
the Black-Scholes option-pricing model with
the following weighted average assumptions
for 2003, 2002 and 2001: Expected volatility
of 40% for 2003, 74.2% for 2002 and 50% for
2001; a risk free interest rate of 3.67% in
2003, 3.67% in 2002 and 3.67% in 2001; and an
expected option life of 3 years for 2003,
2002 and 2001.

F-29


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

12. INCOME TAXES The Company has no taxable income during the
three year period ended December 31, 2003.

A reconciliation of the statutory U.S.
Federal income tax and the income tax
provision included in the accompanying
consolidated statements of loss is as
follows:

DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Statutory rate 34% 34% 34%
Tax benefit at statutory rate $ (866,000) $ (1,073,000) $ (769,000)
State income tax benefit (152,000) (189,000) (136,000)
Other - -
Increase in deferred tax asset
valuation allowance 1,018,000 1,262,000 905,000
- --------------------------------------------------------------------------------

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

DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------------------------

Net operating loss carryforward $8,157,000 $ 7,139,000 $ 5,877,000
Capital loss carryforward 263,000 263,000 263,000
- --------------------------------------------------------------------------------

8,420,000 7,402,000 6,140,000

Valuation allowance (8,420,000) (7,402,000) (6,140,000)
- --------------------------------------------------------------------------------

Net deferred taxes $ - $ - $ -
================================================================================

The Company recorded a valuation allowance at
December 31, 2003, 2002 and 2001 equal to the
excess of deferred tax assets over deferred
tax liabilities, as management is unable to
determine that these tax benefits are more
likely than not to be realized. Potential
future reversal of the portion of the
valuation allowance relative to deferred tax
asset resulting from the exercise of stock
options will be recorded as additional paid
in capital realized

As of December 31, 2003, the Company had net
operating loss carryforwards of approximately
$13,700,000 which will expire between 2010
and 2023 if not utilized.

F-30


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

13. SUPPLEMENTAL CASH The Company paid approximately $634,635,
FLOW INFORMATION $571,000 and $853,500 for interest in 2003,
2002 and 2001, respectively. The Company
capitalized approximately $148,000 of
interest in 2001. No interest was capitalized
in 2003 or 2002. No income taxes were paid in
2003, 2002, or 2001.


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

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

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

The net proceeds of the Rights Offering will
be used initially to pay non-bank
indebtedness in the aggregate amount of
approximately $6 million (including up to
$3,850,000 in principal amount plus accrued
interest owed by the Company to Dolphin
Offshore Partners, L.P., the general partner
of which is Peter E. Salas a director of the
Company), with the balance of the net
proceeds to be used to repay bank
indebtedness and/or for working capital
purposes, including the drilling of
additional wells. At December 31, 2003, the
Company incurred offering costs $223,003,
which are reflected in the consolidated
balance sheet as an asset. This asset will be
offset against gross proceeds, when received
by the Company.

F-31


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

At the time the Rights Offering closed on
March 18, 2004 all 36.3 million shares
offered had been subscribed for and, as a
result, the Company raised approximately $9.1
million. The total number of shares
subscribed actually exceeded the 36.3 million
shares available for issuance under the
offering. Consequently, all shares subscribed
for under the basic privilege were issued and
the number shares issued under the over
subscription privilege was proportionately
reduced to equal the number of remaining
shares. The allocation and issuance of the
oversubscribed shares was made by Mellon
Investor Services, the Company's subscription
agent who also returned payments for those
oversubsubcribed shares that were not
available.

As called for in the Rights Offering,
7,029,604 rights were exercised pursuant to
the basic subscription privilege, resulting
in the purchase of 21,088,812 shares at $0.25
per share for gross proceeds to the Company
of $5,272,203 resulting from the basic
subscription privilege. A total of 15,211,118
shares were purchased pursuant to the
oversubscription privilege, resulting in
additional gross proceeds to the Company of
$3,802,797. Of the shares purchased pursuant
to the Rights Offering 14,966,344 shares were
purchased by Directors, Officers and owners
of more than ten percent (10%) of the
Company's outstanding common stock.


F-32


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

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




FISCAL YEAR ENDED 2003

- ---------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter(b) Quarter(c)
- ---------------------------------------------------------------------------------------------------------------------

Revenues $1,971,603 $1,482,390 $1,549,461 $ 1,201,796

Net loss (282,162) (678,592) (508,247) (1,973,646)

Cumulative effects of changes in
accounting principles (351,204) - 1,247,121 -

Net income (loss) attributable to common
stockholders (767,561) (812,786) 738,874 (1,973,646)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:

Operations $ (0.02) $ (0.07) $ 0.03 $ (0.17)
Cumulative Effects $ (0.03) - $ 0.08 -
- ---------------------------------------------------------------------------------------------------------------------
Total $ (0.05) $ (0.07) $ 0.05 $ (0.17)



FISCAL YEAR ENDED 2002
- ----------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------

Revenues $1,176,482 $1,297,668 $1,507,308 $ 1,719,020

Net loss (818,341) (858,197) (721,879) (756,138)

Net loss attributable to common
stockholders (930,799) (984,139) (856,074) (890,332)
- ----------------------------------------------------------------------------------------------------------------------
Loss per common share

Basic and diluted $ (0.09) $ (0.09) $ (0.08) $ (0.07)
- ----------------------------------------------------------------------------------------------------------------------



FISCAL YEAR ENDED 2001
- ----------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter(a) Quarter
- ----------------------------------------------------------------------------------------------------------------------

Revenues $1,448,318 $1,863,068 $2,583,758 $ 1,101,542

Net loss (368,768) (336,034) (378,597) (1,179,388)

Net loss attributable to common
stockholders (447,546) (423,523) (491,055) (1,291,846)
- ----------------------------------------------------------------------------------------------------------------------
Loss per common share

Basic and diluted $ (0.05) $ (0.04) $ (0.05) $ (0.12)
- ----------------------------------------------------------------------------------------------------------------------



F-33


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

(a) Third quarter 2001 results reflect the
effect on depletion expense that resulted
from a decrease in reserve estimates provided
in a study performed by Ryder Scott and
issued August 10, 2001. The amount recorded
during this quarter was $562,000 higher than
the quarterly estimates made by management
during the first three quarters as a result
of a change in estimate arising from new
information provided in the Ryder Scott
Report.

(b) Amounts disclosed above for the third
quarter of 2003 differ from those previously
filed with the SEC as a result of adopting
SFAS 150 after September 30, 2003. Management
will amend the September 30, 2003 SEC Form
10-Q filing during 2004.

(c) During the fourth quarter of 2003, the
Company recognized an impairment loss on
equipment totaling $495,000.

16. SUPPLEMENTAL OIL AND Information with respect to the Company's oil
GAS INFORMATION and gas producing activities is presented in
the following tables. Estimates of reserve
quantities, as well as future production and
discounted cash flows before income taxes,
were determined by Ryder Scott Company, L.P.
as of December 31, 2003, 2002 and 2001.

OIL AND GAS RELATED COSTS

The following table sets forth information
concerning costs related to the Company's oil
and gas property acquisition, exploration and
development activities in the United States
during the years ended December 31, 2003,
2002 and 2001:

2003 2002 2001
- -----------------------------------------------------------------------------

Property acquisition
Proved $ - $ - $ -
Unproved - - -
Less - proceeds from
sales of properties - (100,000) (750,000)
Development costs 480,421 2,082,529 5,571,883
- -----------------------------------------------------------------------------

$480,421 $1,982,529 $4,821,883
=============================================================================

F-34


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

RESULTS OF OPERATIONS FROM OIL AND GAS
PRODUCING ACTIVITIES

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

December 31, 2003 2002 2001
------------------------------------------------------------------------------

Revenues $ 6,040,872 $ 5,437,723 $ 6,656,758
Production costs and taxes (3,412,201) (3,094,731) (2,951,746)
Depreciation, depletion and
amortization (1,268,470) (1,388,138) (1,342,000)
------------------------------------------------------------------------------

Income from oil and gas
producing activities $ (1,360,201) $ 954,854 $ 2,363,012
------------------------------------------------------------------------------

In the presentation above, no deduction has
been made for indirect costs such as
corporate overhead or interest expense. No
income taxes are reflected above due to the
Company's tax loss carryforwards.

OIL AND GAS RESERVES (UNAUDITED)

The following table sets forth the Company's
net proved oil and gas reserves at December
31, 2003, 2002 and 2001 and the changes in
net proved oil and gas reserves for the years
then ended. Proved reserves represent the
estimated quantities of crude oil and natural
gas which geological and engineering data
demonstrate with reasonable certainty to be
recoverable in the future years from known
reservoirs under existing economic and
operating conditions. The reserve information
indicated below requires substantial judgment
on the part of the reserve engineers,
resulting in estimates which are not subject
to precise determination. Accordingly, it is
expected that the estimates of reserves will
change as future production and development
information becomes available and that
revisions in these estimates could be
significant. Reserves are measured in barrels
(bbls) in the case of oil, and units of one
thousand cubic feet (MCF) in the case of gas.

F-35


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

OIL (BBLS) GAS (MCF)
- -----------------------------------------------------------------------------

Proved reserves:

Balance, January 1, 2001 1,814,905 47,539,871
Discoveries and extensions 62,254 4,915,431
Revisions of previous estimates (672,443) (25,263,634)
Production (148,041) (1,311,466)
Balance, January 1, 2002 1,056,675 25,880,202
Discoveries and extensions 34,968 937,000
Revisions of previous estimates 542,229 786,430
Production (157,973) (1,004,899)
- -----------------------------------------------------------------------------

Balance, December 31, 2002 1,475,899 26,598,733
Discoveries and extensions 0 0
Revisions of previous estimates 42,478 (11,633,157)
Production (147,243) (620,873)
- -----------------------------------------------------------------------------
Proved reserves at, December 31, 2003 1,371,134 14,344,703
Proved developed producing
reserves at, December 31, 2003 1,059,038 5,167,832
=============================================================================
Proved developed producing
reserves at, December 31, 2002 1,108,293 6,592,711
=============================================================================
Proved developed producing
reserves at, December 31, 2001 767,126 7,157,183
=============================================================================

Of the Company's total proved reserves as of
December 31, 2003 and 2002 and 2001,
approximately 51%, 37% and 36%, respectively,
were classified as proved developed
producing, 14%, 19% and 26%, respectively,
were classified as proved developed
non-producing and 35%, 44% and 37%,
respectively, were classified as proved
undeveloped. All of the Company's reserves
are located in the continental United States.

F-36



STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS (UNAUDITED)

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

AMOUNTS IN THOUSANDS
---------------------------------------------
December 31, 2003 2002 2001
- --------------------------------------------------------------------------------

Future cash inflows $ 109,102 $152,180 $ 78,296
Future production
costs and taxes (48,761) (41,870) (26,083)
Future development costs (5,957) (11,348) (6,384)
Future income tax expenses - - -
- --------------------------------------------------------------------------------

Net future cash flows 54,384 98,962 45,829

Discount at 10% for
timing of cash flows (28,021) (52,314) (24,095)
- --------------------------------------------------------------------------------

Discounted future net
cash flows from
proved reserves $ 26,363 $ 46,648 $ 21,734
================================================================================

The following unaudited table sets forth the
changes in the standardized measure of
discounted future net cash flows from proved
reserves during 2003, 2002 and 2001:

AMOUNTS IN THOUSANDS
-----------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------

BALANCE, beginning of year $ 46,648 $ 21,734 $ 235,743
Sales, net of production costs
and taxes (2,884) (2,343) (3,705)
Discoveries and extensions - 1,686 4,167
Changes in prices and
production costs (9,040) 20,586 (299,527)
Revisions of quantity estimates (13,988) 6,120 (33,449)
Development costs incurred - -
Interest factor - accretion
of discount 4,665 2,173 32,198
Net change in income taxes - - 86,237
Changes in future development
costs 5,391 (4,860) 2,666
Changes in production rates
and other (4,429) 1,552 (2,596)
- --------------------------------------------------------------------------------
BALANCE, end of year $ 26,363 $ 46,648 $ 21,734
================================================================================

F-37


TENGASCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

Estimated future net cash flows represent an
estimate of future net revenues from the
production of proved reserves using current
sales prices, along with estimates of the
operating costs, production taxes and future
development and abandonment costs (less
salvage value) necessary to produce such
reserves. The average prices used at December
31, 2003, 2002 and 2001 were $29.72, $27.25
and $17.03 per barrel of oil and $4.76, $4.01
and $2.33 per MCF of gas, respectively. No
deduction has been made for depreciation,
depletion or any indirect costs such as
general corporate overhead or interest
expense.

Operating costs and production taxes are
estimated based on current costs with respect
to producing gas properties. Future
development costs are based on the best
estimate of such costs assuming current
economic and operating conditions. The
estimates of reserve values include estimated
future development costs that the company
does not currently have the ability to fund.
If the company is unable to obtain additional
funds, it may not be able to develop its oil
and natural gas properties as estimated in
its December 31, 2003 reserve report.

Income tax expense is computed based on
applying the appropriate statutory tax rate
to the excess of future cash inflows less
future production and development costs over
the current tax basis of the properties
involved, less applicable carryforwards, for
both regular and alternative minimum tax.

The future net revenue information assumes no
escalation of costs or prices, except for gas
sales made under terms of contracts which
include fixed and determinable escalation.
Future costs and prices could significantly
vary from current amounts and, accordingly,
revisions in the future could be significant.

F-38