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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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.

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

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

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

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.

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

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.