U.S. Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

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

For the Quarterly period ended June 30, 2004

Commission File No. 0-20975

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

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

(865-523-1124)
(Registrant’s telephone number, including area code)

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 48,506,977 common shares at June 30, 2004.

TENGASCO, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

2

TENGASCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

See accompanying notes to condensed consolidated financial statements

3

TENGASCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes to condensed consolidated financial statements

4

TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS

(Unaudited)

See accompanying notes to condensed consolidated financial statements

5

TENGASCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

See accompanying notes to condensed consolidated financial statements

6

TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

7

Tengasco, Inc. And Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

         (1)                   Basis of Presentation  

                The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. Additionally, deferred income taxes and income tax expense is not reflected in the Company’s financial statements due to the fact that the Company has had recurring losses and deferred tax assets arising from net operating gross carry-forwards have been fully reserved. For further information, refer to the Company’s consolidated financial statements and footnotes thereto for the year ended December 31, 2003 included in the Company’s annual report on Form 10-K.

         (2)                    Earnings Per Share  

                In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share”, basic and diluted loss per share are based on 48,506,977 and 11,944,583 weighted average shares outstanding for the quarter ended June 30, 2004 and June 30, 2003, respectively, and 33,115,395 and 11,854,950 for the six months ended June 30, 2004 and June 30, 2003 respectively.

                For the six-month periods ended June, 2004 and 2003, the Company had no vested, unexercised, in the money options. As the Company was in a net loss position, any potential common share equivalents would have been anti-dilutive.

                The Company adopted the disclosure provision of the Statement of Financial Accounting Standards (SFAS or statement) No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, which amends SFAS No. 123. “Accounting for Stock-Based Compensation”, SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, which was originally provided under SFAS No. 123. The Statement also improves the timeliness of disclosures by requiring the information be included in interim, as well as annual, financial statements. The adoption of these disclosure provisions did not have a material affect on the Company’s June 30, 2004 consolidated results of operations, financial position, or cash flows.

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

8

        date. As such, no compensation expense is recorded in the accompanying consolidated financial statements.

        Had compensation cost been determined based upon the fair value at the grant date for awards under the stock option plan consistent with the methodology prescribed under SFAS No. 123, the Company’s pro forma net loss and net loss per share would have differed from the amounts reported as follows:

         (3)                    Liquidity  

                  The Company continues to be in the early stages of its oil and gas related operating history as it endeavors to expand its operations. Accordingly, the Company has incurred continuous losses through these operating stages and has an accumulated deficit of $32,889,432 and a working capital deficit of $4,549,139 as of June 30, 2004. 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. The Company disputed its obligation to make this payment and has resolved the dispute as discussed in Note 10. The Company believes that now that its dispute has been resolved and that it has obtained additional funds through its Rights Offering discussed in Note 9, it will be able to obtain long-term financing to allow the Company to continue drilling and to locate and develop other properties. If such funding for additional drilling becomes available, the Company plans to drill new wells in locations it has identified in Kansas on its existing leases in response to drilling activity in the area, which it believes will establish new areas of oil production. However, no assurances can be made that such financing will be obtained or that any additional drilling will result in new producing reserves. The inability of the Company to obtain additional long-term financing could impair the Company’s ability to meet its other obligations as they become due.

9

          (4)                   New Accounting Pronouncements  

                In March 2004, The Emerging Issues Task Force (“EITF”) reached a consensus that mineral rights, as defined in EITF Issue No. 04-02, “Whether Mineral Rights are Tangible or Intangible Asset,” are tangible assets and that they should be removed as examples of intangible assets in SFAS Nos. 141 and 142. The FASB has recently ratified this consensus and directed the FASB staff to amend SFAS Nos. 141 and 142 through the issuance of FASB Staff Positions FSP FAS 141-1 and FSP FAS 142-1. Historically the Company has included the cost of such mineral rights as tangible assets, which is consistent with the EITF’s consensus. As such, EITF 04-02 will not affect Tengasco’s consolidated condensed financial statements.

                 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 the 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 assets to restricted fair values 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 reclassified the preferrred stock to shares subject to mandatory redemption (liability) at estimated fair value, and recognized a cumulative gain from a change in accounting principle of approximately $365,675. This cumulative gain results from the difference between the carrying amount of the preferred shares and the fair value of the shares after adoption. In the first and second quarters of 2004, $224,722 and $216,254, respectively, were recognized as interest expense related to those shares subject to mandatory redemption.

          (5)                   Letter of Credit Agreement  

                 On November 8, 2001, the Company signed a credit facility with the Energy Finance Division of 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. The interest rate was the Bank One base rate plus one-quarter percent.

                On November 9, 2001, funds from this credit line were used to (1) refinance existing indebtedness on the Company’s Kansas properties, (2) to repay the internal financing provided by directors and shareholders on the Company’s completed 65-mile Tennessee intrastate pipeline system, (3) to repay a note payable to Spoonbill, Inc., (4) to repay a purchase money note due to M.E. Ratliff, who at the time was the Company’s Chief Executive Officer and Chairman of the Board of Directors, for purchase by the Company of a drilling rig and related equipment, (5) to repay in full the remaining principal of the working capital loan due December 31, 2001 to Edward W.T. Gray III, who at that time was a director of the Company. All of these obligations incurred interest at a rate substantially greater than the rate being charged by Bank One under the credit facility.

10

                 On April 5, 2002, the Company received a notice from Bank One stating that it had re-determined and reduced the borrowing base under the Credit Agreement by $6,000,000 to $3,101,766. Bank One demanded that the Company pay the $6,000,000 within thirty days of the notice. The Company filed a lawsuit in Federal Court to prevent Bank One from exercising any rights under the Credit Agreement. The Company was paying $200,000 per month toward the outstanding balance of the credit facility until the settlement. As of May 1, 2004, the outstanding balance due to Bank One under the Credit Agreement was $4,101,796. On May 13, 2004 the Company entered into an agreement, settling its lawsuit with Bank One. See Note 10, Bank One Litigation Settlement.

          (6)                   Notes Payable  

                 From December 2002 through December 9, 2003, Dolphin Offshore Partners, L.P. (“Dolphin”) acquired a total of an 85% undivided interest in the Company’s Tennessee and Kansas pipelines as collateral for a series of seven loans. In the first five of these transactions totaling $1,650,000, Peter E. Salas, a Director of the Company 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 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 Company 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 referred to as the Lutheran note then being held by several persons. This loan was 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 were 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 was 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 were secured by an undivided interest in the Company’s Tennessee and Kansas pipelines and the security agreement referred to above.

                All notes payable to Dolphin dated prior to May 18, 2004 were repaid on March 30, 2004 from the proceeds received by the Company from its Rights Offering.

                On May 18, 2004, Dolphin loaned the Company $2,500,000 bearing interest at 12% per annum with interest payable monthly beginning June 18, 2004 and principal payable on May 20, 2005, which loan is secured by a first lien on the Company’s Tennessee and Kansas producing properties and the Tennessee pipeline. The proceeds of the loan were used to fund in part the settlement of the Bank One litigation. See, Part II, Item 1, Legal Proceedings.

11

          (7)                    Litigation Settlements  

                On May 10, 2004 the Court entered its final order approving the fairness of the settlement to the class, dismissing the action pursuant to a Settlement Stipulation, and fully releasing the claims of the class members in Paul Miller v. M. E. Ratliff and Tengasco, Inc., No. 3:02-CV-644 in the United States District Court for the Eastern District of Tennessee, Knoxville, Tennessee. This action sought 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, unspecified damages allegedly caused by violations of the federal securities laws. In January, 2004 all parties reached a settlement subject to court approval. On April 29, 2004, a final hearing for approval of the settlement was held. The Court entered its order approving the settlement on May 10, 2004. Class members may file their claims against the settlement fund through July 15, 2004. The fund will be disbursed in accordance with the claims filed. Under the settlement, the Company paid into a settlement fund the amount of $37,500 to include all costs of administration, contributed 150,000 shares of stock of Miller Petroleum, Inc. owned by the Company and will 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 subject to adjustments. All expenses including attorney’s fees are to be paid out of these settlement funds.

          (8)                   Cumulative Effect of a Change in Accounting Principle  

                 Effective January 1, 2003, the Company implemented the requirements of Statement of Financial Accounting Standards No. 143 (SFAS 143), “Accounting for Asset Retirement Obligations”. Among other things, SFAS 143 requires entities to record a liability and corresponding increase in 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 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 its statement of operations effective January 1, 2003. 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 depletion on this cost through that date. A corresponding obligation totaling $611,395 was recorded as of January 1, 2003. Accretion expense for the three months and six months ended June 30, 2003 was $18,342 and $36,684, respectively. Accretion expense for the three and six months ended June 30, 2004 was also $18,342 and $36,684, respectively.

          (9)                   Rights Offering  

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

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

12

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

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

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

                The net proceeds of the Rights Offering have been used to pay non-bank indebtedness in the aggregate amount of approximately $6 million (including up to $3,850,000 in principal amount plus accrued interest owed by the Company to Dolphin) and to pay $1,157,000 as a portion of the Company’s settlement with Bank One. The balance of the net proceeds will be used for working capital purposes, including the drilling of additional wells. At December 31, 2003, the Company incurred costs in connection with the Rights Offering of $223,003, which were reflected in the consolidated balance sheet in other current assets. This asset was offset against gross proceeds in March 2004, when such proceeds were received by the Company.

          (10)                   Bank One Litigation Settlement  

                As of May 1, 2004, the principal amount owed by the Company under the credit facility with Bank One signed on November 8, 2001 was $4,101,601. On Thursday, May 13, 2003, the Company and the Bank One executed a written agreement resolving all claims against each other. Pursuant to that agreement, the Company agreed to pay the sum of $3,657,000 to the Bank by May 18, 2004, in full satisfaction of its obligations to the Bank and to immediately release all claims against the Bank and to dismiss the litigation. In turn, Bank One agreed to immediately release all its claims against the Company, dismiss the litigation and to execute releases of its liens on all of the Company’s properties securing the credit facility upon receipt of the agreed payment. Bank One retained a right to seek specific performance of the May 13, 2004 agreement if payment were not made by May 18, 2004 and to recover attorney’s fees if such relief were sought. The Company and the Bank each agreed to bear all of its own costs, expenses, and attorneys’ fees incurred to date.

                On May 18, 2004, the Company paid Bank One, the agreed upon settlement in the amount of $3,657,000. The funds were obtained from proceeds of a bridge loan from Dolphin Offshore Partners,

13

LP (“Dolphin”) (the managing partner of Dolphin is Peter E. Salas, a member of the Board of Directors), in the principal amount of $2,500,000 bearing interest at 12% per annum and payable interest only monthly beginning June 18, 2004 with the principal amount due May 20, 2005. The loan is secured by a first lien on the Company’s Tennessee and Kansas producing properties and the Tennessee pipeline. The balance of the settlement amount of $1,157,000 was paid from funds available to the Company from the proceeds of the rights offering. Upon receipt of this payment, an agreed order signed by the Company and the Bank dismissing all claims in litigation was filed with the court on May 20, 2004 and entered by the court. No hearing or approval of the settlement by the court is required. The Company recorded a gain from extinguishment of debt in the amount of $336,820 in the second quarter of 2004, which was the difference between the carrying amount of the loan less the settlement amount.

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

                      Results of Operations and Financial Condition

                      Kansas 

                During the first six months of 2004, the Company produced and sold 58,742 barrels of oil and 126,987 Mcf of natural gas from its Kansas Properties comprised of 149 producing oil wells and 59 producing gas wells. The first six months production of 58,742 barrels of oil compares to 65,458 barrels produced in the first six months of 2003. The first six months production of 126,987 Mcf of gas compares to 129,995 Mcf produced in the first six months of 2003. In summary, the six months production reflected expected continued production levels from the Kansas Properties, which have been in production for many years. The decrease in oil production reflects a normal decline curve for the Kansas properties. This decline has not been offset by additional drilling and well work-overs due to the Bank One litigation. The revenues from the Kansas properties were $1,958,859 in the first six months of 2004 compared to $2,049,781 in 2003. This decrease was due to the lower production levels in 2004.

                 Tennessee

                 During the first six months of 2004, the Company produced gas from 23 wells in the Swan Creek field, which it sold in Kingsport, Tennessee to Eastman Chemical Company (“Eastman”).

                Natural gas production from the Swan Creek field for the first six months of 2004 was an average of 635 Mcf per day during that period as compared to 1,150 Mcf per day in the first six months of 2003. The first three months production reflected expected natural decline in production from the existing Swan Creek gas wells which were first brought into production in mid-2001 upon completion of the Company’s pipeline. This natural decline is normal for any producing well, and this decline as experienced on existing wells in Swan Creek was not unexpected.

               Comparison of the Six Months Ending June 30, 2004 and 2003

                The Company recognized $2,712,639 in oil and gas revenues from its Kansas Properties and the Swan Creek Field during the first six months of 2004 compared to $3,360,763 in the first six months of 2003. The decrease in revenues was due to a decrease in production from Kansas and Swan Creek oil sales and from gas sales in Swan Creek. Kansas gas sales also declined by approximately $110,000 due to an unusually high price received in March of 2003 of $8.64 per Mcf, as compared to $4.11 in 2004. The decrease in pipeline transportation revenues from $92,723 in 2003 to $47,917 in 2004 is directly related to the decrease in gas volumes in Swan Creek.

14

                The Company realized a net loss attributable to common shareholders of $1,497,933 ($0.05) per share of common stock, during the first six months of 2004 compared to a net loss in the second quarter of 2003 to common shareholders of $1,606,331 ($0.14) per share of common stock.

                Production costs and taxes in the first six months of 2004 of $1,539,432 decreased from $1,627,879 in the first six months of 2003. The difference is due to management controlling costs at every level.

                Depreciation, depletion, and amortization expense for the first six months of 2004 was $1,173,148 compared to $1,259,138 in the first six months of 2003.

                During the first six months the Company reduced it general and administrative costs by $239,869 from 2003. Management has made an effort to control costs in every aspect of its operations, including a reduction in personnel from 2003 levels.

                Professional fees, in the first six months of 2004 were $531,278 compared to $420,944 in the same period in 2003. These fees have remained at a high level, primarily due to costs incurred for legal and accounting services as a result of the Bank One and Paul Miller lawsuits.

                Interest expense for the first six months of 2004 increased from the first six months of 2003 to $779,239 from $294,098. The increase was due to the issuance of notes to Dolphin during the first quarter of 2004. These notes were paid on March 20, 2004. In addition, dividends on the Company’s Preferred Stock in the amount of $268,388 and accretion of $172,588 were recognized as interest expense in the first six months of 2004 due to the Company’s adoption of SFAS 150, discussed in Note 4 of the Company’s Condensed Notes to Consolidated Financial Statements.

        The Company recorded a gain from extinguishment of debt in the amount of $336,820 in the second quarter of 2004, which was the difference between the carrying amount of the Bank One loan less the settlement amount. See Note 10 of the Condensed Notes to Consolidated Financial Statements, Bank One Litigation Settlement.

                    Comparison of the Quarters Ending June 30, 2004 and 2003 

                The Company recognized $1,380,289 in oil and gas revenues from its Kansas Properties and the Swan Creek Field during the second quarter of 2004 compared to $1,436,848 in the second quarter of 2003. The decrease in revenues was due to a decrease in production from Kansas and Swan Creek oil sales and from gas sales in Swan Creek, although revenues from Kansas oil sales increased in the second quarter of 2004 from the second quarter in 2003 due to higher oil prices. The decrease in pipeline transportation revenues of $20,543 is directly related to the decrease of gas volumes in Swan Creek.

                The Company realized a net loss attributable to common shareholders of $281,628 ($0.01) per share of common stock, during the second quarter of 2004 compared to a net loss in the second quarter of 2003 to common shareholders of $812,786 ($0.07) per share of common stock

                 Production costs and taxes in the second quarter of 2004 of $667,851 decreased from $857,970 in the second quarter of 2003. The difference is due to management’s cost-controlling efforts.

                Depreciation, depletion, and amortization expense for the second quarter of 2004 was $564,984 compared to $628,196 in the second quarter of 2003. This is due to equipment that had become fully depreciated in late 2003.

15

                During the second quarter due to the cost-cutting efforts of management the Company reduced its general and administrative costs by $16,892 from 2003.

                Professional fees, in the second quarter of 2004 were $233,403 compared to $211,518 in the same period in 2003. These fees have remained at a high level, primarily due to costs incurred for legal and accounting services as a result of the Bank One and Paul Miller lawsuits.

                Interest expense for the second quarter of 2004 increased from the second quarter of 2003 to $274,854 from $140,742. Dividends on the Company’s Preferred Stock in the amount of $134,194 and accretion of $82,060 were recognized as interest expense in the second quarter of 2004 due to the Company’s adoption of SFAS 150, discussed in Note 4 of the Company’s Condensed Notes to Consolidated Financial Statements.

                The Company recorded a gain from extinguishment of debt in the amount of $336,820 in the second quarter of 2004, which was the difference between the carrying amount of the Bank One loan less the settlement amount. See Note 10 of the Condensed Notes to Consolidated Financial Statements Bank One Litigation Settlement.

             Liquidity and Capital Resources

                 On November 8, 2001, the Company signed a credit facility agreement (the “Credit Agreement”) with the Energy Finance Division of Bank One, N.A. in Houston Texas (“Bank One”). The Company instituted litigation in May 2002 based on certain actions taken by Bank One under the agreement.

                 The harmful effects upon operations of the Company caused by the actions of Bank One and the litigation with Bank One were dramatic. First, the action of Bank One had the effect of totally cutting off any additional funds to the Company to support Company operations. Further, the funds loaned to the Company by Bank One were to refinance the Company’s indebtedness and no funds were then available to pay this large repayment obligation to Bank One, even if such action by the Bank had been proper, which the Company vigorously and continually denied. The principal reason the Company had entered into the Bank One credit agreement was to provide for additional funds to promote the growth of the Company. Consequently, as a result of Bank One’s unwarranted actions no additional funds under the credit facility agreement were available for additional drilling that the Company had anticipated performing in 2002 and 2003.

                 Second, the existence of the dispute with Bank One, compounded by the fact that Bank One’s action caused the Company to disclose that there was an uncertainty over the Company’s ability to continue as a going concern, significantly discouraged other institutional lenders from considering a variety of additional or replacement financing options for drilling and other purposes that may have ordinarily been available to the Company. Third, the dispute caused Bank One to fail to grant permission under the existing loan agreements with the Company to permit the Company to formulate drilling programs involving potential third party investors that may have permitted additional drilling to occur. Finally, this dispute caused the Company to incur significant legal fees to protect the Company’s rights.

                 On May 13, 2004, the Company resolved its dispute with Bank One. See, Part II, Item 1, Legal Proceedings. The Company believes that now that its dispute has been resolved it will be able to obtain long term financing to allow the Company to continue drilling and to locate and develop other properties. However, no assurances can be made that such financing will be obtained.

                The Company plans to drill wells in new locations it has identified in Kansas on its existing leases in response to drilling activity in the area establishing new areas of oil production. Although the

16

Company successfully drilled the Dick No. 7 well in Kansas in 2001 and completed the well as an oil well, it was not able to drill any new wells in Kansas in 2002 or 2003 due to lack of funds available for such drilling caused by the Bank One situation. The Company is hopeful now that the Bank One matter has been resolved that it will soon be able to resume drilling and well work-overs in Kansas to maximize production from the Kansas Properties.

      ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        Commodity Risk  

                The Company’s major market risk exposure is in the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas production. Historically, prices received for oil and gas production have been volatile and unpredictable and price volatility is expected to continue. Monthly oil price realizations ranged from a low of $29.77 per barrel to a high of $38.08 per barrel during 2004. Gas price realizations ranged from a monthly low of $4.11 per Mcf to a monthly high of $6.68 per Mcf during the same period. The Company did not enter into any hedging agreements in 2003 or the first six months of 2004, to limit exposure to oil and gas price fluctuations.

        Interest Rate Risk

                At June 30, 2004, the Company had debt outstanding of approximately $2.5 million at a fixed rate. The Company did not have any open derivative contracts relating to interest rates at June 30, 2004.

        Forward-Looking Statements and Risk  

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

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

17

                ITEM 4        CONTROLS AND PROCEDURES

                Controls and Procedures  

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

                 There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

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

                Changes in Internal Controls  

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

        PART II OTHER INFORMATION
                
        ITEM 1      LEGAL PROCEEDINGS

                 To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company that 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 had 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.

18

                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 re-determined 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. The Company sought 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.

                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 continued to pay the sum of $200,000 per month of principal due under the original terms of the Credit Agreement, plus interest.

                As of May 1, 2004, the principal amount owed by the Company under the credit facility, with Bank One was $4,101,601. On May 13, 2003, the Company and Bank One executed a written agreement resolving all claims against each other. Pursuant to that agreement, the Company agreed to pay the sum of $3,657,000 to Bank One by May 18, 2004, in full satisfaction of its obligations to Bank One and each of the parties agreed to the dismissal of the lawsuit and to release their claims against each other. Bank One agreed to execute releases of its liens on all of the Company’s properties securing the credit facility upon receipt of the agreed payment. The Company and the Bank agreed to bear all of their own costs, expenses, and attorneys’ fees incurred to date. The settlement payment was made by the Company on May 18, 2004. See Part II, Item 5, Other Information.

                 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, Tennessee.

                This action was commenced in November 2002 and sought 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. 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

19

offering made by the Company or other stated events. All expenses including attorney’s fees as are awarded by the court on final hearing are to be paid out of the settlement funds. The parties stipulated the existence of a class for settlement purposes only. On April 29, 2004, a final hearing for approval of the settlement was held in federal court in Knoxville, Tennessee. On May 10, 2004 the Court entered its final order approving the fairness of the settlement to the class, dismissing the action pursuant to the Settlement Stipulation, and fully releasing the claims of the class members. Pursuant to the Settlement Stipulation and the Court’s final order, class members may file their claims against the settlement fund through July 15, 2004. The fund will be disbursed in accordance with the claims filed. No further court approval is required or contemplated, although the Court retains jurisdiction to enforce the settlement stipulation and the Court’s final order.

                ITEM 5     OTHER INFORMATION

                On May 18, 2004, Dolphin loaned the Company $2,500,000 bearing interest at 12% per annum with interest payable monthly beginning June 18, 2004 and principal payable on May 20, 2005, which loan is secured by a first lien on the company’s Tennessee and Kansas producing properties and the Tennessee pipeline. The proceeds of the loan were used to fund in part the settlement of the Bank One litigation. See, Part II, Item 1, Legal Proceedings.

             Tengasco drilled two wells to the Knox formation in the Swan Creek field in May 2004. The first was the Hazel Sutton #3, which encountered lower than expected gas volumes. The well was plugged back to the Trenton formation. A completion in the Trenton has resulted in both gas and oil production while testing. Oil production from the Trenton depends on oil being driven into the well bore by the pressure of gas. Production of this well as a gas well, or simultaneous production of both oil and gas, might inhibit future oil well development. Consequently, the well is not currently being produced while management evaluates the effect on future possible nearby oil wells.

         The second well, the Stephen Lawson #8, was also drilled to the Knox formation and has been producing since its completion in late June. The well is producing at a rate of approximately 45,000 cubic feet of gas per day from the Knox formation. The Stephen Lawson #8 also had evidence of oil and gas in the shallower Trenton and Stones River formations during drilling. No production is presently occurring from the Trenton and Stones River formations, but based on the showings additional reserves may be logged in the Company’s future reserve reports in a “behind pipe” category.      

20

ITEM 6       EXHIBITS AND REPORTS ON FORM 8-K

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

10.47 Promissory Note dated May 18, 2004 from Tengasco, Inc. and Tengasco Pipeline Corporation as Maker to Dolphin Offshore Partners, LP as Holder in the principal amount of $2,500,000 bearing interest at 12% per annum, payable interest only monthly beginning June 18, 2004 with principal due May 20, 2005, pre-payable without penalty, and secured by the Company’s Tennessee and Kansas producing properties and the Tennessee pipeline.

31.1 Certification of Chief Executive Officer, pursuant to Exchange Act Rule, Rule 13a-14a/15d-14a.

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

32.1 Certifications 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 Certifications 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.

(b)     During this quarter, the Company filed one Current Report on Form 8-K on April 23, 2004 which included, under Item 5, an announcement that on April 23, 2004 the Company issued a press release announcing its resumption of drilling in the Swan Creek Filed in Tennessee.

21

SIGNATURES

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

Dated: August 20, 2004

TENGASCO, INC.

22

23

24

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

          I have reviewed the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

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

Dated: August 20, 2004

25

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

          I have reviewed the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

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

Dated: August 20, 2004

26