** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D. C. 20549**

** **

# **FORM 10-Q**

 

**ý****  QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2004**

 

**OR**

 

**o****  TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to**

 

**Commission File Number 1-7796**

 

**TIPPERARY CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Texas**                                | ** ** | **75-1236955**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or organization)           |       | Identification No.) |
|                                     |       |                |
| **633  Seventeenth Street, Suite 1550**  |       |                |
| **Denver, Colorado**                     | ** ** | **80202**           |
| (Address of principal executive offices) |       | (Zip Code)          |

 

**(303) 293-9379**

(Issuer’s telephone number)

 

Indicate by check mark whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of the Exchange Act of1934 during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes **ý**    No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o    Noý

 

State the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date.

 

| **Class**                    | ** ** | **Outstanding at November 12, 2004** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| Common Stock, $.02 par value |       | 41,333,994 shares                    |       |

 

 

----

 

**TIPPERARY CORPORATION ANDSUBSIDIARIES**

 

Index to Form 10-Q

 

 
|                           |                                                                                                |   |
|--------------------------------|-----------------------------------------------------------------------------------------------------|--------|
|                           |                                                                                                |   |
| PART  I. FINANCIAL INFORMATION |                                                                                                |
|                           |                                                                                                |   |
| Item 1.                        | Financial  Statements                                                                               |   |
|                           |                                                                                                |   |
|                           | Consolidated Balance Sheets September  30, 2004 and December 31, 2003                               |   |
|                           |                                                                                                |   |
|                           | Consolidated Statements of  Operations three and nine months ended September 30, 2004 and 2003      |   |
|                           |                                                                                                |   |
|                           | Consolidated Statements of  Stockholders’ Equity nine months ended September 30, 2004 and 2003 |   |
|                           |                                                                                                |   |
|                           | Consolidated  Statements of Cash Flows nine months ended September 30, 2004 and 2003                |   |
|                           |                                                                                                |   |
|                           | Notes to Consolidated Financial  Statements                                                         |   |
|                           |                                                                                                |   |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         |   |
|                           |                                                                                                |   |
| Item 3.                        | Quantitative  and Qualitative Disclosure About Market Risk                                          |   |
|                           |                                                                                                |   |
| Item 4.                        | Controls  and Procedures                                                                            |   |
|                           |                                                                                                |   |
| PART  II. OTHER INFORMATION    |                                                                                                |
|                           |                                                                                                |   |
| Item 1.                        | Legal Proceedings                                                                                   |   |
|                           |                                                                                                |   |
| Item  2.                       | Changes in Securities                                                                               |   |
|                           |                                                                                                |   |
| Item  6.                       | Exhibits and Reports on Form 8-K                                                                    |   |
|                           |                                                                                                |   |
| SIGNATURES                     |                                                                                                |
|                           |                                                                                                |   |
| EXHIBIT INDEX                  |                                                                                                |
|                                |                                                                                                     |        |  |

 

 

----

# **PART I**- FINANCIAL INFORMATION

 

**Item 1****.    Financial Statements**

 

**TIPPERARYCORPORATION AND SUBSIDIARIES**

Consolidated Balance Sheets

($in thousands except pershare data)

(unaudited)

 
| ** **                                                                                                                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                            | ** ** | **2004**          | ** ** | **2003**         | ** ** |
|                                                                                                                                                                                                                  |       |              |       |             |       |
| ASSETS                                                                                                                                                                                                                |       |              |       |             |       |
| Current assets:                                                                                                                                                                                                       |       |              |       |             |       |
| Cash and cash  equivalents                                                                                                                                                                                            |       | $                 | 8,590      |             | $          | 2,996 |   |
| Receivables                                                                                                                                                                                                           |       | 1,292             |       | 1,585            |       |
| Other current  assets                                                                                                                                                                                                 |       | 608               |       | 344              |       |
| Total current  assets                                                                                                                                                                                                 |       | 10,490            |       | 4,925            |       |
|                                                                                                                                                                                                                  |       |              |       |             |       |
| Property, plant  and equipment, at cost:                                                                                                                                                                              |       |              |       |             |       |
| Oil and gas  properties, full cost method                                                                                                                                                                             |       | 127,654           |       | 120,703          |       |
| Other property  and equipment                                                                                                                                                                                         |       | 4,517             |       | 4,431            |       |
|                                                                                                                                                                                                                  |       | 132,171           |       | 125,134          |       |
|                                                                                                                                                                                                                  |       |              |       |             |       |
| Less accumulated  depreciation, depletion and amortization                                                                                                                                                            |       | (9,062            | )          | (8,078           | )          |
| Property, plant  and equipment, net                                                                                                                                                                                   |       | 123,109           |       | 117,056          |       |
|                                                                                                                                                                                                                  |       |              |       |             |       |
| Deferred loan  costs                                                                                                                                                                                                  |       | 4,495             |       | 1,140            |       |
| Other noncurrent  assets                                                                                                                                                                                              |       | 444               |       | 487              |       |
|                                                                                                                                                                                                                  |       | $                 | 138,538    |             | $          | 123,608 |   |
|                                                                                                                                                                                                                  |       |              |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                            |       |              |       |             |       |
| Current  liabilities:                                                                                                                                                                                                 |       |              |       |             |       |
| Current portion  of long-term debt                                                                                                                                                                                    |       | $                 | 4,000      |             | $          | — |   |
| Accounts payable                                                                                                                                                                                                      |       | 1,866             |       | 1,883            |       |
| Accrued  liabilities                                                                                                                                                                                                  |       | 1,308             |       | 2,329            |       |
| Royalties  payable                                                                                                                                                                                                    |       | 135               |       | 75               |       |
| Total current  liabilities                                                                                                                                                                                            |       | 7,309             |       | 4,287            |       |
|                                                                                                                                                                                                                  |       |              |       |             |       |
| Long-term debt,  net of current portion                                                                                                                                                                               |       | 90,834            |       | 74,126           |       |
| Long-term asset  retirement obligation                                                                                                                                                                                |       | 338               |       | 268              |       |
| Commitments and  contingencies (Note 6)                                                                                                                                                                               |       |              |       |             |       |
| Minority  interest                                                                                                                                                                                                    |       | —            |       | 418              |       |
|                                                                                                                                                                                                                  |       |              |       |             |       |
| Stockholders’  equity                                                                                                                                                                                            |       |              |       |             |       |
| Preferred stock:                                                                                                                                                                                                      |       |              |       |             |       |
| Cumulative; par  value $1.00; 10,000,000 shares authorized; none issued                                                                                                                                               |       | —            |       | —           |       |
| Non-cumulative,  par value $1.00; 10,000,000 shares authorized; none issued                                                                                                                                           |       | —            |       | —           |       |
| Common stock;  par value $.02; 50,000,000 shares authorized; 41,343,594 and 39,231,087  shares issued, and 41,333,994 and 39,221,489 shares outstanding as of  September 30, 2004 and December 31, 2003, respectively |       | 827               |       | 785              |       |
| Capital in  excess of par value                                                                                                                                                                                       |       | 158,310           |       | 149,970          |       |
| Accumulated  deficit                                                                                                                                                                                                  |       | (124,583          | )          | (113,315         | )          |
| Accumulated  other comprehensive income                                                                                                                                                                               |       | 5,528             |       | 7,094            |       |
| Treasury stock,  at cost; 9,598 shares                                                                                                                                                                                |       | (25               | )          | (25              | )          |
| Total  stockholders’ equity                                                                                                                                                                                      |       | 40,057            |       | 44,509           |       |
| ** **                                                                                                                                                                                                            | ** ** | $                 | 138,538    |             | $          | 123,608 | ** ** |

 

See accompanying notes toConsolidated Financial Statements.

 

1

----

 

# **TIPPERARY CORPORATION ANDSUBSIDIARIES**Consolidated Statements of Operations(in thousands, except per share data)(unaudited)

 
| ** **                                                                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                                | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Revenues                                                                  |       | $                      | 2,533      |                  | $          | 1,714 |   | $ | 5,263 |   | $ | 4,764 |   |
| Costs and  expenses:                                                      |       |                   |       |                  |       |   |   |   |   |
| Operating                                                                 |       | 1,483                  |       | 1,257                 |       | 4,124 |   | 3,320 |   |
| Depreciation,  depletion and amortization                                 |       | 539                    |       | 455                   |       | 1,146 |   | 1,161 |   |
| Asset retirement  obligation accretion                                    |       | 10                     |       | 6                     |       | 28 |   | 18 |   |
| Impairment of  oil and gas properties                                     |       | —                 |       | 165                   |       | 150 |   | 2,386 |   |
| General and  administrative                                               |       | 2,081                  |       | 1,353                 |       | 5,635 |   | 4,165 |   |
| Total costs and  expenses                                                 |       | 4,113                  |       | 3,236                 |       | 11,083 |   | 11,050 |   |
| Operating loss                                                            |       | (1,580                 | )          | (1,522                | )          | (5,820 | ) | (6,286 | ) |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Other income  (expense):                                                  |       |                   |       |                  |       |   |   |   |   |
| Interest and other  income                                                |       | 42                     |       | 13                    |       | 149 |   | 30 |   |
| Interest expense                                                          |       | (1,791                 | )          | (1,403                | )          | (6,024 | ) | (3,883 | ) |
| Write-off of  deferred loan costs                                         |       | —                 |       | (5,069                | )          | — |   | (5,069 | ) |
| Foreign currency  exchange gain (loss)                                    |       | 18                     |       | (1,053                | )          | 9 |   | 2,060 |   |
| Total other  income (expense)                                             |       | (1,731                 | )          | (7,512                | )          | (5,866 | ) | (6,862 | ) |
| Loss before  income taxes                                                 |       | (3,311                 | )          | (9,034                | )          | (11,686 | ) | (13,148 | ) |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Income tax  benefit                                                       |       | —                 |       | —                |       | — |   | — |   |
| Loss before  minority interest and cumulative effect of accounting change |       | (3,311                 | )          | (9,034                | )          | (11,686 | ) | (13,148 | ) |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Minority  interest in loss (income) of subsidiary                         |       | —                 |       | 230                   |       | 418 |   | 49 |   |
| Loss before  cumulative effect of accounting change                       |       | (3,311                 | )          | (8,804                | )          | (11,268 | ) | (13,099 | ) |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Cumulative  effect of accounting change                                   |       | —                 |       | —                |       | — |   | (46 | ) |
| Net loss                                                                  |       | $                      | (3,311     | )                     | $          | (8,804 | ) | $ | (11,268 | ) | $ | (13,145 | ) |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Net loss per  share basic and diluted                                     |       | $                      | (.08       | )                     | $          | (.22 | ) | $ | (.29 | ) | $ | (.34 | ) |
| Weighted average  shares outstanding basic and diluted                    |       | 39,553                 |       | 39,221                |       | 39,390 |   | 39,221 |   |

 

See accompanying notesto Consolidated Financial Statements.

 

2

----

 

**TIPPERARYCORPORATION AND SUBSIDIARIES**

**Consolidated Statements of Stockholders’Equity (Unaudited)**

**For the NineMonths Ended September 30, 2003 and 2004**

**(in thousands)**

 
| ** **                                  | ** ** | **Common Stock** | ** ** | **Capital in excess of** | ** ** | **Accumulated** | ** ** | **Accumulated Other Comprehensive** | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------|------------|--------------------------|------------|-----------------|------------|-------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **Shares**       | ** ** | **Amount**               | ** ** | **par value**   | ** ** | **Deficit**                         | ** ** | **Income**         | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
|                                        |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |
| Balance at  December 31, 2002          |       | 39,221           |       | $                        | 785        |            | $          | 149,953                             |       | $                  | (97,946    | )          | —     |   | 10 |   | $ | (25 | ) | $ | 52,767 |   |
|                                        |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |
| Net loss                                    |       | —           |       | —                   |       | —          |       | (13,145                             | )          | —             |       | —     |       | — |   | (13,145 | ) |
| Other  comprehensive income:                |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |
| Foreign currency  translation adjustment    |       | —           |       | —                   |       | —          |       | —                              |       | 3,663              |       | —     |       | — |   | 3,663 |   |
| Comprehensive  loss                         |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   | (9,482 | )  |
| Compensatory  warrants granted for services |       | —           |       | —                   |       | 17              |       | —                              |       | —             |       | —     |       | — |   | 17 |   |
|                                        |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |
| Balance at  September 30, 2003              |       | 39,221           |       | $                        | 785        |            | $          | 149,970                             |       | $                  | (111,091   | )          | $          | 3,663 |   | 10 |   | $ | (25 | ) | $ | 43,302 |   |
|                                        |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |
| Balance at  December 31, 2003          |       | 39,221           |       | $                        | 785        |            | $          | 149,970                             |       | $                  | (113,315   | )          | $          | 7,094 |   | 10 |   | $ | (25 | ) | $ | 44,509 |   |
|                                        |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |
| Net loss                                    |       | —           |       | —                   |       | —          |       | (11,268                             | )          | —             |       | —     |       | — |   | (11,268 | ) |
| Other comprehensive  loss:                  |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |
| Foreign currency  translation adjustment    |       | —           |       | —                   |       | —          |       | —                              |       | (1,566             | )          | —     |       | — |   | (1,566 | ) |
| Comprehensive  loss                         |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   | (12,834 | ) |
| Issuance of  common stock for cash          |       | 2,000            |       | 40                       |       | 7,960           |       | —                              |       | —             |       | —     |       | — |   | 8,000 |   |
| Compensatory  warrants granted for services |       | —           |       | —                   |       | 81              |       | —                              |       | —             |       | —     |       | — |   | 81 |   |
| Stock options  exercised                    |       | 113              |       | 2                        |       | 299             |       | —                              |       | —             |       | —     |       | — |   | 301 |   |
| Balance at  September 30, 2004              |       | 41,334           |       | $                        | 827        |            | $          | 158,310                             |       | $                  | (124,583   | )          | $          | 5,528 |   | 10 |   | $ | (25 | ) | $ | 40,057 |   |
|                                        |       |             |       |                     |       |            |       |                                |       |               |       |       |       |   |   |   |   |

 

See accompanying notes toConsolidated Financial Statements.

 

3

----

 

# **TIPPERARY CORPORATION AND SUBSIDIARIES**

ConsolidatedStatements of Cash Flows

(in thousands)

(unaudited)

 
| ** **                                                                   | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **September 30,**     | ** ** |
| ** **                                                                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                                                         |       |                  |       |   |   |
| Cash flows from  operating activities:                                       |       |                  |       |   |   |
| Net loss                                                                     |       | $                     | (11,268    | ) | $ | (13,145 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                  |       |   |   |
| Depreciation,  depletion and amortization                                    |       | 1,146                 |       | 1,161 |   |
| Amortization of  deferred loan costs                                         |       | 418                   |       | 5,770 |   |
| Compensatory  warrants granted                                               |       | 81                    |       | 6 |   |
| Minority  interest in loss of subsidiary                                     |       | (418                  | )          | (49 | ) |
| Asset retirement  obligation accretion                                       |       | 28                    |       | 18 |   |
| Cumulative  effect of accounting change                                      |       | —                |       | 46 |   |
| Impairment of  oil and gas properties                                        |       | 150                   |       | 2,386 |   |
| Foreign currency  exchange gain                                              |       | —                |       | (2,070 | ) |
| Changes in  current assets and current liabilities:                          |       |                  |       |   |   |
| Decrease  (increase) in receivables                                          |       | 293                   |       | (178 | ) |
| Increase in  other current assets                                            |       | (264                  | )          | (395 | ) |
| (Decrease)  increase in accounts payable and accrued liabilities             |       | (153                  | )          | 823 |   |
| Increase  (decrease) in royalties payable                                    |       | 60                    |       | (41 | ) |
| Net cash used in  operating activities                                       |       | (9,927                | )          | (5,668 | ) |
|                                                                         |       |                  |       |   |   |
| Cash flows from  investing activities:                                       |       |                  |       |   |   |
| Proceeds from  asset sales                                                   |       | —                |       | 2,912 |   |
| Capital  expenditures                                                        |       | (12,858               | )          | (26,340 | ) |
| Net cash used in  investing activities                                       |       | (12,858               | )          | (23,428 | ) |
|                                                                         |       |                  |       |   |   |
| Cash flows from  financing activities:                                       |       |                  |       |   |   |
| Proceeds from  issuance of common stock and exercise of stock options        |       | 8,301                 |       | — |   |
| Proceeds from  borrowings                                                    |       | 94,309                |       | 55,512 |   |
| Principal  repayments                                                        |       | (70,382               | )          | (27,129 | ) |
| Decrease in  restricted cash                                                 |       | —                |       | 546 |   |
| Payments for  deferred loan costs                                            |       | (3,790                | )          | (362 | ) |
| Net cash  provided by financing activities                                   |       | 28,438                |       | 28,567 |   |
|                                                                         |       |                  |       |   |   |
| Effect of  exchange rate changes on cash                                     |       | (59                   | )          | (130 | ) |
|                                                                         |       |                  |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 5,594                 |       | (659 | ) |
|                                                                         |       |                  |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 2,996                 |       | 1,725 |   |
|                                                                         |       |                  |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                     | 8,590      |   | $ | 1,066 |   |

 

See accompanying notes toConsolidated Financial Statements.

 

4

----

 

**TIPPERARY CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED**FINANCIAL STATEMENTS

**(Unaudited)**

 

**NOTE 1 - OPERATIONS ANDSIGNIFICANT ACCOUNTING POLICIES**

 

## Basis ofPresentation

 

In the opinion of management, the accompanyingunaudited Consolidated Financial Statements reflect all adjustments, consistingonly of normal recurring adjustments, which are necessary for a fairpresentation of the financial position of Tipperary Corporation and itssubsidiaries (the “Company”) at September 30, 2004, and the results of theiroperations for the three-month and nine-month periods ended September 30, 2004and 2003 and their cash flows for the nine-month periods ended September 30,2004 and 2003. The Consolidated Financial Statements include the accounts ofTipperary Corporation and its wholly-owned subsidiaries, Tipperary Oil and GasCorporation, Tipperary CSG Inc., Burro Pipeline Corporation, and its 90%-ownedsubsidiary, Tipperary Oil and Gas (Australia) Pty Ltd (“TOGA”). Allintercompany balances have been eliminated. The accounting policies followed bythe Company are included in Note 1 to the Consolidated Financial Statements inits Annual Report on Form 10-K for the year ended December 31, 2003. Thesefinancial statements should be read in conjunction with the Form 10-K.

 

New Accounting Pronouncements

 

The Company follows the full cost method to accountfor its oil and gas exploration and development activities as more fullydescribed in the Company’s Annual Report on Form 10-K for the year endedDecember 31,2003. SEC Staff Accounting Bulletin 106 (September 2004) requires estimatedfuture asset retirement obligations to be included in the amortization base,whereby such costs are amortized over proved reserves. Such obligations are tobe excluded in the determination of the ceiling for capitalized costs. Compliancewith the bulletin, effective in the fourth quarter of 2004, is not expected tohave a significant effect on the ceiling calculation or depreciation, depletionand amortization expense.

 

The Company has reviewed all other recently issued,but not yet adopted, accounting pronouncements and standards to determine theireffects, if any, on its results of operations or financial position. Based onits review, the Company believes that none of these pronouncements will have asignificant effect on its current or future financial position or results ofoperations.

 

## Asset RetirementObligation

 

On January 1, 2003, the Company adopted Statement ofFinancial Accounting Standards No. 143, “Accounting for Asset RetirementObligations” (“SFAS No. 143”), which provides accounting requirements forretirement obligations associated with tangible long-lived assets, includingthe timing of liability recognition, initial measurement of the liability,allocation of asset retirement costs to expense, subsequent measurement of theliability, and financial statement disclosures. SFAS No. 143 requires thatasset retirement costs be capitalized along with the cost of the relatedlong-lived asset. The asset retirement costs should then be allocated toexpense using a systematic and rational method. The Company has determined thatit has asset retirement costs associated with wells drilled in Australia andthe United States. The Company also expects to incur retirement costs todismantle two gas compression plant facilities located in Australia. Thefollowing table sets forth the changes in the asset retirement obligation:

 

 

| **(in thousands)**                                          | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|
| Beginning asset  retirement obligation at December 31, 2003 |       | $          | 268        |   |
| Asset retirement  obligation accretion                      |       | 28         |       |
| Asset retirement  obligation additions                      |       | 42         |       |
| Payments on  asset retirement obligation                    |       | —     |       |
| Ending asset  retirement obligation at September 30, 2004   |       | $          | 338        |   |

 

 

5

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Stock-Based Compensation

 

SFAS Nos. 148 and No. 123 encourage, but do not require, companies torecord the compensation cost for stock-based employee compensation plans atfair value. At September 30, 2004, the Company had two stock-based employeeoption plans and warrants issued to directors and employees. The Company haschosen to continue to account for stock-based compensation using the intrinsicvalue method prescribed in Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” (“APB 25”) and has applied thedisclosure provisions of SFAS Nos. 123 and 148. Accordingly, compensation costfor fixed stock options and warrants is measured as the excess, if any, of thequoted market price of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock. Pro forma disclosures as ifthe Company had adopted the cost recognition provisions of SFAS Nos. 148 and123 are presented below:

 
| ** **                                                                                       | ** ** | **Nine Months Ended September 30,**       | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                             |       |                                      |       |   |   |
| Net loss, as  reported                                                                           |       | $                                         | (11,268    | ) | $ | (13,145 | ) |
| Add:                                                                                             |       |                                      |       |   |   |
| Total  compensation cost included in reported net loss, net of $0 tax                            |       | —                                    |       | — |   |
| Deduct:                                                                                          |       |                                      |       |   |   |
| Total  compensation cost determined under fair value based method for all awards,  net of $0 tax |       | (43                                       | )          | (110 | ) |
|                                                                                             |       |                                      |       |   |   |
| Pro forma net  loss                                                                              |       | $                                         | (11,311    | ) | $ | (13,255 | ) |
| Loss per share                                                                                   |       |                                      |       |   |   |
| Basic and  diluted—as reported                                                              |       | $                                         | (. 29      | ) | $ | (.34 | ) |
| Basic and  diluted—pro forma                                                                |       | $                                         | (. 29      | ) | $ | (.34 | ) |

** **
| ** **                                                                                       | ** ** | **Three Months Ended September 30,**      | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                             |       |                                      |       |   |   |
| Net loss, as  reported                                                                           |       | $                                         | (3,311     | ) | $ | (8,804 | ) |
| Add:                                                                                             |       |                                      |       |   |   |
| Total  compensation cost included in reported net loss, net of $0 tax                            |       | —                                    |       | — |   |
| Deduct:                                                                                          |       |                                      |       |   |   |
| Total  compensation cost determined under fair value based method for all awards,  net of $0 tax |       | (14                                       | )          | (37 | ) |
|                                                                                             |       |                                      |       |   |   |
| Pro forma net  loss                                                                              |       | $                                         | (3,325     | ) | $ | (8,841 | ) |
| Loss per share                                                                                   |       |                                      |       |   |   |
| Basic and  diluted—as reported                                                              |       | $                                         | (. 08      | ) | $ | (.22 | ) |
| Basic and  diluted—pro forma                                                                |       | $                                         | (. 08      | ) | $ | (.23 | ) |

 

 

6

----

 

Revenue Recognition and Gas Imbalances

 

TheCompany recognizes natural gas and oil revenue from its interests in producingwells as natural gas and oil are produced and sold from those wells. TheCompany uses the sales method of accounting for these revenues. Under the salesmethod, revenues are recognized based on actual volumes sold to purchasers.With natural gas production operations, joint owners may take more or less thanthe production volumes entitled to them under the governing operatingagreement. The Company records a natural gas imbalance in other liabilities ifits excess takes of natural gas exceed its remaining proved reserves for theproperty. As of September 30, 2004, the Company had taken and sold more thanits entitled share of natural gas volumes produced from the Comet Ridgeproject, and was overproduced by approximately 1,821 MMcf (net of royalties).Based on the September 30, 2004 average sales price of $1.70 per Mcf, thisoverproduction represents approximately $3.1 million in gas revenues. Noliability has been recorded for the excess volumes taken, as they do not exceedthe Company’s share of remaining proved reserves. Under the terms of thegoverning gas balancing agreement, the Company may be required to reduce themonthly volumes it sells by up to 50% of its entitled share of sales, to enableunderproduced parties to sell more than their entitled share of the gas salesand cure the imbalance.

 

Foreign Currency

 

Thefunctional currency of the Company’s Australian subsidiary, TOGA, is theAustralian dollar. As the functional currency is the local currency, thecurrent rate method is used to translate Australian dollar financial statementsinto U.S. dollars for TOGA. All assets and liabilities are translated usingcurrent exchange rates, while revenues and expenses are translated at rates inexistence when the transactions occurred. The translation adjustment thatresults from using varying rates in the translation process is reported as acomponent of other comprehensive income (loss) and is accumulated and reportedas a separate component of stockholders’ equity in the Company’s ConsolidatedFinancial Statements.

 

Thecumulative foreign currency translation adjustment (net of $0 tax) as ofSeptember 30, 2004 and December 31, 2003 totaled $5.5 million and$7.1 million, respectively, of other comprehensive income.

 

#### Liquidity andOperations

 

The Company had cash and cash equivalents of $8.6million as of September 30, 2004, compared to approximately $3.0 million as ofDecember 31, 2003. In September 2004, the Company sold two million shares ofits common stock in a private placement to 11 unaffiliated institutionalinvestors for $4.00 per share.

 

The Company anticipates funding operations and capital expenditures inAustralia for the remainder of 2004 using funds from a $150 million AUD(approximately $114 million USD) financing facility (see Note 3).

 

On October 30, 2004, the Company and Tri-Star entered into a settlementagreement covering the litigation between the two parties. Subject to certainevents occurring within 45 days of the settlement agreement, the Company willpay $5 million to Tri-Star, and the Company will receive from Tri-Starapproximately 96% of the registered titles for the Comet Ridge project and2.25% working interest in the Comet Ridge project, subject to a 1.5%contractual overriding royalty interest to be retained by Tri-Star. See Note 6.The Company expects to fund this contingent commitment with funds from itsavailable cash and with funds from TOGA’s Australian loan facility.

 

The Company anticipates funding operations and capital expenditures inthe United States for the remainder of 2004 using (a) cash on hand at September30, 2004 and (b) a commitment from Slough Estates USA Inc. (“Slough”), theCompany’s majority shareholder, to provide funds for working capital,board-approved capital expenditures and operations through April 2005.

 

Property, Plant and Equipment

 

With regards to the aforementioned settlement agreement, the Company’scurrent assessment is that the fair market value of the registered titlescollectively is at least the sum of (a) the $5 million the Company would payTri-Star and (b) the fair market value of the overriding royalty interestpayable to Tri-Star, less (c) the fair market value of the working interestbeing received from Tri-Star, whereby the $5 million will be recorded asan addition to the Company’s Australian 

 

 

7

----

 

 

full cost pool as the cost of acquiring the titles and workinginterest, subject to the overriding royalty.

 

**NOTE 2 - RELATED PARTY TRANSACTIONS**

 

AtSeptember 30, 2004, the Company owed Slough and Slough Trading Estates Limited(“STEL”), a United Kingdom company which is the parent of Slough, approximately$17.0 million.

 

Asof September 30, 2004, the Company had one credit facility agreement withSTEL allowing the Company to borrow on an unsecured basis up to$13.0 million for its U.S. operations. Using borrowings from this creditfacility, the Company substantially funded its operating and capital needs inthe United States during 2003 and through the first nine months of 2004. TheCompany may repay the loan in whole or in part without prepayment penalties. Thecredit facility bears interest at 13% per annum and is due April 2, 2012. STELmay demand repayment prior to the maturity date provided that STEL gives18-months notice. So long as the STEL indebtedness exists, the Company may notobtain any additional third party indebtedness, either secured or unsecured, ormaking a priority payment in respect of any obligation without first obtaining writtenapproval from STEL. In connection with this credit facility, the Company paidSTEL arrangement fees of $40,000. The U.S. dollar value of the outstandingbalance of this facility as of September 30, 2004 was $13.0 million.

 

In2002, the Company borrowed $4 million from Slough which is evidenced by anote payable that bears interest at LIBOR plus 3.5% (5.30% as of September 30,2004) and is payable in full on April 30, 2005.

 

SloughEstates plc, STEL’s parent, has guaranteed for a period up to five years throughJune 2009 a bank credit facility of $150.0 million AUD that closed in June 2004(See Note 3). As consideration for the guarantee, the Company pays 1% per annumon the daily outstanding balance of the debt guaranteed. For the nine monthperiod ended September 30, 2004, the Company had paid guarantee fees of$211,000.

 

InAugust 2003, TOGA borrowed $29.7 million ($45 million AUD) fromSTEL for the sole purpose of paying off a $22 million long-term debt owedTCW Asset Management Company (“TCW”) and to substantially fund a$7.7 million repurchase of the 6% overriding royalty held by TCW on theCompany’s Comet Ridge properties. In addition, TOGA borrowed $55.0 million AUDunder a credit facility agreement with STEL to fund its operations inAustralia. These loans bore interest at 13% per annum. In connection with theseloans, the Company paid arrangement fees of $250,000 USD and $100,000 AUD,respectively, to STEL. These loans were paid in full June 18, 2004 with fundsfrom a bank credit facility (see Note 3).

 

Forthe nine month period ended September 30, 2004 and 2003, approximately $5.9million and $2.0 million, respectively, in interest and fees were paidcollectively to Slough and STEL under the financing agreements discussedherein.

 

**NOTE 3 - BANK DEBT**

 

OnJune 9, 2004, TOGA entered into a $150.0 million AUD senior credit facilityagreement with Australia and New Zealand Banking Group Limited and BOSInternational (Australia) Limited for the purpose of paying in full TOGA’sborrowings of $100.0 million AUD from STEL (see Note 2) and to fund TOGA’soperating costs and its share of development costs of the Comet Ridge coalseamgas project in Queensland, Australia. Funds from the facility are expected tobe available over five years and repayable in variable amounts beginning in2007 and concluding in 2014. The interest rate for the facility (6.425% perannum as of September 30, 2004) varies with the Australian inter-bank rate plusother factors. Commitment fees of 0.425% per annum of committed but undrawnfunds, as defined in the credit facility, are payable semi-annually. Thefacility’s effective interest rate at September 30, 2004, including interest,commitment and guarantee fees, and amortization of loan costs, is 8.725%. Thefacility is collateralized by, among other things, TOGA’s common stock and theCompany’s consolidated interest in the Comet Ridge project and is guaranteedfor up to five years by Slough Estates plc (See Note 2). The facility containscertain restrictive covenants, including maintenance of certain financialratios and contains provisions that allow the Company to utilize the facilityto finance facility interest expense. The U.S. dollar value of the outstandingbalance of this facility and facility interest expense payable as of September30, 2004 was approximately $77.8 million ($108.9 million AUD). TOGA incurred$4.5 million in loan costs which the Company has deferred and is amortizingover five years.

 

8

----

 

**NOTE 4 - LOSS PER SHARE**

 

The following tables set forth the computation of basic and dilutedloss per share (“EPS”) (in thousands except per share data):

 
| ** **                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                                                   |       |                                  |       |   |   |
| Numerator:                                                                             |       |                                  |       |   |   |
| Net loss                                                                               |       | $                                     | (3,311     | ) | $ | (8,804 | ) |
|                                                                                   |       |                                  |       |   |   |
| Denominator:                                                                           |       |                                  |       |   |   |
| Weighted-average  shares outstanding                                                   |       | 39,553                                |       | 39,221 |   |
| Effect of  dilutive securities:                                                        |       |                                  |       |   |   |
| Assumed exercise  of dilutive options and warrants                                     |       | —                                |       | — |   |
|                                                                                   |       |                                  |       |   |   |
| Weighted-average  shares and dilutive potential common shares                          |       | 39,553                                |       | 39,221 |   |
|                                                                                   |       |                                  |       |   |   |
| Basic and  diluted loss per share                                                      |       | $                                     | (.08       | ) | $ | (.22 | ) |
|                                                                                   |       |                                  |       |   |   |
| Total options  and warrants which could potentially dilute basic EPS in future periods |       | 3,511                                 |       | 3,573 |   |
|                                                                                   |       |                                  |       |   |   |

** **
| ** **                                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                                                   |       |                                 |       |   |   |
| Numerator:                                                                             |       |                                 |       |   |   |
| Net loss                                                                               |       | $                                    | (11,268    | ) | $ | (13,145 | ) |
|                                                                                   |       |                                 |       |   |   |
| Denominator:                                                                           |       |                                 |       |   |   |
| Weighted-average  shares outstanding                                                   |       | 39,390                               |       | 39,221 |   |
| Effect of  dilutive securities:                                                        |       |                                 |       |   |   |
| Assumed exercise  of dilutive options and warrants                                     |       | —                               |       | — |   |
| Weighted-average  shares and dilutive potential common shares                          |       | 39,390                               |       | 39,221 |   |
|                                                                                   |       |                                 |       |   |   |
| Basic and  diluted loss per share                                                      |       | $                                    | (.29       | ) | $ | (.34 | ) |
|                                                                                   |       |                                 |       |   |   |
| Total options  and warrants which could potentially dilute basic EPS in future periods |       | 3,511                                |       | 3,573 |   |

 

**NOTE 5 - MINORITY INTEREST IN TOGA**

 

For the nine month period ended September 30, 2004,the 10% minority interest share of TOGA’s net loss totaled $866,000. Theminority interest in TOGA’s net equity at January 1, 2004 totaled $418,000,resulting in the Company recognizing an additional loss of $468,000. TheCompany will continue recognizing 100% of TOGA’s net losses until TOGA becomesprofitable. The Company will record 100% of TOGA’s net income until it hasrecouped the minority interest’s share of TOGA’s net losses.

 

9

----

 

**NOTE 6 - COMMITMENTS AND CONTINGENCIES**

 

TheCompany, TOGA and two unaffiliated working interest owners are plaintiffs in alawsuit filed in 1998, styled *TipperaryCorporation and Tipperary Oil & Gas (Australia) Pty Ltd v.Tri-Star Petroleum Company, James H. Butler, Sr., and James H. Butler, Jr.*,Cause No. CV42,265, District Court of Midland County, Texas involving theComet Ridge project. The plaintiffs allege, among other matters, that Tri-Starand/or the individual defendants failed to operate the project in a good andworkmanlike manner and committed various other breaches of a joint operatingcontract, breached a previous mediation agreement, committed certain breachesof fiduciary and other duties owed to the plaintiffs, and committed fraud inconnection with the project. Tri-Star has answered the allegations, and filedamended pleadings denying liability and raising a number of affirmativedefenses and asserting various counterclaims. TOGA has operated the projectsince March 2002, after the court entered its Writ of Temporary Injunction (the“Injunction”) to enforce the votes of a majority-in-interest of the partiesunder the joint operating agreement to remove Tri-Star as operator and replaceit with TOGA.

 

On October 30, 2004, theCompany and Tri-Star entered into a settlement agreement covering thislitigation, as well as all other litigation between those parties originatingin Queensland, Australia. Among other provisions, the settlement agreementprovides that, upon receipt of necessary governmental consents and/or approvalsin Queensland, Australia, Tri-Star will transfer to a newly-formed subsidiaryof the Company, Tipperary Queensland, Inc., a 2.25% working interest in theComet Ridge project, subject to a 1.5% contractual overriding royalty interestto be retained by Tri-Star out of the conveyed interest. Tri-Star will alsotransfer to the Company approximately 96% of each of the registered titles forthe Comet Ridge project, including, but not limited to, the relevantAuthorities to Prospect and Petroleum Leases. The remaining percentage of theregistered titles will be conveyed to two unrelated intervening plaintiffsowning a present interest in the Comet Ridge project, representing theirproportionate share of the Project. Upon receipt of the necessary consents andapprovals in Queensland and the transfer of the interest subject to theoverriding royalty interest, the Company will pay (U.S.) $5 million to Tri-Starand Tri-Star will acknowledge the Company’s right to be operator of the CometRidge project. The Company anticipates using TOGA’s Australian loan facilityand existing Tipperary cash to fund the $5 million payment to Tri-Star. Shouldall necessary governmental consents and approvals be obtained within 45 days ofthe date of the settlement agreement, the Company and Tri-Star will dismiss allclaims against the other in the action in Midland County, Texas with no abilityto refile, seek the dismissal of all action pending in Queensland, Australia,and each party will release the other from all liability. If the necessarygovernmental consents, approvals or conditions in Queensland are denied, notreceived or otherwise not met within 45 days from the date of the settlement agreement,either party can avoid the settlement agreement and consider the settlement atan end. The District Court in Midland County, Texas has granted a continuanceof the action for a period of time sufficient to allow the parties to attemptto obtain the requisite approvals and consents, and fulfill any otherconditions, in Queensland, Australia. Should the settlement agreement come toan end, the case will be reassigned to the trial docket in Midland County,Texas.

 

10

----

 

**NOTE 7 - OPERATIONS BY GEOGRAPHIC AREA**

 

Segment information has been prepared in accordancewith SFAS No. 131, “Disclosures About Segments of an Enterprise and RelatedInformation.” The Company has two geographic reporting segments, Australia andthe United States. General and administrative expenses, interest expense andinterest and other income are not allocated to segments. The segment datapresented below was prepared on the same basis as the Consolidated FinancialStatements. Reportable business segment information as of September 30, 2004and 2003 and for the three and nine months ended September 30, 2004 and 2003 isas follows (in thousands):

 

**As of and for the three months ended September 30,2004**

** **
| ** **                                               | ** ** | **Gas and Oil Operations** | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------|------------|
| ** **                                               | ** ** | **Australia**              | ** ** | **United States** | ** ** | **Total**  | ** ** | **Non-Segmented Items** | ** ** | **Total** | ** ** |
|                                                     |       |                       |       |              |       |       |       |   |   |   |   |
| Revenues                                                 |       | $                          | 2,531      |              | $          | 2          |       | $ | 2,533 |   | $ | — |   | $ | 2,533 |   |
| Income (loss)  before minority interest and income taxes |       | 773                        |       | (258              | )          | 515        |       | (3,826 | )(1) | (3,311 | ) |
| Property, plant  and equipment, net                      |       | 112,838                    |       | 9,873             |       | 122,711    |       | 398 |   | 123,109 |   |
|                                                          |            |                            |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |

----

(1) Includes $975,000 of legal expenses for theTri-Star trial (see Note 6) and $1.1 million of other general andadministrative expenses, and $1.8 million of interest expense.

 

**As of andfor the three months ended September 30, 2003**

 
| ** **                                               | ** ** | **Gas and Oil Operations** | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------|------------|
| ** **                                               | ** ** | **Australia**              | ** ** | **United States** | ** ** | **Total**  | ** ** | **Non-Segmented Items** | ** ** | **Total** | ** ** |
|                                                     |       |                       |       |              |       |       |       |   |   |   |   |
| Revenues                                                 |       | $                          | 1,710      |              | $          | 4          |       | $ | 1,714 |   | $ | — |   | $ | 1,714 |   |
| Income (loss)  before minority interest and income taxes |       | 287                        |       | (443              | )          | (156       | )          | (8,878 | )(1) | (9,034 | ) |
| Property, plant  and equipment, net                      |       | 96,637                     |       | 6,139             |       | 102,776    |       | 390 |   | 103,166 |   |
|                                                          |            |                            |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |

----

(1) Includes $1.4 million of general andadministrative expenses, $1.4 million of interest expense, $5.1 million ofwrite-off of deferred loan costs and $1.1 million of foreign currency exchangeloss.

 

**As of and for the nine months ended September 30,2004**

** **
| ** **                                               | ** ** | **Gas and Oil Operations** | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------|------------|
| ** **                                               | ** ** | **Australia**              | ** ** | **United States** | ** ** | **Total**  | ** ** | **Non-Segmented Items** | ** ** | **Total** | ** ** |
|                                                     |       |                       |       |              |       |       |       |   |   |   |   |
| Revenues                                                 |       | $                          | 5,256      |              | $          | 7          |       | $ | 5,263 |   | $ | — |   | $ | 5,263 |   |
| Income (loss)  before minority interest and income taxes |       | 746                        |       | (889              | )          | (143       | )          | (11,543 | )(1) | (11,686 | ) |
| Property, plant  and equipment, net                      |       | 112,838                    |       | 9,873             |       | 122,711    |       | 398 |   | 123,109 |   |
|                                                          |            |                            |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |

----

(1) Includes $1.9 million of legal expenses for theTri-Star trial (see Note 6) and $3.7 million of other general andadministrative expenses and $6.0 million of interest expense.

 

11

----

 

**As of andfor the nine months ended September 30, 2003**

 
| ** **                                               | ** ** | **Gas and Oil Operations** | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------|------------|
| ** **                                               | ** ** | **Australia**              | ** ** | **United States** | ** ** | **Total**  | ** ** | **Non-Segmented Items** | ** ** | **Total** | ** ** |
|                                                     |       |                       |       |              |       |       |       |   |   |   |   |
| Revenues                                                 |       | $                          | 4,753      |              | $          | 11         |       | $ | 4,764 |   | $ | — |   | $ | 4,764 |   |
| Income (loss)  before minority interest and income taxes |       | 963                        |       | (3,046            | )          | (2,083     | )          | (11,065 | )(1) | (13,148 | ) |
| Property, plant  and equipment, net                      |       | 96,637                     |       | 6,139             |       | 102,776    |       | 390 |   | 103,166 |   |
|                                                          |            |                            |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |

----

(1) Includes $4.2 million of general andadministrative expenses, $3.9 million of interest expense, $5.1 million ofwrite-off of deferred loan costs and $2.1 million of foreign currency exchangegain.

 

**NOTE 8 - PROPERTY, PLANT ANDEQUIPMENT**

 

A summary ofproperty, plant and equipment follows:

 
| ** **                                                 | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **(in thousands)**      | ** ** |
|                                                       |       |                    |       |                   |       |
| Evaluated oil  and gas properties:                         |       |                    |       |                   |       |
| Australian  properties                                     |       | $                       | 105,451    |                   | $          | 105,264 |   |
| Domestic  properties                                       |       | —                  |       | —                 |       |
| Unevaluated oil  and gas properties:                       |       |                    |       |                   |       |
| Australian  properties                                     |       | 12,330                  |       | 9,221                  |       |
| Domestic  properties                                       |       | 9,874                   |       | 6,218                  |       |
| Oil and gas  properties                                    |       | 127,655                 |       | 120,703                |       |
| Other property  and equipment                              |       | 4,516                   |       | 4,431                  |       |
|                                                       |       | 132,171                 |       | 125,134                |       |
| Less accumulated  depreciation, depletion and amortization |       | (9,062                  | )          | (8,078                 | )          |
| Property, plant  and equipment, net                        |       | $                       | 123,109    |                   | $          | 117,056 |   |

 

**NOTE 9 - STATEMENT OF CASH FLOWS SUPPLEMENTALINFORMATION**

** **
| ** **                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | **(in thousands)**                   | ** ** |
|                                                                  |       |                                 |       |   |   |
| Cash paid during  the period for interest, net of amounts capitalized |       | $                                    | 4,734      |   | $ | 2,860 |   |
| Non-cash  investing and financing activities—                    |       |                                 |       |   |   |   |   |
| Net increase in  payables for capital expenditures                    |       | $                                    | 885        |   | $ | — |   |
|                                                                       |            |                                      |            |  |  |  |  |  |  |

 

12

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**Item 2****.    Management’sDiscussion and Analysis**

 

Information within this report containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 that are based on management’s beliefs,assumptions, current expectations, estimates and projections about the oil andgas industry, the world economy and about the Company itself. Words such as“may,” “will,” “expect,” “anticipate,” “estimate” or “continue,” or comparablewords are intended to identify such forward-looking statements. In addition,all statements other than statements of historical facts that addressactivities that the Company expects or anticipates will or may occur in thefuture are forward-looking statements. These statements are not guarantees offuture performance and involve certain risks, uncertainties and assumptionsthat are difficult to predict with regard to timing, extent, likelihood anddegree of occurrence. Therefore, actual results and outcomes may materiallydiffer from what may be expressed or forecasted in such forward-lookingstatements. Furthermore, the Company undertakes no obligation to update, amendor clarify forward-looking statements, whether as a result of new information, futureevents or otherwise. Readers are encouraged to read the SEC filings of theCompany, particularly its Form 10-K for the year ended December 31, 2003, formeaningful cautionary language and discussion of risk factors disclosing whyactual results may vary materially from those anticipated by management.

 

***Overview***

 

*Australia*

 

The Company’s activities in Australia are conductedsubstantially through Tipperary Corporation’s 90%-owned Australian subsidiary,Tipperary Oil & Gas (Australia) Pty Ltd (“TOGA”). As of September 30, 2004,the Company owned a 73% undivided capital-bearing interest in the Comet Ridgeproject in Queensland, Australia. This project comprises approximately1,230,500 acres in the Bowen Basin, which includes five petroleum leasescovering approximately 288,000 acres, Authority to Prospect (“ATP”) 526covering approximately 712,000 acres, ATP 653 covering approximately 96,000acres and ATP 745 covering approximately 135,000 acres. The Company also holds100% of ATP 655, which is near the Comet Ridge project and covers approximately77,000 acres.

 

An ATP allows the holder to undertake a range ofexploration activities, including geophysical surveys, field mapping andexploratory drilling. Each ATP requires the expenditure of an amount of explorationcosts as determined by Queensland’s Department of Natural Resources and Mines(“Queensland DNRM”) and is subject to renewal every four years. Once apetroleum resource is identified, the holder of an ATP may apply for apetroleum lease, which provides the lessee with the ability to conductadditional exploration, development and production activities.

 

With respect to ATP 653, the Company filed andreceived a variance to combine year two expenditure requirements with those ofyear three and to drill a horizontal well eliminating the obligation to drilltwo conventional wells. Drilling of the horizontal well is expected to commencein late 2004 or early 2005. The Company has completed expenditure requirementsfor ATPs 745 and 655.

 

Upon expiration ofan ATP, the policy of the Queensland DNRM allows the ATP holder to renew theATP for an additional four year exploratory period and generally requires theholder to relinquish a 20% portion of ATP acreage not held by a petroleumlease.  ATP 526 expired on October 31, 2004, and an application hasbeen filed with the Queensland DNRM for the renewal of ATP 526.  Withregards to renewal, there will be discussion with the QueenslandDNRM of establishing petroleum leases on acreage that is part of ATP 526and ATP 653.  ATPs 653, 655 and 745 have initial terms expiring onSeptember 30, 2006, October 31, 2007 and October 31, 2007, respectively.

 

TheCompany’s gas marketing in eastern Australia is currently focused on obtaininglong-term gas sales agreements that provide five to 15 years of firm salestypically starting in 2006 to 2008. Short-term sales contracts are also beingpursued. Effective July 2004, the Company commenced selling gas under twoshort-term sales contracts, one for six months and one for 12 months.

 

13

----

 

The followingtable summarizes field development progress on the Comet Ridge project as ofSeptember 30, 2004. In December 2003, the Company began using its secondcompression plant facility, which increased the field’s gas compressioncapacity to approximately 38 million cubic feet (“MMcf”) per day.

 

**CometRidge Operations Review**

** **

| ** **                         | ** ** | **September 30,  2004 (a)** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
|                               |       |                        |       |
| **Well  Status (Number of Wells)** |       |                        |       |
| Selling                            |       | 46                          |       |
| Dewatering or  temporarily shut-in |       | 30                          |       |
| Producing                          |       | 76                          |       |
| Being evaluated                    |       | 21                          |       |
| Injection/monitoring  wells        |       | 2                           |       |
| To be plugged  and abandoned       |       | 2                           |       |
| Plugged and  abandoned             |       | 3                           |       |
| Total drilled                      |       | 104                         |       |
|                               |       |                        |       |
| **Gross  Daily Volumes (MMcf)**    |       |                        |       |
| Sold                               |       | 29                          |       |
| Flared                             |       | 1                           |       |
| Used for  compression fuel         |       | 3                           |       |
| Produced                           |       | 33                          |       |
|                               |       |                        |       |

----

(a)   This table shows the status of wells drilledat September 30, 2004 and gross daily volumes on that same date. Average grossdaily volumes for the quarter may differ. Net sales volumes are discussed inthe Company’s results of operations.

 

The Company drilled two exploratory wells on the Comet Ridge projectduring the first nine months of 2004. The 2004 drilling was substantiallyfunded with borrowings from Slough Trading Estates Limited (“STEL”) and anAustralian bank senior credit facility described in Note 3 to the ConsolidatedFinancial Statements. Future 2004 development and exploratory costs will befunded by the Australian bank senior credit facility.

 

Duringthe first half of 2004, 100% of the Company’s gas sales in Australia were made undera five-year contract effective June 1, 2000 with ENERGEX Retail Pty Ltd(“Energex”), an unaffiliated customer. The Energex contract has deliveryrequirements of up to approximately 15,000 Mcf of gas per day. The Company has agas sales agreement with Origin Energy Retail Limited (“OERL”), a subsidiary ofOrigin Energy Limited, to supply approximately 9 Bcf per year, or approximately25,000 Mcf of gas per day net to the Company’s interests, for 13 yearsbeginning May 2007. Origin Energy Limited is a large Australian integratedenergy company which, through subsidiaries, owns nearly 24% of the Comet Ridgeproject.

 

 

14

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During the third quarter of 2004, the Company sold its gas under threecontracts, the Energex contract discussed above and two new short-termcontracts that commenced in July 2004 - one six month contract with Energex andone 12 month contract with Santos QNT Pty Ltd. With the new short-termcontracts and increased demand, the Company’s sales increased to 1,505 MMcf forthe third quarter in 2004, a 60% increase over the second quarter’s sales of938 MMcf and a 31% increase over the prior year’s quarter.

 

Effective September 30, 2004, the Company and Queensland FertilizerAssets Limited (“QFAL”) extended until December 31, 2004 the Company’s gassales agreement with QFAL to supply 210 Bcf of gas to QFAL over a 20-yearperiod beginning in early 2007 to a fertilizer plant QFAL is proposing toconstruct in southeastern Queensland. The Company does not yet know if theplant will be built and may in 2005 discontinue the agreement.

 

***United States***

 

*Lay Creek* — The Company holds a 50% working interest in LayCreek, a coalseam gas project located in Moffat County, Colorado. The projectincludes various leasehold interests covering over 82,000 gross acres. KochExploration Company (“Koch”), an unaffiliated third party, holds the remaining50% working interest and operates the project. The Company is currentlyevaluating the gas and water production from pilot wells in order to determineeconomic viability of the production. Gas production in excess of 300 Mcf perday from nine wells is currently being flared. The Company is investigatingpipeline connections and expects to begin selling gas in 2005.

 

*Frenchman* — The Company holds a 25% interest in the Frenchmanprospect in eastern Colorado. Total gross acreage in the prospect isapproximately 162,000 acres. The Houston Exploration Company (“HoustonExploration”) holds the remaining 75% interest and is the operator of theprospect. Houston Exploration recently acquired this interest from Kerr-McGeeRocky Mountain Corporation (“Kerr-McGee”). During 2003, five wells were drilledon the Frenchman prospect by Kerr-McGee. Three of these wells were completed,and two were plugged and abandoned. In 2004, the Company drilled fiveadditional Frenchman wells in which the former operator, Kerr-McGee, electednot to participate. The Company has a 100% interest in these wells. The Companybelieves four of these 100% wells will be commercial producers, and the Companywill earn 100% of offsetting drill sites as set forth in the operatingagreement the Company had with Kerr-McGee. The Company plugged and abandonedthe other well drilled. In the first quarter of 2004, the Company recorded anasset impairment expense of $150,000 related to unsuccessful exploration costsincurred on wells on the Frenchman prospect. Two more wells are expected to bedrilled by the Company on 100% owned acreage in the fourth quarter of 2004 at acost to the Company of approximately $420,000. Further seismic work is expectedto be conducted during the fourth quarter of 2004. The Company expects to builda gathering system at a cost of approximately $200,000 to the Company, connectto a nearby pipeline and begin selling gas in early in 2005.

 

*Republican* — The Company holds a 20% interest in the Republicanprospect in eastern Colorado. Total gross acreage in the prospect isapproximately 170,000 acres. Houston Exploration, which acquired Kerr-McGee’sinterest in the project, holds the remaining 80% interest and is the operatorof the prospect. Five wells were drilled on the Republican prospect in 2004 byKerr-McGee, and the economics of connecting these wells to nearby pipelines arebeing evaluated. Houston Exploration and the Company are currently evaluatingadditional drilling locations to be drilled during the fourth quarter of 2004,and expect to begin a large 3-D seismic acquisition program in 2005.

 

*Stateline* — The Company holds a 25% interest in the Statelineprospect in western Nebraska. Total gross acreage in the prospect isapproximately 120,000 acres. Lance Oil & Gas Company, Inc. (“Lance”) holdsthe remaining 75% interest and is the operator of the prospect. In the firsthalf of 2004, preliminary 2-D seismic operations were conducted at a cost tothe Company of approximately $100,000. The acquisition of 3D seismic data isnow planned for early 2005 at a cost to the Company of approximately $163,500.

 

*Sand Hill* — During late 2003, the Company acquired leaseholdacreage in western Nebraska totaling approximately 51,000 gross acres, the“Sand Hill” prospect. This acreage is located in the vicinity of the Company’sFrenchman, Republican and Stateline prospects. The Company may sell an interestin the prospect to recover its investment and retain an interest in thisacreage. Alternatively, the Company may elect to explore and develop thisprospect independently. The Company intends to commence a seismic program inthe fourth quarter of 2004 at an estimated cost of $600,000.

 

 

15

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*Nine Mile* — The Company holds a 70% interest in the prospectiveacreage and 40% interest in the outlying acreage of the Nine Mile prospect, aconventional oil and gas exploration prospect, also located in Moffat County,Colorado, and serves as operator of the prospect. The prospect comprisesapproximately 38,000 gross acres. The Company is currently evaluatingexploratory work performed in 2002 and 2003 and is seeking industry partnersbefore resuming exploratory activity.

 

***Financial Condition, Liquidityand Capital Resources***

 

The Company had cash and cash equivalents of $8.6million as of September 30, 2004, compared to approximately $3.0 million as ofDecember 31, 2003. In September 2004, the Company sold two million shares ofits common stock in a private placement to 11 unaffiliated institutionalinvestors for $4.00 per share. The Company has funded operations, deferred loancosts associated with obtaining TOGA’s senior credit facility and capitalexpenditures for the nine months ended September 30, 2004, using primarily (a)cash on hand at December 31, 2003 and (b) borrowings from STEL and from TOGA’ssenior credit facilities.

 

On October 30, 2004, the Company and Tri-Star entered into a settlementagreement covering the litigation between the two parties. Subject to certainevents occurring within 45 days of the settlement agreement, the Company willpay $5 million to Tri-Star, and the Company will receive from Tri-Star approximately96% of the registered titles for the Comet Ridge project and a 2.25% workinginterest in the Comet Ridge project, subject to a 1.5% contractual overridingroyalty interest to be retained by Tri-Star.  See Note 6. The Company expects to fund thiscontingent commitment with funds from its available cash and with funds fromTOGA’s Australian loan facility.

 

Shortly after the settlement agreement was reached, Slough Estates plc,parent of Slough and STEL, publicly announced that it will consider its optionsfor exiting from its investment in Tipperary. The Company will be conducting discussions with Slough relating to thisannouncement.  TOGA’s $150 million AUDbank facility entered into on June 9, 2004, provides that Slough Estates plc,as parent of Tipperary’s majority shareholder and as recourse guarantor of thebank facility, cannot divest of controlling interest of Tipperary during theten-year term of the loan without approval by the facility’s lenders, actingreasonably.  In addition, STEL’s lendingagreement with Tipperary requires STEL to give Tipperary 18 months notice forrepayment of the amounts borrowed by Tipperary. At September 30, 2004, the outstanding borrowings on the Australian BankFacility were $108.9 million AUD, and the outstanding borrowings on the STELlending agreement were $13.0 million USD.

 

The Company anticipates funding operations and capital expenditures inAustralia for the remainder of 2004 using funds from a $150 million AUD(approximately $114 million USD) credit facility. See Note 3 to theConsolidated Financial Statements.

 

The Companyanticipates funding operations and capital expenditures in the United Statesfor 2004 using (a) cash on hand at September 30, 2004 and (b) a commitment fromSlough to provide funds for working capital, board-approved capitalexpenditures and operations through April 2005.

 

Net cash used by operating activities was $10.6million during the nine months ended September 30, 2004, compared to $5.7million of cash used during the same period last year. The increase in net cashused for operations in the first nine months of 2004 compared with the sameperiod in 2003 resulted primarily from (a) interest expense on increased debtused to fund property acquisition, exploration and development and (b) higheroperating costs and general and administrative expenses.

 

On June 9, 2004, TOGA entered into a $150.0 millionAUD senior credit facility agreement with Australia and New Zealand BankingGroup Limited and BOS International (Australia) Limited. The initial borrowingsunder the facility totaled $103.0 million AUD ($71.0 million USD). TOGA used$100.0 million AUD ($68.2 million USD) to pay in full its borrowings from STELand to pay debt issuance costs. The balance of the credit facility will be usedto fund TOGA’s operating costs and its share of development costs of the CometRidge coalseam gas project in Queensland, Australia.

 

16

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The table below provides an analysis of capitalexpenditures of $12.9 million during the nine months ended September 30, 2004.

 

**CapitalExpenditures Activity**

**(in thousands)**

 
| Australia:                            |   |   |   |
|---------------------------------------|--------|--------|--------|
| Comet Ridge  drilling and completion  |   | $      | 7,169  |   |
| Comet Ridge  facilities and equipment |   | 126    |   |
| ATP 655  exploration                  |   | 782    |   |
| Capitalized  interest                 |   | 817    |   |
| Other                                 |   | 186    |   |
| Domestic:                             |   |   |   |
| Leasehold  acquisitions               |   | 967    |   |
| Capitalized  interest                 |   | 388    |   |
| Lay Creek  drilling and completion    |   | 1,636  |   |
| Frenchman  drilling and completion    |   | 670    |   |
| Other                                 |   | 117    |   |
| Total                                 |   | $      | 12,858 |   |
|                                       |        |        |        |  |  |

 

Capital expenditures for the first nine months of 2004were funded principally under credit facilities with STEL and the Australianbank senior credit facility.

 

The Company has various commitments in addition to itslong-term debt. The table below summarizes the Company’s contractualobligations for the last three months of 2004 and years 2005 through 2007 andthereafter (in thousands):

 
| **Contractual Obligation**         | ** ** | **Total** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **Thereafter** | ** ** |
|------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Long-term  debt                    |       | $         | 90,834     |     | $          | —   |       | $        | —     |     | $          | —         |       | $ | 2,100 |   | $ | 88,734 |   |
| Operating leases  for office space |       | $         | 999        |     | $          | 80       |       | $        | 319        |     | $          | 324            |       | $ | 265 |   | $ | 11 |   |
| Operating leases  for equipment    |       | $         | 282        |     | $          | 44       |       | $        | 162        |     | $          | 44             |       | $ | 32 |   | $ | — |   |
| Standby drilling  fees             |       | $         | 60         |     | $          | —   |       | $        | 60         |     | $          | —         |       | $ | — |   | $ | — |   |
| Petroleum lease  expenditures      |       | $         | 1,100      |     | $          | —   |       | $        | 550        |     | $          | 275            |       | $ | 275 |   | $ | — |   |
| Asset retirement  obligation       |       | $         | 5,034      |     | $          | —   |       | $        | —     |     | $          | —         |       | $ | — |   | $ | 5,034 |   |

 

17

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***Resultsof Operations - Comparison of the Three Months Ended September 30, 2004 and2003***

 

Unless otherwise indicated, the discussion belowcompares the quarter ended September 30, 2004 to the quarter ended September30, 2003. The Company incurred a net loss of $3.3 million compared to a netloss of $8.8 million. An increase in revenues for 2004 was offset by higher legalexpenses related to Tri-Star litigation included within general andadministrative costs . The greater net loss for the 2003 quarter was primarilydue to (a) a $5.1 million write-off of deferred loan costs and (b) a $1.1million foreign currency exchange loss. The table below provides a comparisonof operations, respectively. It is intended to provide a comparative review ofsignificant operational items. Accordingly, nominal differences may exist fromthe amounts presented in the accompanying Consolidated Financial Statements.

 
| ** **                                                       | ** ** | **Three Months Ended September 30,**                               | ** ** | **Increase** | ** ** | **%****Increase**  | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                                                       | ** ** | **2004**                                                           | ** ** | **2003**     | ** ** | **(Decrease****)** | ** ** | **(Decrease)** | ** ** |
| ** **                                                       | ** ** | **($ in thousands, except average per Mcf prices and costs)** | ** ** |
| **Worldwide  operations:**                                       |       |                                                               |       |         |       |               |       |   |   |
|                                                             |       |                                                               |       |         |       |               |       |   |   |
| Operating  revenue                                               |       | $                                                                  | 2,533      |         | $          | 1,714              |       | $ | 819 |   | 48 | % |
| Gas volumes  (MMcf)                                              |       | 1,506                                                              |       | 1,149        |       | 357                |       | 31 | % |
| Average gas  price per Mcf                                       |       | $                                                                  | 1.68       |         | $          | 1.49               |       | $ | 0.19 |   | 13 | % |
| Operating  expenses                                              |       | $                                                                  | 1,483      |         | $          | 1,256              |       | $ | 227 |   | 18 | % |
| Average lifting  cost per Mcf equivalent (“Mcfe”) sold |       | $                                                                  | 0.99       |         | $          | 1.09               |       | $ | (0.10 | ) | (9 | )% |
| General and  administrative                                      |       | $                                                                  | 2,081      |         | $          | 1,353              |       | $ | 728 |   | 54 | % |
| Depreciation,  depletion and amortization (“DD&A”) |       | $                                                                  | 539        |         | $          | 455                |       | $ | 84 |   | 18 | % |
| Impairment of  oil and gas properties                            |       | $                                                                  | —     |         | $          | 165                |       | $ | (165 | ) | N/A |   |
| Interest expense                                                 |       | $                                                                  | 1,791      |         | $          | 1,403              |       | $ | 388 |   | 28 | % |
| Write-off of  deferred loan costs                                |       | $                                                                  | —     |         | $          | 5,069              |       | $ | (5,069 | ) | N/A |   |
|                                                             |       |                                                               |       |         |       |               |       |   |   |
| **Australia  operations:**                                       |       |                                                               |       |         |       |               |       |   |   |
|                                                             |       |                                                               |       |         |       |               |       |   |   |
| Operating  revenue                                               |       | $                                                                  | 2,531      |         | $          | 1,710              |       | $ | 821 |   | 48 | % |
| Gas volumes  (MMcf)                                              |       | 1,505                                                              |       | 1,149        |       | 356                |       | 31 | % |
| Average gas  price per Mcf                                       |       | $                                                                  | 1.68       |         | $          | 1.49               |       | $ | 0.19 |   | 13 | % |
| Operating  expenses                                              |       | $                                                                  | 1,229      |         | $          | 978                |       | $ | 251 |   | 26 | % |
| Average lifting  cost per Mcf sold                               |       | $                                                                  | 0.82       |         | $          | 0.85               |       | $ | (0.03 | ) | (4 | )% |
| Oil and gas  property DD&A                                   |       | $                                                                  | 488        |         | $          | 417                |       | $ | 71 |   | 17 | % |
| Other DD&A                                                   |       | $                                                                  | 37         |         | $          | 25                 |       | $ | 12 |   | 48 | % |
| Oil and  Gas DD&A rate per Mcf volumes sold             |       | $                                                                  | 0.32       |         | $          | 0.36               |       | $ | (0.04 | ) | (11 | )% |
|                                                             |       |                                                               |       |         |       |               |       |   |   |
| **Domestic  operations:**                                        |       |                                                               |       |         |       |               |       |   |   |
|                                                             |       |                                                               |       |         |       |               |       |   |   |
| Operating  revenue                                               |       | $                                                                  | 2          |         | $          | 4                  |       | $ | (2 | ) | (50 | )% |
| Gas volumes (MMcf)                                               |       | 0.5                                                                |       | 0.7          |       | (.2                | )          | (29 | )% |
| Average gas  price per Mcf                                       |       | $                                                                  | 4.54       |         | $          | 4.08               |       | $ | 0.46 |   | 11 | % |
| Operating  expenses — producing properties                  |       | $                                                                  | 1          |         | $          | 3                  |       | $ | (2 | ) | (67 | )% |
| Average lifting  cost on producing properties per Mcfe sold      |       | $                                                                  | 2.94       |         | $          | 3.86               |       | $ | (0.92 | ) | (24 | )% |
| Operating  expenses — non-producing properties              |       | $                                                                  | 253        |         | $          | 275                |       | $ | (22 | ) | (8 | )% |
| Other DD&A                                                   |       | $                                                                  | 14         |         | $          | 13                 |       | $ | 1 |   | 8 | % |

 

 

18

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Revenues and SalesVolumes

 

The Company is currently selling its Australian gasunder three contracts to two purchasers. Energex is purchasing gas from theCompany under a five-year contract with delivery requirements of up to 15,000Mcf of gas per day and under a new short-term contract that terminates December31, 2004. The Company also entered into a one year gas sales contract withSantos QNT Pty Ltd effective July 2004. The Company is actively pursuinglong-term and short-term gas contracts to increase gas sales. With the additionof the two new short-term contracts, the Company’s sales increased to 1,505MMcf for the third quarter in 2004, a 60% increase over the second quarter’ssales of 938 MMcf and a 31% increase over the same period in 2003. Gas revenuesin Australia for the third quarter increased by 48% due to higher sales volumesand a 13% increase in average gas prices. Changes in the exchange rate and theaddition of a new gas sales contract with higher prices resulted in theincrease in average gas prices.

 

During the third quarter of 2004, the Company hadminimal domestic revenue. Domestic revenues and volumes in 2004 and 2003 relateto small, retained interests in properties producing in the Powder River Basinin Wyoming.

 

Costs and Expenses

 

Operating expenses in Australia increased 26% due tothe addition of a second compressor facility which commenced operations inDecember 2003 and well workover costs. Australian oil and gas property DD&Aexpense increased 17% due principally to higher sales volumes.

 

Domestic operating expenses in the third quarter of2004 and 2003 are principally attributable to the Lay Creek coal-seam gasproject where the wells are in the dewatering phase.

 

General and administrative (“G&A”) expenses forthe third quarter of 2004 increased 54% compared to the same period in 2003,due principally to an increase in legal costs of approximately $583,000incurred for the Tri-Star litigation. With the execution of the SettlementAgreement with Tri-Star in October 2004, the Company expects legal expenses tobe significantly lower in 2005.

 

Other Income (Expense)

 

Interest expense increased to $1.8 million from $1.4million in 2003, due primarily to increased borrowings to fund operations andcapital expenditures. As of September 30, 2004, the Company’s total debt was$94.8 million compared with $58.2 million as of September 30, 2003, an increaseof $36.6 million. The interest expense associated with increased borrowings waspartially offset by the effect of lower interest rates on TOGA’s long-termdebt. As a result of refinancing TOGA’s debt, TOGA’s interest rates decreasedfrom 13% to an average effective rate of 8.725% per annum, which reduced theCompany’s total debt effective rate from 12.7% to 9.19%.

 

In the third quarter of 2003, the Company wrote off$5.1 million in deferred loan costs related to the TCW loan which was retiredon August 15, 2003. In accordance with SFAS No. 52, “Foreign CurrencyTranslation” (SFAS 52”), the Company recognized a foreign currency exchangeloss of $1.1 million related to the TOGA debt repaid.

 

Minority Interest in Loss of Subsidiary

 

During the third quarter of 2004, the Companyrecognized 100% of TOGA’s net loss as the minority interest in TOGA’S netequity had been reduced to zero at June 30, 2004.

 

 

19

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***Results of Operations - Comparisonof the Nine Months Ended September 30, 2004 and 2003***

 

Unless otherwise indicated, the discussion belowcompares the nine months ended September 30, 2004 to the nine months endedSeptember 30, 2003. The Company incurred a net loss of $11.3 million comparedto a net loss of $13.1 million. A 10% increase in revenues was offset byincreases in operating costs and general and administrative expenses. Increaseddebt to fund property exploration and development caused interest expense toincrease. An additional expense attributed to the write-off of deferred loancosts partially offset by a foreign currency exchange gain was recorded in2003. The table below provides a comparison of operations. It is intended toprovide a comparative review of significant operational items. Accordingly,nominal differences may exist from the amounts presented in the accompanyingConsolidated Financial Statements.

 
| ** **                                                       | ** ** | **Nine Months Ended  September 30,**                               | ** ** | **Increase** | ** ** | **%****Increase** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------|------------|-------------------|------------|
| ** **                                                       | ** ** | **2004**                                                           | ** ** | **2003**     | ** ** | **(Decrease)**    | ** ** | **(Decrease)** | ** ** |
| ** **                                                       | ** ** | **($ in thousands, except average per Mcf prices and costs)** | ** ** |
| **Worldwide  operations:**                                       |       |                                                               |       |         |       |              |       |   |   |
|                                                             |       |                                                               |       |         |       |              |       |   |   |
| Operating  revenue                                               |       | $                                                                  | 5,263      |         | $          | 4,764             |       | $ | 499 |   | 10 | % |
| Gas volumes  (MMcf)                                              |       | 3,095                                                              |       | 3,332        |       | (237              | )          | (7 | )% |
| Average gas  price per Mcf                                       |       | $                                                                  | 1.70       |         | $          | 1.43              |       | $ | 0.27 |   | 19 | % |
| Operating  expenses                                              |       | $                                                                  | 4,124      |         | $          | 3,320             |       | $ | 804 |   | 24 | % |
| Average lifting  cost per Mcf equivalent (“Mcfe”) sold |       | $                                                                  | 1.33       |         | $          | 1.00              |       | $ | .33 |   | 33 | % |
| General and  administrative                                      |       | $                                                                  | 5,635      |         | $          | 4,165             |       | $ | 1,470 |   | 35 | % |
| Depreciation,  depletion and amortization (“DD&A”) |       | $                                                                  | 1,146      |         | $          | 1,161             |       | $ | (15 | ) | (1 | )% |
| Impairment of  oil and gas properties                            |       | $                                                                  | 150        |         | $          | 2,386             |       | $ | (2,236 | ) | (94 | )% |
| Interest expense                                                 |       | $                                                                  | 6,024      |         | $          | 3,883             |       | $ | 2,141 |   | 55 | % |
| Write-off of  deferred loan costs                                |       | $                                                                  | —     |         | $          | 5,069             |       | $ | (5,069 | ) | N/A |   |
|                                                             |       |                                                               |       |         |       |              |       |   |   |
| **Australia  operations:**                                       |       |                                                               |       |         |       |              |       |   |   |
|                                                             |       |                                                               |       |         |       |              |       |   |   |
| Operating  revenue                                               |       | $                                                                  | 5,256      |         | $          | 4,753             |       | $ | 503 |   | 11 | % |
| Gas volumes  (MMcf)                                              |       | 3,093                                                              |       | 3,330        |       | (237              | )          | (7 | )% |
| Average gas  price per Mcf                                       |       | $                                                                  | 1.70       |         | $          | 1.43              |       | $ | 0.27 |   | 19 | % |
| Operating  expenses                                              |       | $                                                                  | 3,394      |         | $          | 2,660             |       | $ | 734 |   | 28 | % |
| Average lifting  cost per Mcf sold                               |       | $                                                                  | 1.10       |         | $          | 0.80              |       | $ | 0.30 |   | 38 | % |
| Oil and Gas  property DD&A                                   |       | $                                                                  | 998        |         | $          | 1,070             |       | $ | (72 | ) | (7 | )% |
| Other DD&A                                                   |       | $                                                                  | 106        |         | $          | 53                |       | $ | 53 |   | 100 | % |
| Oil and  Gas DD&A rate per Mcf volumes sold             |       | $                                                                  | 0.32       |         | $          | 0.32              |       | $ | — |   | — |   |
|                                                             |       |                                                               |       |         |       |              |       |   |   |
| **Domestic  operations:**                                        |       |                                                               |       |         |       |              |       |   |   |
|                                                             |       |                                                               |       |         |       |              |       |   |   |
| Operating  revenue                                               |       | $                                                                  | 7          |         | $          | 11                |       | $ | (4 | ) | (36 | )% |
| Gas volumes  (MMcf)                                              |       | 2                                                                  |       | 2            |       | —            |       | — |   |
| Average gas  price per Mcf                                       |       | $                                                                  | 4.19       |         | $          | 3.99              |       | $ | 0.20 |   | 5 | % |
| Operating  expenses — producing properties                  |       | $                                                                  | 4          |         | $          | 6                 |       | $ | (2 | ) | (33 | )% |
| Average lifting  cost on producing properties per Mcfe sold      |       | $                                                                  | 2.49       |         | $          | 2.58              |       | $ | (0.09 | ) | (3 | )% |
| Operating  expenses — non-producing properties              |       | $                                                                  | 726        |         | $          | 654               |       | $ | 72 |   | 11 | % |
| Impairment of  oil and gas properties                            |       | $                                                                  | 150        |         | $          | 2,386             |       | $ | (2,236 | ) | (94 | )% |
| Other DD&A                                                   |       | $                                                                  | 42         |         | $          | 38                |       | $ | 4 |   | 11 | % |

 

 

20

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Revenues and SalesVolumes

 

The Company is currently selling its Australian gasunder three contracts to two purchasers. Energex is purchasing gas from theCompany under a five-year contract with delivery requirements of up to 15,000Mcf of gas per day and under a new short-term contract that terminates December31, 2004. The Company entered into a one year gas sales contract with SantosQNT Pty Ltd. effective July 2004. The addition of two new gas sales contractseffective July 2004 increased gas sales for the third quarter 2004 by 31% overthe same period in 2003 and minimized the decline in gas volumes sold inAustralia to 7% for the nine month period 2004 compared with the same period in2003. The Company is actively pursuing long-term and short-term gas contractsto increase gas volumes sold. A decrease in volumes sold for the nine monthperiod ended September 30, 2004 compared with the same period in 2003 wasoffset by a 19% increase in average gas prices. Changes in the exchange rateand the addition of a new gas sales contract with higher prices resulted in theincrease in average gas prices.

 

During the first nine months of 2004, the Company hadminimal domestic revenue. Domestic revenues and volumes in 2004 and 2003 relateto small, retained interests in properties producing in the Powder River Basinin Wyoming.

 

Costs and Expenses

 

Operating expenses in Australia increased 28% due toan increase in the number of producing wells, increased well workover costs,gas transportation expense and the addition of a second compressor facilitywhich commenced operations in December 2003. Australian oil and gas propertyDD&A expense decreased 7% due principally to lower sales volumes.

 

Domestic operating expenses in the first nine monthsof 2004 and 2003 were principally attributable to the Lay Creek coal-seam gasproject where the wells are in the dewatering phase.

 

The impairment expense of $150,000 was attributed tounsuccessful exploration costs incurred on wells on the Frenchman prospect.  Impairment expense of approximately $2.4million in 2003 was attributed largely to unsuccessful exploration on the NineMile prospect.

 

General and administrative (“G&A”) expenses forthe first nine months of 2004 increased 35% compared to the same period in 2003due principally to an increase in legal costs of approximately $828,000 for theTri-Star litigation and higher employee and consulting costs associated withmanaging the Comet Ridge properties. With the execution of the SettlementAgreement with Tri-Star in October 2004, the Company expects legal expenses tobe significantly lower in 2005.

 

Other Income (Expense)

 

Interest expense increased to $6.0 million from $3.9million, due primarily to increased borrowings to fund operations and capitalexpenditures. As of September 30, 2004, the Company’s total debt was $94.8million compared with $58.2 million as of September 30, 2003, an increase of$36.6 million. The interest expense associated with increased borrowings waspartially offset by the effect of lower interest rates on TOGA’s long-termdebt. As a result of refinancing TOGA’s debt, TOGA’s interest rates decreasedfrom 13% to an average effective rate of 8.725% per annum, which reduced theCompany’s total debt effective rate from 12.7% to 9.19%.

 

In the first nine months of 2003, the Company wroteoff $5.1 million in deferred loan costs related to TCW loan which was retiredon August 15, 2003. In accordance with SFAS No. 52, the Company recognized aforeign currency exchange gain of $2.1 million related to the TOGA debt repaid.

 

 

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***Critical Accounting Policies***

 

The Company’s financial statements are based on theselection and application of significant accounting policies, some of whichrequire management to make estimates and assumptions which affect the reportedamounts of assets, liabilities, revenues and expenses and also affect thedisclosure of contingent items. A summary of the Company’s significantaccounting policies is included in Item 7 of the Company’s annual report onForm 10-K for the year ended December 31, 2003. The Company believes that thesignificant accounting policies discussed therein are some of the more criticaljudgment areas in application of its accounting policies that currently affectits financial condition and results of operations.

 

***Off-balance Sheet Arrangements***

We do not currently have and have never had any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purposes entities, which typically areestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes.  Further,  we havenot guaranteed any obligations of unconsolidated entities nor do we have anycommitment or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in theserelationships.

 

 

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**Item 3****.    Quantitativeand Qualitative Disclosure About Market Risk**

 

Market risk is the potential loss arising from adversechanges in market rates and prices, such as foreign currency exchange, interestrates and commodity prices. The Company does not use financial instruments toany degree to manage foreign currency, interest rate or commodity risk and doesnot hold or issue financial instruments to any degree for trading purposes. OurAustralian debt facility has a variable interest rate. Fluctuations in theinterest rate could increase or decrease our interest expense. At September 30,2004, we had approximately $76.5 million ($107.0 million AUD) in outstandingvariable rate debt. If the interest rate for our variable rate debt increasedor decreased by 1%, our annual interest expense would increase or decrease byapproximately $760,000. In addition, at September 30, 2004, the Company wasexposed to some market risk with respect to foreign currency and natural gasprices; however, management does not believe such risk to be material.

 

**Item 4****.    Controlsand Procedures**

 

As of the end of the period covered by this report, we evaluated, underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, the effectiveness of thedesign and operation of our disclosure controls and procedures over financialreporting pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of1934. Based upon that evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures overfinancial reporting are adequate and effective in timely alerting them tomaterial information required to be included in this quarterly report on Form10-Q.

 

Disclosure controls and procedures, no matter how welldesigned and implemented, can provide only reasonable assurance of achieving anentity’s disclosure objectives. The likelihood of achieving such objectives isaffected by limitations inherent in disclosure controls and procedures. Theselimitations include the fact that human judgment in decision-making can befaulty and that breakdowns in internal control can occur because of humanfailures such as simple errors or mistakes or because of intentionalcircumvention of the established process.

 

During the period covered by this report, there havebeen no significant changes in our internal controls over financial reportingor in other factors, which could significantly affect internal controls overfinancial reporting.

 

 

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**PART II****- OTHER INFORMATION**

 

Item 1.    Legal Proceedings

 

                SeeNote 6 to the Consolidated Financial Statements under Part I - Item 1.

 

Item 2.    Changes in Securities

 

During the quarterly period ended September 30, 2004,the Company sold and issued two million shares of its common stock in a privateplacement to 11 unaffiliated institutional investors for $4.00 per share. Theissuance of these securities was deemed to be exempt from registration underSection 4(2) of the Securities Act of 1933 as a transaction by an issuer notinvolving a public offering. The offereesand purchasers were institutional investors who represented that they werepurchasing the shares for investment purposes and acknowledged that thecertificates in respect of the shares would be affixed with a restrictivelegend.

 

Item 6.    Exhibits 

(a)           Exhibits:

 

Filed herewith

 

31.1         Certification of Chief ExecutiveOfficer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2         Certification of Chief FinancialOfficer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1         Certification of Chief Executive Officerof Tipperary Corporation Pursuant to 18 U.S.C. §1350.

 

32.2         Certification of Chief FinancialOfficer of Tipperary Corporation Pursuant to 18 U.S.C. §1350.

 

The other exhibitsof the Company are incorporated herein by reference to the exhibit list in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   |              | Tipperary Corporation |
|--------|-------------------|-----------------------|
|   |              | Registrant            |
|   |              |                  |   |
|   |              |                  |   |
| Date:  | November 15, 2004 | By:                   | /s/ David L. Bradshaw |
|   |              |                  | David L. Bradshaw, President, Chief Executive  Officer and Chairman of the Board of Directors |
|   |              |                  |   |
|   |              |                  |   |
| Date:  | November 15, 2004 | By:                   | /s/ Joseph B. Feiten |
|   |              |                  | Joseph B. Feiten, Chief Financial Officer and Principal  Accounting Officer |
|   |              |                  |   |

 

 

 

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**EXHIBIT INDEX**

 

31.1         Certification of Chief ExecutiveOfficer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2         Certification of Chief FinancialOfficer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1         Certification of Chief ExecutiveOfficer of Tipperary Corporation Pursuant to 18 U.S.C. §1350.

 

32.2         Certification of Chief FinancialOfficer of Tipperary Corporation Pursuant to 18 U.S.C. §1350.

 

 

 

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