**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

# ** **

# **FORM10-Q**

 
| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                        |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                          |
|       | **For the quarterly period ended  March 31, 2004**                                                                                                                                                                                                                                                                                                                       |
|       |                                                                                                                                                                                                                                                                                                                                                                          |
| **OR**     |
|       |                                                                                                                                                                                                                                                                                                                                                                          |
| **o**      | **TRANSITION  REPORT 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 registrantas specified in its charter)

 

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

 

**(303) 293-9379**

(Issuer’s telephonenumber)

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý      No  o

 

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

Yes  o      No  ý

 

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

 

| **Class**                     |   | **Outstanding at May 11, 2004** |
|-------------------------------|--------|---------------------------------|
| Common Stock, $.02 par  value |   | 39,326,489 shares               |

 

 

----

 

**TIPPERARY CORPORATION AND SUBSIDIARIES**

 

Index to Form 10-Q

 
| PART I.  FINANCIAL INFORMATION |                                                                                        |
|-------------------------------------|---------------------------------------------------------------------------------------------|
|                                |                                                                                        |   |
| Item 1.                             | Financial Statements                                                                        |   |
|                                |                                                                                        |   |
|                                | Consolidated Balance Sheets  March 31, 2004 and December 31, 2003                           |   |
|                                |                                                                                        |   |
|                                | Consolidated  Statements of Operations  Three months ended March 31, 2004 and 2003          |   |
|                                |                                                                                        |   |
|                                | Consolidated  Statements of Cash Flows  Three months ended March 31, 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 - FINANCIALINFORMATION**

 

**Item1.  Financial Statements**

 

**TIPPERARY CORPORATION ANDSUBSIDIARIES**

Consolidated BalanceSheets

($ in thousandsexcept per share data)

(unaudited)

 
|                                                                                                                                                                                                                   |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                   |   |                |    |                    |   |
| ASSETS                                                                                                                                                                                                                 |   |                |    |                    |   |
| Current assets:                                                                                                                                                                                                        |   |                |    |                    |   |
| Cash and cash  equivalents                                                                                                                                                                                             |   | $                   | 2,309   |                    | $      | 2,996 |   |
| Receivables                                                                                                                                                                                                            |   | 1,662               |    | 1,585                   |   |
| Other current  assets                                                                                                                                                                                                  |   | 208                 |    | 344                     |   |
| Total current  assets                                                                                                                                                                                                  |   | 4,179               |    | 4,925                   |   |
|                                                                                                                                                                                                                   |   |                |    |                    |   |
| Property, plant  and equipment, at cost:                                                                                                                                                                               |   |                |    |                    |   |
| Oil and gas  properties, full cost method                                                                                                                                                                              |   | 125,700             |    | 120,703                 |   |
| Other property  and equipment                                                                                                                                                                                          |   | 4,598               |    | 4,431                   |   |
|                                                                                                                                                                                                                   |   | 130,298             |    | 125,134                 |   |
|                                                                                                                                                                                                                   |   |                |    |                    |   |
| Less accumulated  depreciation, depletion and amortization                                                                                                                                                             |   | (8,464              | )       | (8,078                  | )      |
| Property, plant  and equipment, net                                                                                                                                                                                    |   | 121,834             |    | 117,056                 |   |
|                                                                                                                                                                                                                   |   |                |    |                    |   |
| Deferred loan  costs                                                                                                                                                                                                   |   | 1,557               |    | 1,140                   |   |
| Other noncurrent  assets                                                                                                                                                                                               |   | 494                 |    | 487                     |   |
|                                                                                                                                                                                                                   |   | $                   | 128,064 |                    | $      | 123,608 |   |
|                                                                                                                                                                                                                   |   |                |    |                    |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                             |   |                |    |                    |   |
| Current  liabilities:                                                                                                                                                                                                  |   |                |    |                    |   |
| Accounts payable                                                                                                                                                                                                       |   | $                   | 2,713   |                    | $      | 1,883 |   |
| Accrued  liabilities                                                                                                                                                                                                   |   | 1,745               |    | 2,329                   |   |
| Royalties  payable                                                                                                                                                                                                     |   | 71                  |    | 75                      |   |
| Total current  liabilities                                                                                                                                                                                             |   | 4,529               |    | 4,287                   |   |
|                                                                                                                                                                                                                   |   |                |    |                    |   |
| Long-term debt                                                                                                                                                                                                         |   | 82,301              |    | 74,126                  |   |
| Long-term asset  retirement obligation                                                                                                                                                                                 |   | 277                 |    | 268                     |   |
| Commitments and  contingencies (Note 4)                                                                                                                                                                                |   |                |    |                    |   |
| Minority  interest                                                                                                                                                                                                     |   | 63                  |    | 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;  39,331,087 and 39,231,087 shares issued, and 39,321,489 and 39,221,489 shares  outstanding as of March 31, 2004 and December 31, 2003, respectively |   | 787                 |    | 785                     |   |
| Capital in  excess of par value                                                                                                                                                                                        |   | 150,299             |    | 149,970                 |   |
| Accumulated  deficit                                                                                                                                                                                                   |   | (117,741            | )       | (113,315                | )      |
| Accumulated  other comprehensive income                                                                                                                                                                                |   | 7,574               |    | 7,094                   |   |
| Treasury stock,  at cost; 9,598 shares                                                                                                                                                                                 |   | (25                 | )       | (25                     | )      |
| Total  stockholders’ equity                                                                                                                                                                                       |   | 40,894              |    | 44,509                  |   |
|                                                                                                                                                                                                                   |   | $                   | 128,064 |                    | $      | 123,608 |   |

# ** **

See accompanying notes toConsolidated Financial Statements.

 

1

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# **TIPPERARY CORPORATION AND SUBSIDIARIES**

Consolidated Statements of Operations

(in thousands,except per share data)

(unaudited)

 
|                                                                      |   | **Three  months ended  March 31,** |   |
|---------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                      |   | **2004**                           |   | **2003** |   |
|                                                                      |   |                               |   |   |   |
| Revenues                                                                  |   | $                                  | 1,168  |   | $ | 1,341 |   |
|                                                                      |   |                               |   |   |   |
| Costs and  expenses:                                                      |   |                               |   |   |   |
| Operating                                                                 |   | 1,394                              |   | 957 |   |
| Depreciation,  depletion and amortization                                 |   | 251                                |   | 308 |   |
| Asset retirement  obligation accretion                                    |   | 9                                  |   | 6 |   |
| Impairment of  oil and gas properties                                     |   | 150                                |   | — |   |
| General and  administrative                                               |   | 2,044                              |   | 1,521 |   |
| Total costs and  expenses                                                 |   | 3,848                              |   | 2,792 |   |
| Operating loss                                                            |   | (2,680                             | )      | (1,451 | ) |
|                                                                      |   |                               |   |   |   |
| Other income  (expense):                                                  |   |                               |   |   |   |
| Interest and  other income                                                |   | 38                                 |   | 7 |   |
| Interest expense                                                          |   | (2,136                             | )      | (1,305 | ) |
| Foreign currency  exchange loss                                           |   | (3                                 | )      | (4 | ) |
| Total other  expense                                                      |   | (2,101                             | )      | (1,302 | ) |
| Loss before  income taxes                                                 |   | (4,781                             | )      | (2,753 | ) |
|                                                                      |   |                               |   |   |   |
| Income tax  benefit                                                       |   | —                             |   | — |   |
| Loss before  minority interest and cumulative effect of accounting change |   | (4,781                             | )      | (2,753 | ) |
|                                                                      |   |                               |   |   |   |
| Minority  interest in loss of subsidiary                                  |   | 355                                |   | 84 |   |
| Loss before  cumulative effect of accounting change                       |   | (4,426                             | )      | (2,669 | ) |
|                                                                      |   |                               |   |   |   |
| Cumulative  effect of accounting change                                   |   | —                             |   | (46 | ) |
| Net loss                                                                  |   | $                                  | (4,426 | ) | $ | (2,715 | ) |
|                                                                      |   |                               |   |   |   |
| Net loss per  share basic and diluted                                     |   | $                                  | (.11   | ) | $ | (.07 | ) |
| Weighted average  shares outstanding basic and diluted                    |   | 39,321                             |   | 39,221 |   |

 

See accompanying notes toConsolidated Financial Statements.

 

2

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# **TIPPERARY CORPORATION AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 
|                                                                         |   | **Three  months ended  March 31,** |   |
|------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                         |   | **2004**                           |   | **2003** |   |
|                                                                         |   |                               |   |   |   |
| Cash flows from  operating activities:                                       |   |                               |   |   |   |
| Net loss                                                                     |   | $                                  | (4,426 | ) | $ | (2,715 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                               |   |   |   |
| Depreciation,  depletion and amortization                                    |   | 251                                |   | 308 |   |
| Amortization of  deferred loan costs                                         |   | 127                                |   | 353 |   |
| Amortization of  deferred compensation                                       |   | 56                                 |   | 3 |   |
| Minority  interest in loss of subsidiary                                     |   | (355                               | )      | (84 | ) |
| Asset retirement  obligation accretion                                       |   | 9                                  |   | 6 |   |
| Cumulative effect  of accounting change                                      |   | —                             |   | 46 |   |
| Impairment of  oil and gas properties                                        |   | 150                                |   | — |   |
| Changes in  current assets and current liabilities:                          |   |                               |   |   |   |
| Decrease  (increase) in receivables                                          |   | 182                                |   | (83 | ) |
| Decrease in  other current assets                                            |   | 131                                |   | 187 |   |
| Increase in accounts  payable and accrued liabilities                        |   | 169                                |   | 259 |   |
| Decrease in  royalties payable                                               |   | (4                                 | )      | (21 | ) |
| Net cash used in  operating activities                                       |   | (3,710                             | )      | (1,741 | ) |
|                                                                         |   |                               |   |   |   |
| Cash flows from  investing activities:                                       |   |                               |   |   |   |
| Capital  expenditures                                                        |   | (4,209                             | )      | (4,553 | ) |
| Net cash used in  investing activities                                       |   | (4,209                             | )      | (4,553 | ) |
|                                                                         |   |                               |   |   |   |
| Cash flows from  financing activities:                                       |   |                               |   |   |   |
| Proceeds from  issuance of common stock on exercise of options               |   | 275                                |   | — |   |
| Proceeds from  borrowings                                                    |   | 7,568                              |   | 4,700 |   |
| Principal  repayments                                                        |   | —                             |   | (120 | ) |
| Decrease in  restricted cash                                                 |   | —                             |   | 359 |   |
| Payments for  deferred loan costs                                            |   | (495                               | )      | (12 | ) |
| Net cash  provided by financing activities                                   |   | 7,348                              |   | 4,927 |   |
|                                                                         |   |                               |   |   |   |
| Effect of  exchange rate changes on cash                                     |   | (116                               | )      | — |   |
|                                                                         |   |                               |   |   |   |
| Net decrease in  cash and cash equivalents                                   |   | (687                               | )      | (1,367 | ) |
|                                                                         |   |                               |   |   |   |
| Cash and cash  equivalents at beginning of period                            |   | 2,996                              |   | 1,725 |   |
|                                                                         |   |                               |   |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                                  | 2,309  |   | $ | 358 |   |

 

See accompanying notes toConsolidated Financial Statements.

 

3

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**TIPPERARY CORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**

 

## Basis of Presentation

 

In the opinion of management, the accompanying unauditedConsolidated Financial Statements reflect all adjustments, consisting only ofnormal recurring adjustments, which are necessary for a fair presentation ofthe financial position of Tipperary Corporation and its subsidiaries (the“Company”) at March 31, 2004, and the results of its operations for thethree-month periods ended March 31, 2004 and 2003 and their cash flows for thethree-month periods ended March 31, 2004 and 2003. The Consolidated FinancialStatements include the accounts of Tipperary Corporation and its wholly-ownedsubsidiaries, Tipperary Oil and Gas Corporation and Burro Pipeline Corporation,and its 90%-owned subsidiary, Tipperary Oil and Gas (Australia) Pty Ltd(“TOGA”).  All intercompany balanceshave been eliminated.  The accountingpolicies followed by the Company are included in Note 1 to the ConsolidatedFinancial Statements in its Annual Report on Form 10-K for the year endedDecember 31, 2003.  These financialstatements should be read in conjunction with the Form 10-K.

 

Impact of New Accounting Pronouncements

 

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued InterpretationNo. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) whichrequires the consolidation of variable interest entities, as defined. InDecember 2003, the FASB issued Interpretation No. 46R, “Consolidationof Variable Interest Entities—An Interpretation of ARB 51 (RevisedDecember 2003)” (“FIN 46R”), which also addresses consolidation bybusiness enterprises of variable interest entities. The adoption of FIN 46 andFIN 46R did not have a material effect on the Company’s Consolidated FinancialStatements.

 

## Asset Retirement Obligations

 

On January 1, 2003, the Company adopted SFAS No. 143, “Accounting forAsset Retirement Obligations” (“SFAS 143”), which provides accountingrequirements for retirement obligations associated with tangible long-livedassets, including the timing of liability recognition, initial measurement ofthe liability, allocation of asset retirement costs to expense, subsequentmeasurement of the liability, and financial statement disclosures.  SFAS 143 requires that asset retirementcosts be capitalized along with the cost of the related long-lived asset.  The asset retirement costs should then beallocated to expense using a systematic and rational method.  The Company has determined that it has assetretirement costs associated with wells drilled in Australia and the UnitedStates.  The Company also expects toincur retirement costs to dismantle two gas compression plant facilitieslocated in Australia.  The followingtable sets forth the changes in the asset retirement obligations:

 
| **(in  thousands)**                                         |   |   |   |
|-------------------------------------------------------------|--------|--------|--------|
| Beginning asset  retirement obligation at December 31, 2003 |   | $      | 268    |   |
| Asset retirement  obligation accretion                      |   | 9      |   |
| Asset retirement  obligation additions                      |   | — |   |
| Payments on  asset retirement obligation                    |   | — |   |
| Ending asset  retirement obligation at March 31, 2004  |   | $      | 277    |   |

 

4

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Business Combinations andGoodwill and Intangible Assets

 

In June 2001, theFASB issued SFAS No. 141, “Business Combinations” (“SFAS 141”) andSFAS No. 142, “Goodwill and Intangible Assets” (“SFAS 142”).SFAS 141 and 142 became effective on July 1, 2001 and January 1,2002, respectively. SFAS 141 requires all business combinations initiatedafter June 30, 2001 to be accounted for using the purchase method.Additionally, SFAS 141 requires companies to disaggregate and reportseparately from goodwill certain intangible assets. SFAS 142 establishesnew guidelines for accounting for goodwill and other intangible assets. UnderSFAS 142, goodwill and certain other intangible assets are not amortized,but rather are reviewed annually for impairment. One interpretation that wasconsidered relative to these standards was that oil and gas mineral rights heldunder lease and other contractual arrangements representing the right toextract such reserves for both undeveloped and developed leaseholds should beclassified separately from oil and gas properties, as intangible assets on theCompany’s consolidated balance sheets. In April 2004, the Financial Accounting Standards Board amended SFASNos. 141 and 142 and clarified the interpretation by defining mineral rights,such as oil and gas mineral rights, as tangible assets.  Accordingly, the guidelines for accountingfor intangible assets as provided in SFAS 142 would not apply to oil and gasmineral rights.  In accordance with thisnew guideline, the Company will continue to classify its contractual rights toextract oil and gas reserves as tangible oil and gas properties.

 

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 March 31, 2004, theCompany had two stock-based employee option plans and warrants issued todirectors and employees.  The Companyhas chosen to continue to account for stock-based compensation using theintrinsic value 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 cost for fixed stock options andwarrants is measured as the excess, if any, of the quoted market price of theCompany’s stock at the date of the grant over the amount an employee must payto acquire the stock.  Pro formadisclosures as if the Company had adopted the cost recognition provisions of SFASNos. 148 and 123 are presented below:

 
|                                                                                             |   | **Three  Months Ended March 31,**         |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                             |   | **2004**                                  |   | **2003** |   |
|                                                                                             |   | **(in thousands, except per share data)** |   |
|                                                                                             |   |                                      |   |   |   |
| Net loss, as  reported                                                                           |   | $                                         | (4,426 | ) | $ | (2,715 | ) |
| 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 |   | (16                                       | )      | (37 | ) |
|                                                                                             |   |                                      |   |   |   |
| Pro forma net  loss                                                                              |   | $                                         | (4,442 | ) | $ | (2,752 | ) |
| Loss per share                                                                                   |   |                                      |   |   |   |
| Basic and  diluted—as reported                                                              |   | $                                         | (.11   | ) | $ | (.07 | ) |
| Basic and  diluted—pro forma                                                                |   | $                                         | (.11   | ) | $ | (.07 | ) |

 

5

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RevenueRecognition and Gas Imbalances

 

The Company recognizesnatural gas and oil revenue from its interests in producing wells as naturalgas and oil are produced and sold from those wells. The Company uses the salesmethod of accounting for these revenues. Under the sales method, revenues arerecognized based on actual volumes sold to purchasers. With natural gasproduction operations, joint owners may take more or less than the productionvolumes entitled to them under the governing operating agreement. The Companyrecords a natural gas imbalance in other liabilities if its excess takes ofnatural gas exceed its remaining proved reserves for the property.  As of March 31, 2004, the Company had takenand sold more than its entitled share of natural gas volumes produced from theComet Ridge project, and was overproduced by approximately 1,669 MMcf (net ofroyalties). Based on the March 31, 2004 average sales price of $1.75 perMcf, this overproduction represents $2.9 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.

 

ForeignCurrency

 

The functional currencyof the Company’s Australian subsidiary, TOGA, is the Australian dollar. As thefunctional currency is the local currency, the current rate method is used totranslate Australian dollar financial statements into U.S. dollars for TOGA.All assets and liabilities are translated using current exchange rates, whilerevenues and expenses are translated at rates in existence when thetransactions occurred. The translation adjustment that results from usingvarying rates in the translation process is reported as a component of othercomprehensive income (loss) and is accumulated and reported as a separatecomponent of stockholders’ equity in the Company’s Consolidated FinancialStatements.

 

The cumulative foreigncurrency translation adjustment (net of $0 tax) as of March 31, 2004 andDecember 31, 2003 totaled $7.6 million and $7.1 million,respectively.

 

Comprehensive Loss

 

The following table sets forth the comprehensive loss for the threemonths ended March 31, 2004 and 2003 (in thousands):

 
|                                     |   | **2004** |   | **2003** |   |
|------------------------------------------|--------|----------|--------|----------|--------|
| Net loss                                 |   | $        | (4,426 | )        | $      | (2,715 | ) |
| Other  comprehensive income:             |   |     |   |     |   |
| Foreign currency  translation adjustment |   | 480      |   | —   |   |
| Comprehensive  loss                      |   | $        | (3,946 | )        | $      | (2,715 | ) |

 

#### Liquidityand Operations

 

The Company anticipates funding operations and capital expenditures inAustralia for the remainder of 2004 using (a) a commitment from Slough EstatesUSA Inc. ("Slough"), the Company’s majority shareholder, to providefunds for working capital, board-approved capital expenditures and operationsuntil such time as (b) funds from a $150 million AUD (approximately $114million USD) project financing facility becomes available.  The Company anticipates the projectfinancing facility will close in the second quarter of 2004.

 

The Company anticipates funding operations and capital expenditures inthe United States for 2004 using (a) cash on hand at March 31, 2004 and (b) acommitment from Slough to provide funds for working capital, board-approvedcapital expenditures and operations through April 2005.

 

In order to fund discretionary domestic capital expenditures in 2004 inexcess of these cash resources, the Company contemplates that it will requirealternative sources of capital. Potential additional sources of funding may include additional debtfinancings and asset sales.  With thesale of interests in its prospective acreage, the Company expects to generatecash to reduce its investment in individual projects.  However, in the event that sufficient funding cannot be obtained,the Company will be required to curtail planned expenditures and may have tosell additional acreage and/or relinquish acreage.

 

6

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**NOTE 2 -RELATED PARTY TRANSACTIONS**

 

At March 31, 2004,the Company owed Slough and Slough Trading Estates Limited (“STEL”), a UnitedKingdom company which is the parent of Slough, approximately$82.3 million.

 

In December 2003, SloughEstates plc, STEL’s parent, agreed to guarantee a project financing facilityexpected to close in the second quarter of 2004.  As consideration for the guarantee, the Company will pay 1% perannum on the daily outstanding balance of the debt guaranteed.

 

In August 2003, TOGAborrowed $29.7 million ($45 million Australian) from STEL for thesole purpose of paying off a $22 million long-term debt owed TCW AssetManagement Company (“TCW”) and to substantially fund a $7.7 millionrepurchase of the 6% overriding royalty held by TCW on the Company’s CometRidge properties.  The STEL loan bearsinterest at 13% per annum and is due June 2, 2005.  An arrangement fee of $250,000 USD was paid to STEL in connectionwith this loan. The loan’s stated currency is Australian dollars. The U.S.dollar value of the loan principal as of March 31, 2004 was$34.1 million.

 

As of March31, 2004, the Company had two credit facility agreements with STELallowing the Company to borrow on an unsecured basis up to $11.5 millionUSD and $45.0 million AUD for its U.S. and Australian operations,respectively.  As of April 8, 2004, theborrowing limit of the Australian operations credit facility was increased to$50.0 million AUD.  Using borrowingsfrom these credit facilities, the Company substantially funded its operatingand capital needs in the United States and Australia during 2003 and throughthe first quarter of 2004. The Company may repay the loans in whole or in partwithout prepayment penalties. Both credit facilities bear interest at 13% perannum and are due April 2, 2012.  STELmay demand repayment prior to the maturity date provided that STEL gives18-months notice. The Company is limited in taking on any additional thirdparty indebtedness, either secured or unsecured, or making a priority paymentin respect of any obligation without first obtaining written approval from STELso long as the STEL indebtedness exists. In connection with these creditfacilities, the Company paid STEL arrangement fees of $40,000 USD and $100,000AUD, respectively. The U.S. dollar values of the outstanding balances of thesefacilities as of March 31, 2004 were $10.0 million and$34.2 million, respectively.

 

In 2002, the Companyborrowed $4 million from Slough which is evidenced by a note payable thatbears interest at LIBOR plus 3.5% (4.62% as of March 31, 2004) and ispayable in full on April 30, 2005.

 

7

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**NOTE 3 -LOSS PER SHARE**

 

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

 
|                                                                                                                                              |   | **Three  Months Ended March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                              |   | **2004**                          |   | **2003** |   |
| Numerator:                                                                                                                                        |   |                              |   |   |   |
|                                                                                                                                              |   |                              |   |   |   |
| Net loss                                                                                                                                          |   | $                                 | (4,426 | ) | $ | (2,715 | ) |
|                                                                                                                                              |   |                              |   |   |   |
| Denominator:                                                                                                                                      |   |                              |   |   |   |
| Weighted-average  shares outstanding                                                                                                              |   | 39,321                            |   | 39,221 |   |
| Effect of  dilutive securities:                                                                                                                   |   |                              |   |   |   |
| Assumed exercise  of dilutive options and warrants                                                                                                |   | —                            |   | — |   |
| Weighted-average  shares and dilutive potential common shares                                                                                     |   | 39,321                            |   | 39,221 |   |
|                                                                                                                                              |   |                              |   |   |   |
| Basic and  diluted loss per share                                                                                                                 |   | $                                 | (.11   | ) | $ | (.07 | ) |
|                                                                                                                                              |   |                              |   |   |   |
| Potentially  dilutive common stock from the exercise of options and warrants not included  in EPS because the effect would have been antidilutive |   | 1,285                             |   | 75 |   |
|                                                                                                                                              |   |                              |   |   |   |
| Total options  and warrants which could potentially dilute basic EPS in future periods                                                            |   | 3,523                             |   | 3,573 |   |

 

**NOTE 4 -COMMITMENTS AND CONTINGENCIES**

 

The Company, TOGA and twounaffiliated working interest owners are plaintiffs in a lawsuit filed in 1998,styled *Tipperary Corporation and TipperaryOil & Gas (Australia) Pty Ltd v. Tri-Star Petroleum Company,James H. Butler, Sr., and James H. Butler, Jr.*, CauseNo. CV42,265, District Court of Midland County, Texas involving the CometRidge project. The plaintiffs allege, among other matters, that Tri-Star and/orthe 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-Starhas answered the allegations, and filed amended pleadings on April 6, 2004,denying liability and raising a number of affirmative defenses.  Tri-Star also amended its counterclaim toinclude claims for various breaches of the joint operating contract by theCompany and TOGA, other breaches of duties, forfeiture of acreage and unjustenrichment.  Tri-Star has also requestedforeclosure of operator’s liens, modification and reformation of the jointoperating contract.  TOGA has operatedthe project since March 2002, after the court entered its Writ ofTemporary Injunction (the “Injunction”) to enforce the votes of amajority-in-interest of the parties under the joint operating agreement toremove Tri-Star as operator and replace it with TOGA.  All available appeals of the Injunction have been exhausted andTOGA will continue as operator of the Comet Ridge Project at least through theconclusion of a trial on the merits, and thereafter if successful at trial.

 

In June 2002, theDistrict Court ruled as unenforceable the arbitration provisions of theexisting mediation agreement between the parties. The Eighth District Court ofAppeals affirmed the action of the District Court, and on April 9, 2004, theTexas Supreme Court denied Tri-Star’s Petition for Review and Petition for Writof Mandamus.  With the exception of aMotion for Reconsideration which may be filed, all available appeals of thearbitration issues have been exhausted. The case is set for trial beginning the week of September 27, 2004.Both the Company and Tri-Star have filed motions for summary judgment whichwould be dispositive of some pending claims. On May 7, 2004, Tri-Star and the individual defendants filed a motion torecuse or disqualify the presiding judge of the Midland Court which wasdenied.  In accordance with Texas law,the motion was assigned to another judge for hearing, which is set for May 19,2004.  The presiding judge may not ruleon any pending matters until the recusal motion is resolved.  It is not yet known whether the recusalmotion will delay the hearing on the summary judgment motions.

 

In August 2003, theDistrict Court heard the Company’s Motion to Compel Compliance with AmendedWrit of Temporary Injunction. On October 1, 2003, the Court signed anOrder finding that Tri-Star willfully disobeyed the Injunction, orderingTri-Star to cooperate with the Operator and, among other things, to execute apower of attorney to allow the Company to deal directly with the Department ofNatural Resources and Mines in Queensland, and the surface owners, on matters

 

8

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pertaining to the Comet RidgeProject. Tri-Star filed objections to the power of attorney. InJanuary 2004, the Court conducted a show cause hearing to determinewhether sanctions for Tri-Star’s past violations of the Injunction, andconditional sanctions to deter future violations, should be imposed and heard aTri-Star motion to increase the amount of the bond securing the injunction from$500,000 to $1.0 million and objections to the power of attorney. OnMarch 8, 2004, the Court ruled that the bond will not be increased and deniedTri-Star’s objections to the power of attorney. The Court has not yet ruled onsanctions against Tri-Star.  Tri-Starunsuccessfully appealed the October ruling to the Eighth District Court ofAppeals, and then filed a Petition for Review and Petition for Writ of Mandamusin the Texas Supreme Court.  The Companyfiled response briefs and requested sanctions against Tri-Star.  Hearing the case is discretionary in theTexas Supreme Court, and the Court has made no decision, at this time, onwhether to accept review.

 

**NOTE 5 -OPERATIONS BY GEOGRAPHIC AREA**

 

Segment information has been prepared in accordance with SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information.”  The Company has two geographic reportingsegments within the oil and gas exploration, development and productionindustry, Australia and the United States. General and administrative expense, interest expense and interest andother income are not allocated to segments. The segment data presented below was prepared on the same basis as theConsolidated Financial Statements. Reportable business segment information as of March 31, 2004 and 2003,and for the three months ended March 31, 2004 and 2003 is as follows (inthousands):

 

**As ofand for the three months ended March 31, 2004**

** **
|                                |   | **Gas and  Oil Operations** |   | **Non-  Segmented  Items(1)** |      |    |   |
|-------------------------------------|--------|-----------------------------|--------|-------------------------------|-----------|---------|--------|
|                                |   |                        |   | **United  States**            |      |    |   |   |   |   |
|                                |   | **Australia**               |   |                          | **Total** |    |   | **Total** |   |
| Revenues                            |   | $                           | 1,166  |                          | $         | 2       |   | $ | 1,168 |   | $ | — |   | $ | 1,168 |   |
| Loss before  income taxes           |   | (215                        | )      | (407                          | )         | (622    | )      | (4,159 | ) | (4,781 | ) |
| Property, plant  and equipment, net |   | 113,903                     |   | 7,510                         |      | 121,413 |   | 421 |   | 121,834 |   |
|                                     |        |                             |        |                               |           |         |        |  |  |  |  |  |  |  |  |  |

 

----

(1)               Loss before incometaxes reconciling items includes $2.0 million of general and administrativeexpenses, $14,000 of corporate depreciation and $2.1 million of interestexpense.  Property, plant and equipment,net, includes $421,000 of corporate office equipment, computer hardware andsoftware.

 

**As of and for the three months endedMarch 31, 2003**

 
|                                |   | **Gas and  Oil Operations** |   | **Non-  Segmented  Items(1)** |      |   |   |
|-------------------------------------|--------|-----------------------------|--------|-------------------------------|-----------|--------|--------|
|                                |   |                        |   | **United  States**            |      |   |   |   |   |   |
|                                |   | **Australia**               |   |                          | **Total** |   |   | **Total** |   |
|                                |   |                        |   |                          |      |   |   |   |   |   |   |
| Revenues                            |   | $                           | 1,338  |                          | $         | 3      |   | $ | 1,341 |   | $ | — |   | $ | 1,341 |   |
| Income (loss)  before income taxes  |   | 245                         |   | (163                          | )         | 82     |   | (2,835 | ) | (2,753 | ) |
| Property, plant  and equipment, net |   | 68,981                      |   | 8,745                         |      | 77,726 |   | 392 |   | 78,118 |   |
|                                     |        |                             |        |                               |           |        |        |  |  |  |  |  |  |  |  |  |

 

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(1)               Loss before incometaxes reconciling items includes $1.5 million of general and administrativeexpenses, $12,000 of corporate depreciation and $1.3 million of interestexpense.  Property, plant and equipment,net, includes $392,000 of corporate office equipment, computer hardware andsoftware.

 

9

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**NOTE6- PROPERTY, PLANT AND EQUIPMENT**

 

A summary ofproperty, plant and equipment follows:

 

|                                                       |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                       |   | **(in thousands)**  |    |
| Evaluated oil and  gas properties:                         |   |                |    |                    |   |
| Australian  properties                                     |   | $                   | 107,220 |                    | $      | 105,264 |   |
| Domestic  properties                                       |   | —              |    | —                  |   |
| Unevaluated oil  and gas properties:                       |   |                |    |                    |   |
| Australian  properties                                     |   | 10,970              |    | 9,221                   |   |
| Domestic  properties                                       |   | 7,510               |    | 6,218                   |   |
| Oil and gas  properties                                    |   | 125,700             |    | 120,703                 |   |
| Other property  and equipment                              |   | 4,598               |    | 4,431                   |   |
|                                                       |   | 130,298             |    | 125,134                 |   |
| Less accumulated  depreciation, depletion and amortization |   | (8,464              | )       | (8,078                  | )      |
| Property, plant  and equipment, net                        |   | $                   | 121,834 |                    | $      | 117,056 |   |

 

**NOTE7 – STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION**

** **

|                                               |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------|--------|-----------------------------------------|--------|
|                                               |   | **2004**                                |   | **2003** |   |
|                                               |   | **(in  thousands)**                     |   |
|                                               |   |                                    |   |   |   |
| Cash paid during  the period for interest          |   | $                                       | 2,418  |   | $ | 685 |   |
| Non-cash  investing and financing activities— |   |                                    |   |   |   |
| Net increase in  payables for capital expenditures |   | $                                       | 177    |   | — |   |
|                                                    |        |                                         |        |  |  |  |  |

 

10

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**Item2.****           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 comparable words are intended toidentify such forward-looking statements. In addition, all statements otherthan statements of historical facts that address activities that the Companyexpects or anticipates will or may occur in the future are forward-lookingstatements.  These statements are notguarantees of future performance and involve certain risks, uncertainties andassumptions that are difficult to predict with regard to timing, extent,likelihood and degree of occurrence.  Therefore,actual results and outcomes may materially differ from what may be expressed orforecasted in such forward-looking statements. Furthermore, the Companyundertakes no obligation to update, amend or clarify forward-lookingstatements, whether as a result of new information, future events or otherwise.Readers are encouraged to read the SEC filings of the Company, particularly itsForm 10-K for the year ended December 31, 2003, for meaningful cautionarylanguage and discussion of risk factors disclosing why actual results may varymaterially 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 March 31, 2004, the Company owned a 73% undivided capitalbearing interest in the Comet Ridge project 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.  Nearby the Comet Ridge project, the Companyholds a 100% interest of approximately 77,000 acres comprising ATP 655.

 

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 ofexploration costs as determined by Queensland’s Department of Natural Resourcesand Mines (“Queensland DNRM”) and is subject to renewal every four years. Oncea petroleum resource is identified, the holder of an ATP may apply for a petroleumlease, which provides the lessee with the ability to conduct additionalexploration, development and production activities.

 

The Company is in correspondence with the QueenslandDNRM about surface access issues on portions of ATP 526 and as a consequence isnot certain of its 2004 work commitment for ATPs 526 and 653.  The ATP 526 expenditure requirements net tothe Company’s interest will be $3 million or less for a drilling program and $2million or less for a seismic program. The ATP 653 expenditure requirements net to the Company’s interest willbe $3 million or less for a drilling program. During 2004, ATPs 655 and 745 have expenditure requirements totalingapproximately $1.4 million net to the Company’s interest.  The Company expects to meet theserequirements by conducting seismic operations and exploratory drilling. ATPs526, 653, 655 and 745 have initial terms expiring on October 31, 2004,  September 30, 2006, October 31, 2007 andOctober 31, 2007, respectively.  Uponexpiration of an ATP, the stated policy of the Queensland DNRM allows the ATPholder to renew the ATP for an additional four year exploratory period andgenerally requires the holder to relinquish a 20 percent portion of ATP acreagenot held by a petroleum lease.  TheCompany is currently negotiating with the Queensland DNRM regarding the amountof ATP 526 acreage that will be subject to the relinquishment provisions as itsterm expires October 31, 2004.

 

11

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The Company’s gas marketing in eastern Australia isfocused currently on obtaining long-term gas sales agreements that provide fiveto 15 years of firm sales typically starting in 2006 to 2008.  Secondary, short-term sales contracts for 2004and 2005 are also being pursued.  Salesgrowth is estimated by the Company to be limited in the near term, escalatingto 17 Bcf net or more per annum in 2008. The Company anticipates spending approximately $30 million over the nextthree years on development drilling and expansion of delivery facilities toincrease the Company’s annual sales deliverability to approximately 24 Bcf netby 2008.

 

The followingtable summarizes field development progress on the Comet Ridge project as ofMarch 31, 2004.  In December 2003, theCompany began using its second compression plant facility, which increased thefield’s gas compression capacity to approximately 38 million cubic feet(“MMcf”) per day.

 

**Comet Ridge Operations Review**

** **

|                               |   | **March 31,  2004** |   |
|------------------------------------|--------|--------------------------|--------|
| **Well Status (Number of Wells)**  |   |                     |   |
| Selling                            |   | 46                       |   |
| Dewatering or  temporarily shut-in |   | 32                       |   |
| Producing                          |   | 78                       |   |
| Being evaluated                    |   | 19                       |   |
| To be plugged  and abandoned       |   | 2                        |   |
| Plugged and  abandoned             |   | 3                        |   |
| Total drilled                      |   | 102                      |   |
|                               |   |                     |   |
| **Gross Daily Volumes (MMcf)**     |   |                     |   |
| Sold                               |   | 10                       |   |
| Flared                             |   | 6                        |   |
| Used for  compression fuel         |   | 2                        |   |
| Produced                           |   | 18                       |   |

 

The Company drilled two exploratory wells on the CometRidge project during the first quarter of 2004.  The 2004 drilling was substantially funded with borrowings fromSlough Trading Estates Limited (“STEL”). The Company is actively pursuing short-term gas contracts to reduce theamount of flared gas.

 

During the first quarter of 2004, 100% of theCompany’s gas sales in Australia were under a five-year contract effective June1, 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.  In December 2002, the Company signed a gassupply term sheet 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 Australianintegrated energy company which, through subsidiaries, owns nearly 24% of theComet Ridge project.

 

Effective March 31, 2004, the Company and Queensland Fertilizer AssetsLimited (“QFAL”) extended until September 30, 2004 the Company’s gas salesagreement with QFAL to supply 210 Bcf of gas to QFAL over a 20-year period beginningin early 2007 to a fertilizer plant QFAL is proposing to construct insoutheastern Queensland.

 

12

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***United States***

 

*LayCreek* — 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 currently evaluating the gas and water productionfrom two five-well pilot programs drilled in 2001 and 2002 in order todetermine economic viability of the production.  The Company and Koch drilled four additional pilot wellsoffsetting one of the five-well pilot programs during the period from December2003 through February 2004 at a cost to the Company of $1.0 million.  The Company expects the four new wells willbegin dewatering in late May.

 

*Frenchman*— The Company holds a 25% interest in the Frenchman prospect in easternColorado.  Total gross acreage in theprospect is approximately 162,000 acres. Kerr-McGee Rocky Mountain Corporation (“Kerr-McGee”) holds the remaining75% interest and is the operator of the prospect.  During 2003, five wells were drilled on the Frenchmanprospect.  Three of these wells werecompleted and two were plugged and abandoned. In early 2004, the Company drilled two additional Frenchman wells inwhich Kerr-McGee elected not to participate. The Company believes one of these 100% wells will be a commercialproducer and the Company will earn 100% of offsetting drill sites around thewell bore as set forth in the operating agreement the Company has withKerr-McGee.  The Company plugged andabandoned the other well drilled.  Inthe first quarter of 2004, the Company recorded an asset impairment expense of$150,000 related to unsuccessful exploration costs incurred on wells on theFrenchman prospect.  The Company andKerr-McGee are evaluating the economics of connecting the successfullycompleted wells to nearby pipelines.

 

*Republican*— The Company holds a 20% interest in the Republican prospect in easternColorado.  Total gross acreage in theprospect is approximately 170,000 acres. Kerr-McGee holds the remaining 80% interest and is the operator of theprospect.  Three wells were drilled onthe Republican prospect in March and April of 2004, and the economics ofconnecting these wells to nearby pipelines are being evaluated.  At least seven wells on the Republican prospectare expected to be drilled in 2004 at a cost to the Company of approximately$280,000.

 

*Stateline*— The Company holds a 25% interest in the Stateline prospect in westernNebraska.  Total gross acreage in theprospect is approximately 120,000 acres. Lance Oil & Gas Company, Inc. (“Lance”) holds the remaining 75%interest and is the operator of the prospect. In the first half of 2004, preliminary seismic operations are beingconducted at a cost to the Company of approximately $100,000.  Further seismic operations and exploratorydrilling may be conducted if the results of the current seismic survey areencouraging.

 

*SandHill* — During late 2003, the Company acquired leaseholdacreage in western Nebraska totaling approximately 51,000 gross acres, which isreferred to as the Sand Hill prospect. This acreage is located in the vicinity of the Company’s Frenchman,Republican and Stateline prospects.  TheCompany is actively marketing the Sand Hill prospect and plans to sell aninterest to recover its investment and retain an interest in this acreage.

 

*NineMile* — 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 is the operator of the prospect. The prospect comprises approximately 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, Liquidity and CapitalResources***

 

The Company had cash and cash equivalents of $2.3 million as of March31, 2004, compared to approximately $3.0 million as of December 31, 2003.  The Company has funded operations and capitalexpenditures for the three months ended March 31, 2004, using primarily (a)$3.0 million of cash on hand at December 31, 2003 and (b) borrowings from STEL.

 

13

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The Company anticipates funding operations and capital expenditures inAustralia for the remainder of 2004 using (a) a commitment from Slough toprovide funds for working capital, board-approved capital expenditures andoperations until such time as (b) funds from a $150 million AUD (approximately $114million USD) project financing becomes available.  The Company anticipates the project financing facility will closein the second quarter of 2004.

 

The Company anticipates funding operations andcapital expenditures in the United States for 2004 using (a) cash on hand atMarch 31, 2004 and (b) a commitment from Slough to provide funds for workingcapital, board-approved capital expenditures and operations through April 2005.

 

In order to fund discretionary capital expenditures in 2004 in excessof these cash resources, the Company contemplates that it will requirealternative sources of capital. Potential additional sources of funding may include additional debtfinancings and asset sales.  With thesale of interests in its prospective acreage, the Company expects to generatecash to reduce its investment in individual projects.  However, in the event that sufficient funding cannot be obtained,the Company will be required to curtail planned expenditures and may have tosell additional acreage and/or relinquish acreage.

 

Net cash used by operating activities was $3.7 million during the threemonths ended March 31, 2004, compared to $1.7 million of cash used during thesame period last year.  The increase innet cash used for operations in the first quarter of 2004 compared with thesame period in 2003 resulted primarily from (a)  lower gas revenues (b) higher interest expense on debt used tofund property acquisition, exploration and development and (c) higher operatingcosts and general and administrative expenses.

 

The table below provides an analysis of capital expenditures of $4.2million during the three months ended March 31, 2004.

 

**Capital Expenditures Activity**

**(in thousands)**

 
| Australia:                            |   |   |   |
|---------------------------------------|--------|--------|--------|
| Comet Ridge  drilling and completion  |   | $      | 2,201  |   |
| Comet Ridge  facilities and equipment |   | 155    |   |
| Other                                 |   | 409    |   |
| Domestic:                             |   |   |   |
| Leasehold  acquisitions               |   | 441    |   |
| Lay Creek  drilling and completion    |   | 714    |   |
| Other drilling  and completion        |   | 289    |   |
|                                  |   |   |   |
| Total                                 |   | $      | 4,209  |   |

 

Included within the first quarter 2004 capital spending was $421,000 ofcapitalized interest expense associated with the Company’s Australian anddomestic properties.  Capitalexpenditures for the first quarter in 2004 were funded principally under TOGA’scredit facility with STEL.

 

14

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***Results of Operations - Comparison of theThree Months Ended March 31, 2004 and 2003***

 

The Company incurred a net loss of $4.3 million forthe three months ended March 31, 2004 compared to a net loss of $2.7 millionfor the three months ended March 31, 2003. The greater net loss for the three months ended March 31, 2004 wasprimarily due to higher interest expense on debt used to fund propertyacquisitions and exploratory costs and higher operating costs and general andadministrative expenses.  The tablebelow provides a comparison of operations for the three months ended March 31,2004 with those of the prior year’s quarter. The table is intended to provide a comparative review of significantoperational items.  Accordingly, nominaldifferences may exist from the amounts presented in the accompanyingConsolidated Financial Statements. Certain prior period amounts may have been reclassified to ensurecomparability.

 
|                                                             |   | **Three  Months Ended  March 31,**                             |   | **Increase  (Decrease)** |   | **%****Increase  (%Decrease)** |   |
|------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|--------------------------|--------|--------------------------------|--------|
|                                                             |   | **2004**                                                       |   | **2003**                 |   |                           |   |
|                                                             |   | **($ in  thousands, except average per Mcf prices and costs)** |   |
| **Worldwide operations:**                                        |   |                                                           |   |                     |   |                           |   |   |   |
|                                                             |   |                                                           |   |                     |   |                           |   |   |   |
| Operating  revenue                                               |   | $                                                              | 1,168  |                     | $      | 1,341                          |   | $ | (173 | ) | (13)% |   |
| Gas volumes  (MMcf)                                              |   | 651                                                            |   | 1,012                    |   | (361                           | )      | (36)% |   |
| Average gas  price per Mcf                                       |   | $                                                              | 1.79   |                     | $      | 1.33                           |   | $ | 0.46 |   | 35% |   |
| Operating  expenses                                              |   | $                                                              | 1,394  |                     | $      | 957                            |   | $ | 437 |   | 46% |   |
| Average lifting cost per Mcf equivalent (“Mcfe”) sold  |   | $                                                              | 2.14   |                     | $      | 0.94                           |   | $ | 1.20 |   | 127% |   |
| General and  administrative                                      |   | $                                                              | 2,044  |                     | $      | 1,521                          |   | $ | 523 |   | 34% |   |
| Depreciation,  depletion and amortization (“DD&A”) |   | $                                                              | 251    |                     | $      | 308                            |   | $ | (57 | ) | (18)% |   |
| Impairment of  oil and gas properties                            |   | $                                                              | 150    |                     | $      | —                         |   | $ | 150 |   | N/A |   |
| Interest expense                                                 |   | $                                                              | 2,136  |                     | $      | 1,305                          |   | $ | 831 |   | 64% |   |
|                                                             |   |                                                           |   |                     |   |                           |   |   |   |
| **Australia operations:**                                        |   |                                                           |   |                     |   |                           |   |   |   |
|                                                             |   |                                                           |   |                     |   |                           |   |   |   |
| Operating  revenue                                               |   | $                                                              | 1,166  |                     | $      | 1,338                          |   | $ | (172 | ) | (13)% |   |
| Gas volumes  (MMcf)                                              |   | 650                                                            |   | 1,011                    |   | (361                           | )      | (36)% |   |
| Average gas  price per Mcf                                       |   | $                                                              | 1.79   |                     | $      | 1.33                           |   | $ | 0.46 |   | 35% |   |
| Operating  expenses                                              |   | $                                                              | 1,140  |                     | $      | 794                            |   | $ | 346 |   | 44% |   |
| Average lifting  cost per Mcf sold                               |   | $                                                              | 1.75   |                     | $      | 0.79                           |   | $ | 0.96 |   | 122% |   |
| Oil and Gas  property DD&A                                   |   | $                                                              | 203    |                     | $      | 283                            |   | $ | (80 | ) | (28)% |   |
| Other DD&A                                                   |   | $                                                              | 34     |                     | $      | 15                             |   | $ | 19 |   | 127% |   |
| Oil and  Gas DD&A rate per Mcf volumes sold             |   | $                                                              | 0.31   |                     | $      | 0.28                           |   | $ | 0.03 |   | 11% |   |
|                                                             |   |                                                           |   |                     |   |                           |   |   |   |
| **Domestic operations:**                                         |   |                                                           |   |                     |   |                           |   |   |   |
|                                                             |   |                                                           |   |                     |   |                           |   |   |   |
| Operating  revenue                                               |   | $                                                              | 2      |                     | $      | 3                              |   | $ | (1 | ) | (33)% |   |
| Gas volumes  (MMcf)                                              |   | 1                                                              |   | 1                        |   | —                         |   | — |   |
| Average gas  price per Mcf                                       |   | $                                                              | 4.00   |                     | $      | 3.25                           |   | $ | 0.75 |   | 23% |   |
| Operating  expenses – producing properties                  |   | $                                                              | 1      |                     | $      | 2                              |   | $ | (1 | ) | (50)% |   |
| Average lifting  cost on producing properties per Mcfe sold      |   | $                                                              | 2.27   |                     | $      | 2.10                           |   | $ | 0.17 |   | 8% |   |
| Operating  expenses – non-producing properties              |   | $                                                              | 253    |                     | $      | 161                            |   | $ | 92 |   | 57% |   |
| Impairment of  oil and gas properties                            |   | $                                                              | 150    |                     | $      | —                         |   | $ | 150 |   | N/A |   |
| Other DD&A                                                   |   | $                                                              | 14     |                     | $      | 16                             |   | $ | (2 | ) | (13)% |   |

 

15

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Revenues and Sales Volumes

 

The Company is currently selling its Australian gas under a five-yearcontract with delivery requirements of up to 15,000 Mcf of gas per day toEnergex, an unaffiliated customer.  In2003, the Company had two Energex contracts, one of which expired at the end of2003, with combined delivery requirements of up to 20,300 Mcf of gas perday.  The reduction in gas deliveryrequirements of 5,300 Mcf per day was the principal cause for the 36% declinein gas volumes sold in Australia in the first quarter of 2004 compared with thesame period in 2003.  The Company isactively pursuing short-term gas contracts to increase gas volumes sold andreduce flared gas.  Gas revenues in Australiadecreased by 13% due to the lower sales volumes offset by an increase in theaverage sales price received and changes in exchange rates.  The 35% increase in average gas sales pricein Australia is due primarily to favorable changes in exchange rates.

 

During the first quarter of 2004, the Company had minimal domesticrevenue.  Domestic revenues and volumesin 2004 and 2003 relate to small, retained interests in properties producing inthe Powder River Basin in Wyoming.

 

Costs and Expenses

 

Operating expenses in Australia increased 44% due to an increase in thenumber of producing wells and the addition of a second compressor facilitywhich commenced operations in December 2003. Australian oil and gas property DD&A expense decreased 28% dueprincipally to lower sales volumes.

 

Domestic operating expenses in the first quarter of 2004 and 2003 areprincipally attributable to the Lay Creek coal-seam gas project where the wellsare in the dewatering phase.

 

The impairment expense of $150,000 was attributed to unsuccessfulexploration costs incurred on wells on the Frenchman prospect.

 

General and administrative (“G&A”) expenses for the first quarterof 2004 increased 34% compared to the three months ended March 31, 2003.  This increase is attributed to higheremployee and consulting costs associated with managing the Comet Ridgeproperties and continuing costs for the Tri-Star litigation.

 

Other Income (Expense)

 

Interest expense increased to $2.1 million from $1.3 million, dueprimarily to increased loan balances in the first quarter of 2004 as comparedto the same period in 2003.

 

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**Item3.****           Quantitativeand Qualitative Disclosure About Market Risk**

 

Market risk is the potential loss arising from adverse changes inmarket rates and prices, such as foreign currency exchange, interest rates andcommodity prices.  The Company does notuse financial instruments to any degree to manage foreign currency, interestrate or commodity risk and does not hold or issue financial instruments to anydegree for trading purposes.  At March31, 2004, the Company was exposed to some market risk with respect to foreigncurrency, long-term debt, and natural gas prices; however, management did notbelieve such risk to be material.  TheCompany’s market risk, discussed in Item 7A in its Annual Report on Form 10-Kfor the year ended December 31, 2003, was unchanged as of March 31, 2004.

 

**Item4.  Controls and 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, including any corrective actions with regard tosignificant deficiencies or material weaknesses.

 

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**PARTII - OTHER INFORMATION**

 

Item 1.          Legal Proceedings

 

                                                SeeNote 4 to the Consolidated Financial Statements under Part I - Item 1.

 

Item 2.  Changes in Securities

 

During the quarterly period ended March 31, 2004, the Company issued100,000 shares of its common stock upon the exercise of options with a weightedaverage exercise price of $2.75 per share. The issuance of these securities was deemed to be exempt fromregistration under Section 4(2) of the Securities Act of 1933 or Regulation Dthere under as a transaction by an issuer not involving a public offering.

 

Item 6.             Exhibitsand Reports on Form 8-K

 

(a)                                  Exhibits:

 

Filed herewith

 

10.98                     SeventhAmendment to Gas Sales Agreement between Tipperary Oil & Gas (Australia)Pty ltd (ACN 077 536 871) as Seller and Queensland Fertilizer Assets Limited(ACN 011 062 294) as Buyer, dated March 31, 2004, filed herewith.

 

31.1                           Certificationof Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certificationof Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                           Certificationof Chief Executive Officer of Tipperary Corporation Pursuant to 18 U.S.C.§1350.

 

32.2                           Certificationof Chief Financial Officer of Tipperary Corporation Pursuant to 18 U.S.C.§1350.

 

The other material contracts of the Company areincorporated herein by reference from the exhibit list in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2003.

 

(b)                                 Reportson Form 8-K:

 

The Registrant submitted a Form 8-K on March 17, 2004,under Item 12 whereby it furnished its earnings press release announcing yearend and fourth quarter 2003 financial results.

 

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**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                      |   | Tipperary Corporation                                  |
|---------------------------|--------|--------------------------------------------------------|
|                      |   | Registrant                                             |
|                      |   |                                                   |
|                      |   |                                                   |
| Date:  May  14, 2004 | By:    | /s/ David L. Bradshaw                                  |
|                      |   | David L. Bradshaw, President, Chief Executive  Officer |
|                      |   | and Chairman of the Board of Directors                 |
|                      |   |                                                   |
|                      |   |                                                   |
| Date:  May  14, 2004 | By:    | /s/ Joseph B. Feiten                                   |
|                      |   | Joseph B. Feiten, Chief Financial Officer and          |
|                      |   | Principal Accounting Officer                           |

 

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**EXHIBITINDEX**

 

10.98                     SeventhAmendment to Gas Sales Agreement between Tipperary Oil & Gas (Australia)Pty ltd (ACN 077 536 871) as Seller and Queensland Fertilizer Assets Limited(ACN 011 062 294) as Buyer, dated March 31, 2004.

 

31.1                           Certificationof Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certificationof Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                           Certificationof Chief Executive Officer of Tipperary Corporation Pursuant to 18 U.S.C.§1350.

 

32.2                           Certificationof Chief Financial Officer of Tipperary Corporation Pursuant to 18 U.S.C.§1350.

 

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