** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

** **

# **FORM 10-Q/A**

 

**Amendment No. 1**

 

**ý****  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2004**

 

**OR**

 

**o****  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from          to**

 

**CommissionFile Number 1-7796**

 

**TIPPERARYCORPORATION**

(Exact name of registrantas specified in its charter)

 

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

 

**(303)293-9379**

(Issuer’s telephonenumber)

 

Indicate by check mark whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act of 1934 duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes **ý**    Noo

 

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

Yes o    Noý

 

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

 

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

 

 

----

 

**TIPPERARYCORPORATION AND SUBSIDIARIES**

 

Index toForm 10-Q/A

 

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

 

 

----

 

EXPLANATORY NOTE

 

This Amendment No.1 on Form 10-Q is being filed to amend Part I Item 4 of the Company’s QuarterlyReport on Form 10-Q for the quarterly period ended September 30, 2004, filed onNovember 15, 2004 (the “Original 10-Q”). This Amendment No. 1 does not otherwise alter the disclosures set forthin the Original 10-Q and does not reflect events occurring after the filing ofthe Original 10-Q.  This Amendment No. 1is effective for all purposes as of the date of the filing of the Original10-Q.

 

1

----

 

# **PART I**- FINANCIAL INFORMATION

 

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

 

**TIPPERARY CORPORATION AND SUBSIDIARIES**

Consolidated Balance Sheets

($in thousandsexcept per share data)

(unaudited)

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

 

See accompanying notes toConsolidated Financial Statements.

 

2

----

 

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

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

 

See accompanying notes toConsolidated Financial Statements.

 

3

----

 

**TIPPERARY CORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Stockholders’ Equity (Unaudited)**

**For the Nine Months Ended September 30, 2003 and 2004**

**(in thousands)**

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

 

See accompanying notes toConsolidated Financial Statements.

 

4

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# **TIPPERARY CORPORATION AND SUBSIDIARIES**

ConsolidatedStatements of Cash Flows

(in thousands)

(unaudited)

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

 

See accompanying notes toConsolidated Financial Statements.

 

5

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**TIPPERARYCORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED** FINANCIALSTATEMENTS

**(Unaudited)**

 

**NOTE 1 -OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**

 

## Basisof Presentation

 

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

 

New AccountingPronouncements

 

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

 

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

 

## Asset Retirement Obligation

 

On January 1, 2003, the Company adopted Statement of FinancialAccounting Standards No. 143, “Accounting for Asset Retirement Obligations”(“SFAS No. 143”), which provides accounting requirements for retirementobligations associated with tangible long-lived assets, including the timing ofliability recognition, initial measurement of the liability, allocation ofasset retirement costs to expense, subsequent measurement of the liability, andfinancial statement disclosures. SFAS No. 143 requires that asset retirementcosts be capitalized along with the cost of the related long-lived asset. Theasset retirement costs should then be allocated to expense using a systematicand rational method. The Company has determined that it has asset retirementcosts associated with wells drilled in Australia and the United States. TheCompany also expects to incur retirement costs to dismantle two gas compressionplant facilities located in Australia. The following table sets forth thechanges in the asset retirement obligation:

 

 

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

 

 

6

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Stock-Based Compensation

 

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

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

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

 

 

7

----

 

Revenue Recognition and Gas Imbalances

 

The Company recognizes naturalgas and oil revenue from its interests in producing wells as natural gas andoil are produced and sold from those wells. The Company uses the sales methodof 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 September30, 2004, the Company had taken and sold more than its entitled share ofnatural gas volumes produced from the Comet Ridge project, and was overproducedby approximately 1,821 MMcf (net of royalties). Based on the September 30, 2004average sales price of $1.70 per Mcf, this overproduction representsapproximately $3.1 million in gas revenues. No liability has been recordedfor the excess volumes taken, as they do not exceed the Company’s share ofremaining proved reserves. Under the terms of the governing gas balancingagreement, the Company may be required to reduce the monthly volumes it sellsby up to 50% of its entitled share of sales, to enable underproduced parties tosell more than their entitled share of the gas sales and cure the imbalance.

 

Foreign Currency

 

The functional currency of theCompany’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 foreign currencytranslation adjustment (net of $0 tax) as of September 30, 2004 andDecember 31, 2003 totaled $5.5 million and $7.1 million,respectively, of other comprehensive income.

 

#### Liquidityand Operations

 

The Company had cash and cash equivalents of $8.6 million as ofSeptember 30, 2004, compared to approximately $3.0 million as of December 31,2003. In September 2004, the Company sold two million shares of its commonstock in a private placement to 11 unaffiliated institutional investors for$4.00 per share.

 

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

 

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

 

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

 

Property, Plant and Equipment

 

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

 

 

8

----

 

 

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

 

**NOTE 2 - RELATED PARTY TRANSACTIONS**

 

At September 30, 2004, theCompany owed Slough and Slough Trading Estates Limited (“STEL”), a UnitedKingdom company which is the parent of Slough, approximately$17.0 million.

 

As of September 30, 2004,the Company had one credit facility agreement with STEL allowing the Company toborrow on an unsecured basis up to $13.0 million for its U.S. operations. Usingborrowings from this credit facility, the Company substantially funded itsoperating and capital needs in the United States during 2003 and through thefirst nine months of 2004. The Company may repay the loan in whole or in partwithout prepayment penalties. The credit facility bears interest at 13% perannum and is due April 2, 2012. STEL may demand repayment prior to the maturitydate provided that STEL gives 18-months notice. So long as the STELindebtedness exists, the Company may not obtain any additional third partyindebtedness, either secured or unsecured, or making a priority payment inrespect of any obligation without first obtaining written approval from STEL.In connection with this credit facility, the Company paid STEL arrangement feesof $40,000. The U.S. dollar value of the outstanding balance of this facilityas of September 30, 2004 was $13.0 million.

 

In 2002, the Company borrowed$4 million from Slough which is evidenced by a note payable that bearsinterest at LIBOR plus 3.5% (5.30% as of September 30, 2004) and is payable infull on April 30, 2005.

 

Slough Estates plc, STEL’sparent, has guaranteed for a period up to five years through June 2009 a bankcredit facility of $150.0 million AUD that closed in June 2004 (See Note 3). Asconsideration for the guarantee, the Company pays 1% per annum on the dailyoutstanding balance of the debt guaranteed. For the nine month period endedSeptember 30, 2004, the Company had paid guarantee fees of $211,000.

 

In August 2003, TOGAborrowed $29.7 million ($45 million AUD) from STEL for the solepurpose 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. In addition, TOGA borrowed $55.0 million AUD under a creditfacility agreement with STEL to fund its operations in Australia. These loansbore interest at 13% per annum. In connection with these loans, the Companypaid arrangement fees of $250,000 USD and $100,000 AUD, respectively, to STEL. Theseloans were paid in full June 18, 2004 with funds from a bank credit facility(see Note 3).

 

For the nine month period endedSeptember 30, 2004 and 2003, approximately $5.9 million and $2.0 million,respectively, in interest and fees were paid collectively to Slough and STELunder the financing agreements discussed herein.

 

**NOTE 3 - BANK DEBT**

 

On June 9, 2004, TOGA enteredinto a $150.0 million AUD senior credit facility agreement with Australia andNew Zealand Banking Group Limited and BOS International (Australia) Limited forthe purpose of paying in full TOGA’s borrowings of $100.0 million AUD from STEL(see Note 2) and to fund TOGA’s operating costs and its share of developmentcosts of the Comet Ridge coalseam gas project in Queensland, Australia. Fundsfrom the facility are expected to be available over five years and repayable invariable amounts beginning in 2007 and concluding in 2014. The interest ratefor the facility (6.425% per annum as of September 30, 2004) varies with theAustralian inter-bank rate plus other factors. Commitment fees of 0.425% perannum of committed but undrawn funds, as defined in the credit facility, arepayable semi-annually. The facility’s effective interest rate at September 30,2004, including interest, commitment and guarantee fees, and amortization ofloan costs, is 8.725%. The facility is collateralized by, among other things,TOGA’s common stock and the Company’s consolidated interest in the Comet Ridgeproject and is guaranteed for up to five years by Slough Estates plc (See Note2). The facility contains certain restrictive covenants, including maintenanceof certain financial ratios and contains provisions that allow the Company toutilize the facility to finance facility interest expense. The U.S. dollarvalue of the outstanding balance of this facility and facility interest expensepayable as of September 30, 2004 was approximately $77.8 million ($108.9million AUD). TOGA incurred $4.5 million in loan costs which the Company hasdeferred and is amortizing over five years.

 

9

----

 

**NOTE 4 - LOSS PER SHARE**

 

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

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

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

 

**NOTE 5 - MINORITY INTEREST IN TOGA**

 

For the nine month period ended September 30, 2004, the 10% minorityinterest share of TOGA’s net loss totaled $866,000. The minority interest inTOGA’s net equity at January 1, 2004 totaled $418,000, resulting in the Companyrecognizing an additional loss of $468,000. The Company will continuerecognizing 100% of TOGA’s net losses until TOGA becomes profitable. TheCompany will record 100% of TOGA’s net income until it has recouped theminority interest’s share of TOGA’s net losses.

 

10

----

 

**NOTE 6 - 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.*, Cause No. CV42,265,District Court of Midland County, Texas involving the Comet Ridge project. Theplaintiffs allege, among other matters, that Tri-Star and/or the individualdefendants failed to operate the project in a good and workmanlike manner andcommitted various other breaches of a joint operating contract, breached aprevious mediation agreement, committed certain breaches of fiduciary and otherduties owed to the plaintiffs, and committed fraud in connection with theproject. Tri-Star has answered the allegations, and filed amended pleadingsdenying liability and raising a number of affirmative defenses and assertingvarious counterclaims. TOGA has operated the project since March 2002, afterthe court entered its Writ of Temporary Injunction (the “Injunction”) toenforce the votes of a majority-in-interest of the parties under the jointoperating agreement to remove Tri-Star as operator and replace it with TOGA.

 

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

 

11

----

 

**NOTE 7 - OPERATIONS BY GEOGRAPHIC AREA**

 

Segment information has been prepared in accordance with SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information.” TheCompany has two geographic reporting segments, Australia and the United States.General and administrative expenses, interest expense and interest and otherincome are not allocated to segments. The segment data presented below wasprepared on the same basis as the Consolidated Financial Statements. Reportablebusiness segment information as of September 30, 2004 and 2003 and for thethree and nine months ended September 30, 2004 and 2003 is as follows (inthousands):

 

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

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

----

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

 

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

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

----

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

 

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

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

----

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

 

12

----

 

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

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

----

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

 

**NOTE 8 - PROPERTY,PLANT AND EQUIPMENT**

 

A summary ofproperty, plant and equipment follows:

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

 

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

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

 

13

----

 

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

 

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

 

***Overview***

 

*Australia*

 

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

 

An ATP allows the holder to undertake a range ofexploration activities, including geophysical surveys, field mapping andexploratory drilling. Each ATP requires the expenditure of an amount 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 apetroleum lease, which provides the lessee with the ability to conductadditional exploration, development and production activities.

 

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

 

Upon expiration of an ATP, the policy of theQueensland DNRM allows the ATP holder to renew the ATP for an additional fouryear exploratory period and generally requires the holder to relinquish a 20%portion of ATP acreage not held by a petroleum lease.  ATP 526 expired onOctober 31, 2004, and an application has been filed with theQueensland DNRM for the renewal of ATP 526.  With regards to renewal,there will be discussion with the Queensland DNRM of establishingpetroleum leases on acreage that is part of ATP 526 and ATP 653.  ATPs653, 655 and 745 have initial terms expiring on September 30, 2006, October 31,2007 and October 31, 2007, respectively.

 

The Company’s gas marketing in eastern Australia iscurrently focused on obtaining long-term gas sales agreements that provide fiveto 15 years of firm sales typically starting in 2006 to 2008. Short-term salescontracts are also being pursued. Effective July 2004, the Company commencedselling gas under two short-term sales contracts, one for six months and onefor 12 months.

 

14

----

 

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

 

**CometRidge Operations Review**

** **

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

----

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

 

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

 

During the first half of 2004, 100% of the Company’sgas sales in Australia were made under a five-year contract effective June 1,2000 with ENERGEX Retail Pty Ltd (“Energex”), an unaffiliated customer. TheEnergex contract has delivery requirements of up to approximately 15,000 Mcf ofgas per day. The Company has a gas sales agreement with Origin Energy RetailLimited (“OERL”), a subsidiary of Origin Energy Limited, to supplyapproximately 9 Bcf per year, or approximately 25,000 Mcf of gas per day net tothe Company’s interests, for 13 years beginning May 2007. Origin Energy Limitedis a large Australian integrated energy company which, through subsidiaries,owns nearly 24% of the Comet Ridge project.

 

 

15

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

 

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

 

***United States***

 

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

 

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

 

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

 

*Stateline* — The Company holds a 25% interest in the Statelineprospect in western Nebraska. Total gross acreage in the prospect is approximately120,000 acres. Lance Oil & Gas Company, Inc. (“Lance”) holds the remaining75% interest and is the operator of the prospect. In the first half of 2004,preliminary 2-D seismic operations were conducted at a cost to the Company ofapproximately $100,000. The acquisition of 3D seismic data is now planned forearly 2005 at a cost to the Company of approximately $163,500.

 

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

 

 

16

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

 

***Financial Condition, Liquidity and Capital Resources***

 

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

 

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

 

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

 

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

 

The Company anticipates funding operations and capital expenditures inthe United States for 2004 using (a) cash on hand at September 30, 2004 and (b)a commitment from Slough to provide funds for working capital, board-approvedcapital expenditures and operations through April 2005.

 

Net cash used by operating activities was $10.6 million during the ninemonths ended September 30, 2004, compared to $5.7 million of cash used duringthe same period last year. The increase in net cash used for operations in thefirst nine months of 2004 compared with the same period in 2003 resultedprimarily from (a) interest expense on increased debt used to fund propertyacquisition, exploration and development and (b) higher operating costs andgeneral and administrative expenses.

 

On June 9, 2004, TOGA entered into a $150.0 million AUD senior creditfacility agreement with Australia and New Zealand Banking Group Limited and BOSInternational (Australia) Limited. The initial borrowings under the facilitytotaled $103.0 million AUD ($71.0 million USD). TOGA used $100.0 million AUD($68.2 million USD) to pay in full its borrowings from STEL and to pay debtissuance costs. The balance of the credit facility will be used to fund TOGA’soperating costs and its share of development costs of the Comet Ridge coalseamgas project in Queensland, Australia.

 

17

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

 

**Capital Expenditures Activity**

**(in thousands)**

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

 

Capital expenditures for the first nine months of 2004 were fundedprincipally under credit facilities with STEL and the Australian bank seniorcredit facility.

 

The Company has various commitments in addition to its long-term debt. Thetable below summarizes the Company’s contractual obligations for the last threemonths of 2004 and years 2005 through 2007 and thereafter (in thousands):

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

 

18

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***Results of Operations -Comparison of the Three Months Ended September 30, 2004 and 2003***

 

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

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

 

 

19

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Revenues and SalesVolumes

 

The Company is currently selling its Australian gas under threecontracts to two purchasers. Energex is purchasing gas from the Company under afive-year contract with delivery requirements of up to 15,000 Mcf of gas perday and under a new short-term contract that terminates December 31, 2004. TheCompany also entered into a one year gas sales contract with Santos QNT Pty Ltdeffective July 2004. The Company is actively pursuing long-term and short-termgas contracts to increase gas sales. With the addition of the two newshort-term contracts, the Company’s sales increased to 1,505 MMcf for the thirdquarter in 2004, a 60% increase over the second quarter’s sales of 938 MMcf anda 31% increase over the same period in 2003. Gas revenues in Australia for thethird quarter increased by 48% due to higher sales volumes and a 13% increasein average gas prices. Changes in the exchange rate and the addition of a newgas sales contract with higher prices resulted in the increase in average gasprices.

 

During the third quarter of 2004, the Company had minimal domesticrevenue. Domestic revenues and volumes in 2004 and 2003 relate to small,retained interests in properties producing in the Powder River Basin inWyoming.

 

Costs and Expenses

 

Operating expenses in Australia increased 26% due to the addition of asecond compressor facility which commenced operations in December 2003 and wellworkover costs. Australian oil and gas property DD&A expense increased 17%due principally to higher sales volumes.

 

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

 

General and administrative (“G&A”) expenses for the third quarterof 2004 increased 54% compared to the same period in 2003, due principally toan increase in legal costs of approximately $583,000 incurred for the Tri-Starlitigation. With the execution of the Settlement Agreement with Tri-Star inOctober 2004, the Company expects legal expenses to be significantly lower in2005.

 

Other Income (Expense)

 

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

 

In the third quarter of 2003, the Company wrote off $5.1 million indeferred loan costs related to the TCW loan which was retired on August 15,2003. In accordance with SFAS No. 52, “Foreign Currency Translation” (SFAS52”), the Company recognized a foreign currency exchange loss of $1.1 millionrelated to the TOGA debt repaid.

 

Minority Interest in Loss of Subsidiary

 

During the third quarter of 2004, the Company recognized 100% of TOGA’snet loss as the minority interest in TOGA’S net equity had been reduced to zeroat June 30, 2004.

 

 

20

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***Results of Operations - Comparison of the Nine Months Ended September30, 2004 and 2003***

 

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

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

 

 

21

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Revenues and SalesVolumes

 

The Company is currently selling its Australian gas under threecontracts to two purchasers. Energex is purchasing gas from the Company under afive-year contract with delivery requirements of up to 15,000 Mcf of gas perday and under a new short-term contract that terminates December 31, 2004. TheCompany entered into a one year gas sales contract with Santos QNT Pty Ltd.effective July 2004. The addition of two new gas sales contracts effective July2004 increased gas sales for the third quarter 2004 by 31% over the same periodin 2003 and minimized the decline in gas volumes sold in Australia to 7% forthe nine month period 2004 compared with the same period in 2003. The Companyis actively pursuing long-term and short-term gas contracts to increase gasvolumes sold. A decrease in volumes sold for the nine month period endedSeptember 30, 2004 compared with the same period in 2003 was offset by a 19%increase in average gas prices. Changes in the exchange rate and the additionof a new gas sales contract with higher prices resulted in the increase inaverage gas prices.

 

During the first nine months of 2004, the Company had minimal domesticrevenue. Domestic revenues and volumes in 2004 and 2003 relate to small,retained interests in properties producing in the Powder River Basin inWyoming.

 

Costs and Expenses

 

Operating expenses in Australia increased 28% due to an increase in thenumber of producing wells, increased well workover costs, gas transportationexpense and the addition of a second compressor facility which commencedoperations in December 2003. Australian oil and gas property DD&A expensedecreased 7% due principally to lower sales volumes.

 

Domestic operating expenses in the first nine months of 2004 and 2003were principally attributable to the Lay Creek coal-seam gas project where thewells are in the dewatering phase.

 

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

 

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

 

Other Income (Expense)

 

Interest expense increased to $6.0 million from $3.9 million, dueprimarily to increased borrowings to fund operations and capital expenditures. Asof September 30, 2004, the Company’s total debt was $94.8 million compared with$58.2 million as of September 30, 2003, an increase of $36.6 million. Theinterest expense associated with increased borrowings was partially offset bythe effect of lower interest rates on TOGA’s long-term debt. As a result ofrefinancing TOGA’s debt, TOGA’s interest rates decreased from 13% to an averageeffective rate of 8.725% per annum, which reduced the Company’s total debteffective rate from 12.7% to 9.19%.

 

In the first nine months of 2003, the Company wrote off $5.1 million indeferred loan costs related to TCW loan which was retired on August 15, 2003. Inaccordance with SFAS No. 52, the Company recognized a foreign currency exchangegain of $2.1 million related to the TOGA debt repaid.

 

 

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***Critical Accounting Policies***

 

The Company’s financial statements are based on the selection andapplication of significant accounting policies, some of which requiremanagement to make estimates and assumptions which affect the reported amountsof assets, liabilities, revenues and expenses and also affect the disclosure ofcontingent items. A summary of the Company’s significant accounting policies isincluded in Item 7 of the Company’s annual report on Form 10-K for the yearended December 31, 2003. The Company believes that the significant accountingpolicies discussed therein are some of the more critical judgment areas inapplication of its accounting policies that currently affect its financialcondition and results of operations.

 

***Off-balance Sheet Arrangements***

We do not currently have and have never had any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purposes entities, which typicallyare established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes.  Further,  we havenot guaranteed any obligations of unconsolidated entities nor do we have anycommitment or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in theserelationships.

 

 

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

 

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

 

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

 

As of the end of the period covered by this report, weevaluated, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, theeffectiveness of the design and operation of our disclosure controls andprocedures over financial reporting pursuant to Rule 13a-15 and 15d-15 of theSecurities Exchange Act of 1934. Based upon that evaluation, our ChiefExecutive Officer and our Chief Financial Officer concluded that our disclosurecontrols and procedures over financial reporting are adequate and effective atthe reasonable assurance level in timely alerting them to material informationrequired to be included in this quarterly report on Form 10-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 changes in our internal controls over financial reporting or in otherfactors, which could significantly affect internal controls over financialreporting.

 

 

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

 

Item 1.    Legal Proceedings

 

                See Note 6 to theConsolidated Financial Statements under Part I - Item 1.

 

Item 2.    Changes in Securities

 

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

 

Item 6.    Exhibits 

(a)           Exhibits:

 

Filed herewith

 

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

 

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

 

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

 

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

 

The other exhibits of the Company are incorporatedherein by reference to the exhibit list in the Company’s Annual Report on Form10-K for the year ended December 31, 2003.

 

 

 

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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:  | December 10, 2004 | By:                   | /s/ David L. Bradshaw |
|   |              |                  | David L. Bradshaw, President, Chief Executive  Officer and Chairman of the Board of Directors |
|   |              |                  |   |
|   |              |                  |   |
| Date:  | December 10, 2004 | By:                   | /s/ Joseph B. Feiten |
|   |              |                  | Joseph B. Feiten, Chief Financial Officer and Principal  Accounting Officer |
|   |              |                  |   |

 

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**EXHIBITINDEX**

 

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

 

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

 

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

 

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

 

 

 

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