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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-Q

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-9808

PLAINS RESOURCES INC.

(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 13-2898764
(I.R.S. Employer
Identification No.)

700 Milam Street, Suite 3100
Houston, Texas 77002
(Address of principal executive offices)
(Zip Code)

(832) 239-6000
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes þ No o

23.6 million shares of common stock, $0.10 par value, issued and outstanding at
October 31, 2003.



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TABLE OF CONTENTS



|                                             |                                                                                                 |                                                           |  |  |  |  |  | 
|-------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|                                             |                                                                                                 | CONSOLIDATED BALANCE SHEETS                              
|                                             |                                                                                                 | CONSOLIDATED STATEMENTS OF INCOME                        
|                                             |                                                                                                 | CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|                                             |                                                                                                 | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME          
|                                             |                                                                                                 | CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
|                                             |                                                                                                 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS               
|                                             | ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | ITEM 3.  Quantitative and Qualitative Disclosures About Market Risks                          
|                                             | ITEM 4.  Controls and Procedures                                                              
|PART II. OTHER INFORMATION                  
|SIGNATURES                                  
|Exhibit Index                               
|Employment Agreement - Stephen A. Thorington
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906

PLAINS RESOURCES INC. AND SUBSIDIARIES
TABLE OF CONTENTS

|                                                                                                                     |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                     |  | Page
|PART I. FINANCIAL INFORMATION                                                                                        |  |      |    | 
|ITEM 1. Financial Statements:                                                                                        |  |      |    | 
|Consolidated Balance Sheets (Unaudited)
September 30, 2003 and December 31, 2002                                     |  |      | 1  | 
|Consolidated Statements of Income (Unaudited)
For the three months and nine months ended September 30, 2003 and 2002 |  |      | 2  | 
|Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2003 and 2002              |  |      | 3  | 
|Consolidated Statements of Comprehensive Income (Unaudited)
For the nine months ended September 30, 2003 and 2002    |  |      | 4  | 
|Consolidated Statements of Changes in Stockholders Equity (Unaudited)
For the nine months ended September 30, 2003  |  |      | 5  | 
|Notes to Consolidated Financial Statements (Unaudited)                                                               |  |      | 6  | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  |      | 16 | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                                                   |  |      | 28 | 
|ITEM 4. Controls and Procedures                                                                                      |  |      | 29 | 
|PART II. OTHER INFORMATION                                                                                           |  |      | 30 | 

(i)



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PLAINS RESOURCES INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)

|                                                         |                                                                   |   |               |          |              |   |         |          |  
|-------------------------------------------------------- | ----------------------------------------------------------------- | - | ------------- | -------- | ------------ | - | ------- | -------- | -
|                                                         |                                                                   |   | September 30, |          | December 31,
|                                                         |                                                                   |   | 2003          |          | 2002        
|                                                         |                                                                   |   |               |          |             
|ASSETS                                                   |                                                                   |   |               |          |              |   |         |         
|Current Assets                                           |                                                                   |   |               |          |              |   |         |         
|                                                         | Cash and cash equivalents                                         |   | $             | 1,368    |              |   | $       | 8,807    |  
|                                                         | Accounts receivable - Plains All American Pipeline, L.P.          |   |               | 2,993    |              |   |         |         |  
|                                                         | Other accounts receivable                                         |   |               | 41       |              |   |         | 1,589    |  
|                                                         | Inventory                                                         |   |               | 1,699    |              |   |         | 2,305    |  
|                                                         | Other current assets                                              |   |               | 1,479    |              |   |         | 1,515    |  
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   |   | 7,580         |          |              |   | 14,216  |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Property and Equipment, at cost                          |                                                                   |   |               |          |              |   |         |         
|                                                         | Oil
and gas properties - full cost method
Subject to amortization |   |               | 352,963  |              |   |         | 349,517  |  
|                                                         | Other property and equipment                                      |   |               | 27       |              |   |         | 27       |  
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   |   | 352,990       |          |              |   | 349,544 |         
|                                                         | Less allowance for depreciation, depletion and amortization       |   |               | (299,327 | )            |   |         | (299,214 | )
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   |   | 53,663        |          |              |   | 50,330  |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Ownership Interest in Plains All American Pipeline, L.P. |                                                                   |   | 93,116        |          |              |   | 70,042  |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Other Assets                                             |                                                                   |   |               |          |              |   |         |         
|                                                         | Deferred income taxes                                             |   |               |         |              |   |         | 16,957   |  
|                                                         | Other                                                             |   |               | 10,175   |              |   |         | 9,867    |  
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   |   | 10,175        |          |              |   | 26,824  |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   | $ | 164,534       |          |              | $ | 161,412 |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|LIABILITIES AND STOCKHOLDERS EQUITY                     |                                                                   |   |               |          |              |   |         |         
|Current Liabilities                                      |                                                                   |   |               |          |              |   |         |         
|                                                         | Accounts payable and other current liabilities                    |   | $             | 5,522    |              |   | $       | 6,309    |  
|                                                         | Taxes payable                                                     |   |               | 2,283    |              |   |         | 1,878    |  
|                                                         | Current maturities of long-term debt                              |   |               | 20,000   |              |   |         | 18,000   |  
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   |   | 27,805        |          |              |   | 26,187  |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Long-Term Bank Debt                                      |                                                                   |   | 35,000        |          |              |   | 27,000  |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Asset Retirement Obligation                              |                                                                   |   | 2,016         |          |              |   |        |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Other Long-Term Liabilities                              |                                                                   |   | 3,355         |          |              |   | 2,716   |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Deferred Income Taxes                                    |                                                                   |   | 2,379         |          |              |   |        |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Commitments
and Contingencies (Note 9)                   |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|Stockholders Equity                                     |                                                                   |   |               |          |              |   |         |         
|                                                         | Series D cumulative convertible preferred stock                   |   |               |         |              |   |         | 23,300   |  
|                                                         | Common stock                                                      |   |               | 2,825    |              |   |         | 2,806    |  
|                                                         | Additional paid-in capital                                        |   |               | 276,458  |              |   |         | 273,162  |  
|                                                         | Retained earnings (deficit)                                       |   |               | (94,646  | )            |   |         | (103,882 | )
|                                                         | Accumulated other comprehensive income                            |   |               | 5,387    |              |   |         | (2,862   | )
|                                                         | Treasury stock, at cost                                           |   |               | (96,045  | )            |   |         | (87,015  | )
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   |   | 93,979        |          |              |   | 105,509 |         
|                                                         |                                                                   |   |               |          |              |   |         |         
|                                                         |                                                                   | $ | 164,534       |          |              | $ | 161,412 |         
|                                                         |                                                                   |   |               |          |              |   |         |         

See notes to consolidated financial statements.

1



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PLAINS RESOURCES INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)

|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |         |        |  
|----------------------------------------------------- | -------------------------------------------------------- | --------------------------------- | ------ | ------------------ | ------ | ----------------- | ------ | ------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------- | ------ | -
|                                                      |                                                          |                                   |        | Three Months Ended |        | Nine Months Ended
|                                                      |                                                          |                                   |        | September 30,      |        | September 30,    
|                                                      |                                                          |                                   |        |                    |        |                  
|                                                      |                                                          |                                   |        | 2003               |        | 2002              |        | 2003    |        | 2002
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |     
|Revenues                                              |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      | Oil sales to Plains All American Pipeline, L.P.          |                                   | $      | 4,917              |        |                   | $      | 5,323   |        |      | $      | 16,541 |        |   | $      | 14,289  |       
|                                                      | Hedging                                                  |                                   |        |                   |        |                   |        | (172    | )      |      |        | (307   | )      |   |        | (423    | )     
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      |                                                          |                                   | 4,917  |                    |        |                   | 5,151  |         |        |      | 16,234 |        |        |   | 13,866 |        
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Costs and Expenses                                    |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      | Production expenses                                      |                                   |        | 1,910              |        |                   |        | 1,604   |        |      |        | 5,288  |        |   |        | 4,301   |       
|                                                      | Production and ad valorem taxes                          |                                   |        | 251                |        |                   |        | 146     |        |      |        | 888    |        |   |        | 374     |       
|                                                      | Oil transportation expenses                              |                                   |        | 917                |        |                   |        | 946     |        |      |        | 2,945  |        |   |        | 2,776   |       
|                                                      | General and administrative                               |                                   |        | 1,476              |        |                   |        | 1,312   |        |      |        | 4,883  |        |   |        | 4,687   |       
|                                                      | Depreciation, depletion and amortization                 |                                   |        | 1,089              |        |                   |        | 942     |        |      |        | 3,522  |        |   |        | 3,269   |       
|                                                      | Accretion of asset retirement obligation                 |                                   |        | 58                 |        |                   |        |        |        |      |        | 171    |        |   |        |        |       
|                                                      | Other operating expenses                                 |                                   |        |                   |        |                   |        |        |        |      |        | 137    |        |   |        |        |       
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      |                                                          |                                   | 5,701  |                    |        |                   | 4,950  |         |        |      | 17,834 |        |        |   | 15,407 |        
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Other Income (Expense)                                |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      | Equity in earnings of Plains All American Pipeline, L.P. |                                   |        | 3,142              |        |                   |        | 4,454   |        |      |        | 14,864 |        |   |        | 14,060  |       
|                                                      | Gain on Plains All American Pipeline, L.P. unit offering |                                   |        | 9,119              |        |                   |        | 14,512  |        |      |        | 15,227 |        |   |        | 14,512  |       
|                                                      | Gain (loss) on derivatives                               |                                   |        | (1,211             | )      |                   |        |        |        |      |        | (2,958 | )      |   |        |        |       
|                                                      | Loss on debt extinguishment                              |                                   |        |                   |        |                   |        | (10,319 | )      |      |        |       |        |   |        | (10,319 | )     
|                                                      | Interest expense                                         |                                   |        | (627               | )      |                   |        | (2,324  | )      |      |        | (1,636 | )      |   |        | (5,801  | )     
|                                                      | Interest and other income                                |                                   |        | 21                 |        |                   |        | 236     |        |      |        | 127    |        |   |        | 263     |       
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      |                                                          |                                   | 10,444 |                    |        |                   | 6,559  |         |        |      | 25,624 |        |        |   | 12,715 |        
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Income From Continuing Operations Before Income Taxes |                                                          |                                   | 9,660  |                    |        |                   | 6,760  |         |        |      | 24,024 |        |        |   | 11,174 |        
|                                                      | Income tax benefit (expense)                             |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |         |       
|                                                      |                                                          | Current                           |        |                    | 287    |                   |        |         | (836   | )    |        |        | (2,314 | ) |        |         | 1,569  |  
|                                                      |                                                          | Deferred                          |        |                    | (4,122 | )                 |        |         | (2,157 | )    |        |        | (8,398 | ) |        |         | (6,788 | )
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Income From Continuing Operations                     |                                                          |                                   | 5,825  |                    |        |                   | 3,767  |         |        |      | 13,312 |        |        |   | 5,955  |        
|                                                      | Income from discontinued operations, net of tax          |                                   |        |                   |        |                   |        | 7,418   |        |      |        |       |        |   |        | 21,500  |       
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Income before cumulative effect of accounting change  |                                                          |                                   | 5,825  |                    |        |                   | 11,185 |         |        |      | 13,312 |        |        |   | 27,455 |        
|                                                      | Cumulative effect of accounting change, net of tax       |                                   |        |                   |        |                   |        |        |        |      |        | 933    |        |   |        |        |       
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Net Income                                            |                                                          |                                   | 5,825  |                    |        |                   | 11,185 |         |        |      | 14,245 |        |        |   | 27,455 |        
|                                                      | Preferred dividends                                      |                                   |        |                   |        |                   |        | (350    | )      |      |        | (603   | )      |   |        | (1,050  | )     
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Income Available to Common Stockholders               |                                                          | $                                 | 5,825  |                    |        | $                 | 10,835 |         |        | $    | 13,642 |        |        | $ | 26,405 |        
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Earnings Per Share (in dollars)                       |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      | Basic                                                    |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |         |       
|                                                      |                                                          | Income from continuing operations |        | $                  | 0.25   |                   |        | $       | 0.14   |      |        | $      | 0.54   |   |        | $       | 0.21   |  
|                                                      |                                                          | Discontinued operations           |        |                    |       |                   |        |         | 0.31   |      |        |        |       |   |        |         | 0.90   |  
|                                                      |                                                          | Change in accounting policy       |        |                    |       |                   |        |         |       |      |        |        | 0.04   |   |        |         |       |  
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      |                                                          | $                                 | 0.25   |                    |        | $                 | 0.45   |         |        | $    | 0.58   |        |        | $ | 1.11   |        
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      | Diluted                                                  |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |         |       
|                                                      |                                                          | Income from continuing operations |        | $                  | 0.24   |                   |        | $       | 0.14   |      |        | $      | 0.53   |   |        | $       | 0.20   |  
|                                                      |                                                          | Discontinued operations           |        |                    |       |                   |        |         | 0.30   |      |        |        |       |   |        |         | 0.88   |  
|                                                      |                                                          | Change in accounting policy       |        |                    |       |                   |        |         |       |      |        |        | 0.04   |   |        |         |       |  
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      |                                                          | $                                 | 0.24   |                    |        | $                 | 0.44   |         |        | $    | 0.57   |        |        | $ | 1.08   |        
|                                                      |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|Weighted average shares outstanding                   |                                                          |                                   |        |                    |        |                   |        |         |        |      |        |        |        |   |        |        
|                                                      |                                                          | Basic                             |        |                    | 23,381 |                   |        |         | 23,956 |      |        |        | 23,610 |   |        |         | 23,826 |  
|                                                      |                                                          | Diluted                           |        |                    | 23,975 |                   |        |         | 24,617 |      |        |        | 25,040 |   |        |         | 24,455 |  

See notes to consolidated financial statements.

2



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PLAINS RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

|                                                                    |                                                 |                                                                |         |                   |         |      |          |         |         |  
|------------------------------------------------------------------- | ----------------------------------------------- | -------------------------------------------------------------- | ------- | ----------------- | ------- | ---- | -------- | ------- | ------- | -
|                                                                    |                                                 |                                                                |         | Nine Months Ended
|                                                                    |                                                 |                                                                |         | September 30,    
|                                                                    |                                                 |                                                                |         |                  
|                                                                    |                                                 |                                                                |         | 2003              |         | 2002
|                                                                    |                                                 |                                                                |         |                   |         |     
|CASH FLOWS FROM OPERATING ACTIVITIES                                |                                                 |                                                                |         |                   |         |      |          |        
|Net income                                                          |                                                 | $                                                              | 14,245  |                   |         | $    | 27,455   |        
|Items not affecting cash flows from continuing operating activities |                                                 |                                                                |         |                   |         |      |          |        
|                                                                    | Income from discontinued operations, net of tax |                                                                |         |                  |         |      |          | (21,500 | )      
|                                                                    |                                                 | Depreciation, depletion and amortization                       |         |                   | 3,522   |      |          |         | 3,269   |  
|                                                                    |                                                 | Accretion of asset retirement obligation                       |         |                   | 171     |      |          |         |        |  
|                                                                    |                                                 | Equity in earnings of Plains All American Pipeline, L.P.       |         |                   | (14,864 | )    |          |         | (14,060 | )
|                                                                    |                                                 | Gain on Plains All American Pipeline, L.P. unit offering       |         |                   | (15,227 | )    |          |         | (14,512 | )
|                                                                    |                                                 | Distributions received from Plains All American Pipeline, L.P. |         |                   | 23,089  |      |          |         | 21,558  |  
|                                                                    |                                                 | Deferred income taxes                                          |         |                   | 8,398   |      |          |         | 6,788   |  
|                                                                    |                                                 | Cumulative effect of adoption of SFAS 143, net of tax          |         |                   | (933    | )    |          |         |        |  
|                                                                    |                                                 | Change in derivative fair value                                |         |                   | 1,275   |      |          |         |        |  
|                                                                    |                                                 | Noncash compensation expense                                   |         |                   | 2,049   |      |          |         | 865     |  
|                                                                    |                                                 | Other noncash items                                            |         |                   | 225     |      |          |         | 1,519   |  
|Change in assets and liabilities from operating activities          |                                                 |                                                                | (3,335  | )                 |         |      | (15,611  | )      
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Net cash provided by (used in) continuing activities                |                                                 |                                                                | 18,615  |                   |         |      | (4,229   | )      
|Net cash provided by (used in) discontinued activities              |                                                 |                                                                |        |                   |         |      | 58,353   |        
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Net cash provided by (used in) operating activities                 |                                                 |                                                                | 18,615  |                   |         |      | 54,124   |        
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|CASH FLOWS FROM INVESTING ACTIVITIES                                |                                                 |                                                                |         |                   |         |      |          |        
|Additions to oil and gas properties                                 |                                                 |                                                                | (2,412  | )                 |         |      | (5,641   | )      
|Additions to other property and equipment                           |                                                 |                                                                |        |                   |         |      | (64      | )      
|General Partner Contribution to Plains All American Pipeline, L.P.  |                                                 |                                                                | (1,491  | )                 |         |      | (1,334   | )      
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Net cash provided by (used in) continuing activities                |                                                 |                                                                | (3,903  | )                 |         |      | (7,039   | )      
|Net cash provided by (used in) discontinued activities              |                                                 |                                                                |        |                   |         |      | (53,644  | )      
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Net cash provided by (used in) investing activities                 |                                                 |                                                                | (3,903  | )                 |         |      | (60,683  | )      
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|CASH FLOWS FROM FINANCING ACTIVITIES                                |                                                 |                                                                |         |                   |         |      |          |        
|Net change in credit facility                                       |                                                 |                                                                | 10,000  |                   |         |      | (11,500  | )      
|Principal payments on long-term debt                                |                                                 |                                                                |        |                   |         |      | (267,450 | )      
|Proceeds from exercise of stock options                             |                                                 |                                                                | 1,492   |                   |         |      | 4,748    |        
|Retirement of Series D preferred stock                              |                                                 |                                                                | (23,300 | )                 |         |      |         |        
|Treasury stock purchases                                            |                                                 |                                                                | (9,030  | )                 |         |      |         |        
|Costs incurred in connection with financing arrangements            |                                                 |                                                                | (710    | )                 |         |      |         |        
|Preferred stock dividends                                           |                                                 |                                                                | (603    | )                 |         |      | (700     | )      
|Other                                                               |                                                 |                                                                |        |                   |         |      | (4       | )      
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Net cash provided by (used in) continuing activities                |                                                 |                                                                | (22,151 | )                 |         |      | (274,906 | )      
|Net cash provided by (used in) discontinued activities              |                                                 |                                                                |        |                   |         |      | 281,472  |        
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Net cash provided by (used in) financing activities                 |                                                 |                                                                | (22,151 | )                 |         |      | 6,566    |        
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Net increase (decrease) in cash and cash equivalents                |                                                 |                                                                | (7,439  | )                 |         |      | 7        |        
|Cash and cash equivalents, beginning of period                      |                                                 |                                                                | 8,807   |                   |         |      | 1,179    |        
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        
|Cash and cash equivalents, end of period                            |                                                 | $                                                              | 1,368   |                   |         | $    | 1,186    |        
|                                                                    |                                                 |                                                                |         |                   |         |      |          |        

See notes to consolidated financial statements

3



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##### 






PLAINS RESOURCES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)

|                                   |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |         |     |      |  
|---------------------------------- | ---------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------- | - | ------------------ | --- | ----------------- | ------ | ------ | ---- | ------ | - | ----- | ---- | ------- | ------- | --- | ---- | -
|                                   |                              |                                                                                                |                                                   |   | Three Months Ended |     | Nine Months Ended
|                                   |                              |                                                                                                |                                                   |   | September 30,      |     | September 30,    
|                                   |                              |                                                                                                |                                                   |   |                    |     |                  
|                                   |                              |                                                                                                |                                                   |   | 2003               |     | 2002              |        | 2003   |      | 2002  
|                                   |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |       
|Net Income                         |                              | $                                                                                              | 5,825                                             |   |                    | $   | 11,185            |        |        | $    | 14,245 |   |       | $    | 27,455  |        
|                                   |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |        
|Other Comprehensive Income (Loss): |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |        
|                                   | From continuing operations:  |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |         |    
|                                   |                              | Commodity hedging contracts, net of tax:                                                       |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |         |     |     
|                                   |                              |                                                                                                | Change in fair value                              |   |                    |    |                   |        |        | (288 | )      |   |       | (956 | )       |         |     | (885 | )
|                                   |                              |                                                                                                | Reclassification adjustment for settled contracts |   |                    | 161 |                   |        |        |     |        |   |       | 946  |         |         |     | (10  | )
|                                   |                              | Interest rate swap and other, net of tax                                                       |                                                   |   |                   |     |                   |        | 66     |      |        |   |      |      |         |         | (9  | )   
|                                   |                              | Equity in other comprehensive income changes of
Plains All American Pipeline, L.P., net of tax |                                                   |   | 3,203              |     |                   |        | (1,388 | )    |        |   | 8,259 |      |         |         | 616 |     
|                                   |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |        
|                                   |                              |                                                                                                | 3,364                                             |   |                    |     | (1,610            | )      |        |      | 8,249  |   |       |      | (288    | )      
|                                   | From discontinued operations |                                                                                                |                                                   |  |                    |     |                   | (5,448 | )      |      |        |  |       |      |         | (30,487 | )  
|                                   |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |        
|                                   |                              |                                                                                                | 3,364                                             |   |                    |     | (7,058            | )      |        |      | 8,249  |   |       |      | (30,775 | )      
|                                   |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |        
|Comprehensive Income               |                              | $                                                                                              | 9,189                                             |   |                    | $   | 4,127             |        |        | $    | 22,494 |   |       | $    | (3,320  | )      
|                                   |                              |                                                                                                |                                                   |   |                    |     |                   |        |        |      |        |   |       |      |         |        

See notes to consolidated financial statements.

4



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##### 






PLAINS RESOURCES INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
(in thousands)

|                                                |                                                              |  |                    |        |        |   |        |          |  
|----------------------------------------------- | ------------------------------------------------------------ |  | ------------------ | ------ | ------ | - | ------ | -------- | -
|                                                |                                                              |  | Nine Months Ended 
|                                                |                                                              |  | September 30, 2003
|                                                |                                                              |  |                   
|                                                |                                                              |  | Shares             |        | Amount
|                                                |                                                              |  |                    |        |       
|Series D Cumulative Convertible Preferred Stock |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, beginning of period                                 |  |                    | 47     |        |   | $      | 23,300   |  
|                                                | Shares retired                                               |  |                    | (47    | )      |   |        | (23,300  | )
|                                                |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, end of period                                       |  |                    |       |        |   |        |         |  
|                                                |                                                              |  |                    |        |        |   |        |         
|Common Stock                                    |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, beginning of period                                 |  |                    | 28,048 |        |   |        | 2,806    |  
|                                                | Common stock issued upon exercise of
stock options and other |  |                    | 183    |        |   |        | 19       |  
|                                                |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, end of period                                       |  |                    | 28,231 |        |   |        | 2,825    |  
|                                                |                                                              |  |                    |        |        |   |        |         
|Additional Paid-in Capital                      |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, beginning of period                                 |  |                    |        |        |   |        | 273,162  |  
|                                                | Common stock issued upon exercise of
stock options and other |  |                    |        |        |   |        | 3,296    |  
|                                                |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, end of period                                       |  |                    |        |        |   |        | 276,458  |  
|                                                |                                                              |  |                    |        |        |   |        |         
|Retained Earnings (Deficit)                     |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, beginning of period                                 |  |                    |        |        |   |        | (103,882 | )
|                                                | Spin-off of Plains Exploration & Production Company          |  |                    |        |        |   |        | (4,406   | )
|                                                | Net income                                                   |  |                    |        |        |   |        | 14,245   |  
|                                                | Preferred stock dividends                                    |  |                    |        |        |   |        | (603     | )
|                                                |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, end of period                                       |  |                    |        |        |   |        | (94,646  | )
|                                                |                                                              |  |                    |        |        |   |        |         
|Accumulated Other Comprehensive Income          |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, beginning of period                                 |  |                    |        |        |   |        | (2,862   | )
|                                                | Other comprehensive income                                   |  |                    |        |        |   |        | 8,249    |  
|                                                |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, end of period                                       |  |                    |        |        |   |        | 5,387    |  
|                                                |                                                              |  |                    |        |        |   |        |         
|Treasury Stock                                  |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, beginning of period                                 |  |                    | 3,854  |        |   |        | (87,015  | )
|                                                | Purchase of treasury shares                                  |  |                    | 820    |        |   |        | (9,030   | )
|                                                |                                                              |  |                    |        |        |   |        |         
|                                                | Balance, end of period                                       |  |                    | 4,674  |        |   |        | (96,045  | )
|                                                |                                                              |  |                    |        |        |   |        |         
|Total                                           |                                                              |  |                    |        |        | $ | 93,979 |         
|                                                |                                                              |  |                    |        |        |   |        |         

See notes to consolidated financial statements.

5



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##### 



PLAINS RESOURCES INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1  Organization and Significant Accounting Policies

Organization

The consolidated financial statements of Plains Resources Inc. (Plains,
our, or we) include the accounts of all wholly owned subsidiaries. All
adjustments, consisting only of normal recurring adjustments, that in the
opinion of management were necessary for a fair statement of the results for
the interim periods, have been reflected. All significant intercompany
transactions have been eliminated. Certain reclassifications have been made to
prior year statements to conform to the current year presentation.

We are an independent energy company. We are principally engaged in the
midstream activities of marketing, gathering, transporting, terminalling, and
storage of oil through our equity ownership in Plains All American Pipeline,
L.P. (PAA), a publicly traded master limited partnership that is actively
engaged in the midstream energy markets. All of PAAs midstream activities are
conducted in the United States and Canada. We also participate in the
upstream activities of acquiring, exploiting, developing, exploring for and
producing oil through our wholly owned subsidiary, Calumet Florida L.L.C.,
which has producing properties in the Sunniland Trend in south Florida.

These consolidated financial statements and related notes present our
consolidated financial position as of September 30, 2003 and December 31, 2002,
the results of our operations and our comprehensive income for the three months
and nine months ended September 30, 2003 and 2002, our cash flows for the nine
months ended September 30, 2003 and 2002, and the changes in our stockholders
equity for the nine months ended September 30, 2003. The results for the nine
months ended September 30, 2003, are not necessarily indicative of the final
results to be expected for the full year. These financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements and should be read in conjunction with the audited consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002.

On December 18, 2002, we distributed 100 percent of the common shares of
Plains Exploration & Production Company (PXP), our wholly owned subsidiary
that owned oil and gas properties offshore and onshore California and in
Illinois, to our stockholders (the spin-off). As a result of the spin-off,
the historical results of the operations of PXP are reflected in our financial
statements as discontinued operations. In connection with the spin-off we
entered into certain agreements with PXP, see Note 8.

Accounting Policies

Asset Retirement Obligations. Effective January 1, 2003, we adopted
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 requires entities to record the
fair value of a liability for a legal obligation to retire an asset in the
period in which the liability is incurred. A legal obligation is a liability
that a party is required to settle as a result of an existing or enacted law,
statute, ordinance or contract. When the liability is initially recorded, the
entity should capitalize the retirement cost of the related long-lived asset.
Each period the liability is accreted to its then present value, and the
capitalized cost is depreciated over the useful life of the related asset. If
the liability is settled for an amount other than the recorded amount, a gain
or loss is recognized at the time of settlement. In prior periods we included
estimated future costs of abandonment and dismantlement in our full cost
amortization base and these costs were amortized as a component of our
depletion expense.

At January 1, 2003 the present value of our future Asset Retirement
Obligation for oil and gas properties and equipment was $2.6 million. The
cumulative effect of our adoption of SFAS No. 143 and the change in accounting
principle resulted in an increase in income in 2003 of $0.9 million (reflecting
a $2.8 million decrease in accumulated DD&A, partially offset by $1.3 million
in accretion expense, and $0.6 million deferred income tax expense). We
recorded a

6



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##### 



liability of $2.6 million and an asset of $1.2 million in connection with
the adoption of SFAS 143. Adopting SFAS No. 143 did not effect our cash flows.

The following table illustrates the changes in our asset retirement
obligation during the period (in thousands):

|                                                  |  |                                 |       |    |   |  |  |      |  |           |       | 
|------------------------------------------------- |  | ------------------------------- | ----- | -- | - |  |  | ---- |  | --------- | ----- | 
|                                                  |  | Nine Months Ended September 30,
|                                                  |  |                                
|                                                  |  | 2003                            |       |    |   |  |  | 2002
|                                                  |  |                                 |       |    |   |  |  |     
|                                                  |  |                                 |       |    |   |  |  |      |  | Pro forma
|Asset retirement obligation - beginning of period |  | $                               | 2,556 |    |   |  |  |      |  | $         | 2,344 | 
|Accretion expense                                 |  |                                 | 171   |    |   |  |  |      |  |           | 159   | 
|Asset retirement costs incurred                   |  |                                 | (173  | )  |   |  |  |      |  |           |      | 
|                                                  |  |                                 |       |    |   |  |  |      |  |           |       | 
|Asset retirement obligation - end of period       |  | $                               | 2,554 | (1 | ) |  |  |      |  | $         | 2,503 | 
|                                                  |  |                                 |       |    |   |  |  |      |  |           |       | 

(1)  $538 included in other current liabilities

On a pro forma basis the effect of the adoption of SFAS 143 on our income
from continuing operations, our net income and our earnings per share for the
three months and nine months ended September 30, 2002 is not material.

Inventory.Our oil inventory is stated at the lower of cost to produce or
market value. Materials and supplies inventory is carried at the lower of cost
or market with cost determined on an average cost method. Inventory consists of
the following (in thousands):

|                       |  |           |       |              |  |   |       | 
|---------------------- |  | --------- | ----- | ------------ |  | - | ----- | 
|                       |  | September |       |              |  |  
|                       |  | 30,       |       | December 31,
|                       |  | 2003      |       | 2002        
|                       |  |           |       |             
|Oil                    |  | $         | 1,114 |              |  | $ | 1,482 | 
|Materials and supplies |  |           | 585   |              |  |   | 823   | 
|                       |  |           |       |              |  |   |       | 
|                       |  | $         | 1,699 |              |  | $ | 2,305 | 
|                       |  |           |       |              |  |   |       | 

Other Assets.Other assets consists of the following (in thousands):

|                      |  |           |        |              |  |   |       | 
|--------------------- |  | --------- | ------ | ------------ |  | - | ----- | 
|                      |  | September |        |              |  |  
|                      |  | 30,       |        | December 31,
|                      |  | 2003      |        | 2002        
|                      |  |           |        |             
|Restricted cash       |  | $         | 5,035  |              |  | $ | 5,000 | 
|Debt issue costs, net |  |           | 1,025  |              |  |   | 612   | 
|Receivable from PXP   |  |           | 3,202  |              |  |   | 3,202 | 
|Other                 |  |           | 913    |              |  |   | 1,053 | 
|                      |  |           |        |              |  |   |       | 
|                      |  | $         | 10,175 |              |  | $ | 9,867 | 
|                      |  |           |        |              |  |   |       | 

Federal and State Income Taxes.To reflect differences between the amounts
included in our financial statements at December 31, 2002 and the final 2002
tax returns filed by us and PXP, in the third quarter of 2003 we increased our
deferred tax liability by $4.4 million and decreased our stockholders equity
by such amount that is reflected as Spin-off of PXP in our statement of changes
in stockholders equity.

7



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##### 



Stock-Based Employee Compensation.Statement of Financial Accounting
Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123)
established financial accounting and reporting standards for stock-based
employee compensation. SFAS 123 defines a fair value based method of accounting
for an employee stock option or similar equity instrument. SFAS 123 also allows
an entity to continue to measure compensation cost for those instruments using
the intrinsic value-based method of accounting prescribed by Accounting
Principles Bulletin No. 25 Accounting for Stock Issued to Employees (APB
25). We have elected to follow APB 25 and related interpretations in
accounting for our employee stock options. Under APB 25, if the exercise price
of our employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized in the financial
statements. The compensation expense recorded under APB 25 for our restricted
stock awards is the same as that determined under SFAS 123.

8



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##### 



Set forth below is a summary of our net income and earnings per share as
reported and pro forma as if the fair value based method of accounting defined
in SFAS 123 had been applied (in thousands, except per share data).

|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | - | ------------------ | ---- | ----------------- | - | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                            |                     |   | Three Months Ended |      | Nine Months Ended
|                                                                                                                                            |                     |   | September 30,      |      | September 30,    
|                                                                                                                                            |                     |   |                    |      |                  
|                                                                                                                                            |                     |   | 2003               |      | 2002              |   | 2003   |      | 2002
|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |     
|Income available to common
stockholders, as reported                                                                                        |                     | $ | 5,825              |      |                   | $ | 10,835 |      |      | $ | 13,642 |      |  | $ | 26,405 |     
|Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects                                  |                     |   | 464                |      |                   |   | 133    |      |      |   | 1,161  |      |  |   | 446    |     
|Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects |                     |   | (2,090             | )    |                   |   | (1,263 | )    |      |   | (3,567 | )    |  |   | (1,954 | )   
|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|Pro forma net income                                                                                                                        |                     | $ | 4,199              |      |                   | $ | 9,705  |      |      | $ | 11,236 |      |  | $ | 24,897 |     
|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|Earnings per share:                                                                                                                         |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Basic-as reported   |   | $                  | 0.25 |                   |   | $      | 0.45 |      |   | $      | 0.58 |  |   | $      | 1.11 | 
|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Basic-pro forma     |   | $                  | 0.18 |                   |   | $      | 0.41 |      |   | $      | 0.48 |  |   | $      | 1.04 | 
|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Diluted-as reported |   | $                  | 0.24 |                   |   | $      | 0.44 |      |   | $      | 0.57 |  |   | $      | 1.08 | 
|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Diluted-pro forma   |   | $                  | 0.18 |                   |   | $      | 0.39 |      |   | $      | 0.45 |  |   | $      | 1.02 | 
|                                                                                                                                            |                     |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        |     

The fair value for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2003: risk-free interest rate of 3.0%; a volatility
factor of the expected market price of our common stock of 0.33; no expected
dividends; and weighted average expected option life of 4.4 years. No options
were granted during the nine months ended September 30, 2003. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period.

Recent Accounting Pronouncements. The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 149 Amendment
of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149)
on April 30, 2003. SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of SFAS
No. 149 had no effect on our financial statements.

In May 2003, the FASB issued Statement No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
(SFAS 150). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 had no effect on our financial statements.

In January 2003 FASB Interpretation 46, or FIN 46, Consolidation of
Variable Interest Entities was issued. FIN 46 identifies certain off-balance
sheet arrangements that meet the definition of a variable interest entity
(VIE). The primary beneficiary of a VIE is the party that is exposed to the
majority of the risks and/or returns of the VIE. In future accounting

9



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##### 



periods, the primary beneficiary will be required to consolidate the VIE.
In addition, more extensive disclosure requirements apply to the primary
beneficiary, as well as other significant investors. We do not believe we
participate in any arrangement that would be subject to the provisions of FIN
46.

Note 2  Ownership Interest in Plains All American Pipeline, L.P.

In March 2003, PAA issued 2.6 million common units in a public equity
offering. We recognized a gain of $6.1 million resulting from the increase in
the book value of our equity in PAA to reflect our proportionate share of the
increase in the underlying net assets of PAA due to the sale of the units. As a
result of that offering, we made a general partner capital contribution of
approximately $0.6 million.

In September 2003, PAA issued 3.2 million common units in a public equity
offering. We recognized a gain of $9.1 million resulting from the increase in
the book value of our equity in PAA to reflect our proportionate share of the
increase in the underlying net assets of PAA due to the sale of the units. As a
result of that offering, we made a general partner capital contribution of
approximately $0.9 million.

At September 30, 2003, our aggregate 23% ownership in PAA consisted of:
(i) a 44% ownership interest in the 2% general partner interest and incentive
distribution rights, (ii) 45%, or approximately 4.5 million, of the
subordinated units and (iii) 17%, or approximately 7.9 million, of the common
units (including approximately 1.3 million Class B common units).

PAA Financial Statement Information

The following table presents summarized financial statement information of
PAA (in thousands of dollars):

|                                     |  |                                  |           |                                 |  |      |           |      |  |   |           |  |  |   |           | 
|------------------------------------ |  | -------------------------------- | --------- | ------------------------------- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                     |  | Three Months Ended September 30, |           | Nine Months Ended September 30,
|                                     |  |                                  |           |                                
|                                     |  | 2003                             |           | 2002                            |  | 2003 |           | 2002
|                                     |  |                                  |           |                                 |  |      |           |     
|Revenues                             |  | $                                | 3,053,677 |                                 |  | $    | 2,344,089 |      |  | $ | 9,044,774 |  |  | $ | 5,874,759 | 
|Cost of sales and operations         |  |                                  | 3,003,017 |                                 |  |      | 2,299,823 |      |  |   | 8,881,257 |  |  |   | 5,750,398 | 
|Gross margin, excluding depreciation |  |                                  | 50,660    |                                 |  |      | 44,266    |      |  |   | 163,517   |  |  |   | 124,361   | 
|Operating income                     |  |                                  | 20,468    |                                 |  |      | 23,773    |      |  |   | 85,916    |  |  |   | 67,847    | 
|Net income                           |  |                                  | 11,871    |                                 |  |      | 16,317    |      |  |   | 59,620    |  |  |   | 47,549    | 

|                                        |  |               |           |              |  |   |           | 
|--------------------------------------- |  | ------------- | --------- | ------------ |  | - | --------- | 
|                                        |  | September 30, |           | December 31,
|                                        |  | 2003          |           | 2002        
|                                        |  |               |           |             
|Current assets                          |  | $             | 564,228   |              |  | $ | 602,935   | 
|Property and equipment, net             |  |               | 1,072,071 |              |  |   | 952,753   | 
|Other assets                            |  |               | 173,843   |              |  |   | 110,887   | 
|Total assets                            |  |               | 1,810,142 |              |  |   | 1,666,575 | 
|Current liabilities                     |  |               | 629,531   |              |  |   | 637,249   | 
|Long-term debt                          |  |               | 453,740   |              |  |   | 509,736   | 
|Other long-term liabilities             |  |               | 21,483    |              |  |   | 7,980     | 
|Partners capital                       |  |               | 705,388   |              |  |   | 511,610   | 
|Total liabilities and partners capital |  |               | 1,810,142 |              |  |   | 1,666,575 | 

10



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Note 3  Discontinued Operations

The results of operations of PXP, which have been reclassified as
discontinued operations for the three months and nine months ended September
30, 2002, are summarized as follows (in thousands):

|                                    |  |                    |         |                    |  |   |         |  
|----------------------------------- |  | ------------------ | ------- | ------------------ |  | - | ------- | -
|                                    |  | Three Months       |         | Nine Months       
|                                    |  | Ended              |         | Ended             
|                                    |  | September 30, 2002 |         | September 30, 2002
|                                    |  |                    |         |                   
|Revenues                            |  | $                  | 50,907  |                    |  | $ | 136,720 |  
|Costs and expenses                  |  |                    | (32,135 | )                  |  |   | (85,450 | )
|                                    |  |                    |         |                    |  |   |         |  
|Income from operations              |  |                    | 18,772  |                    |  |   | 51,270  |  
|Other income (expense)              |  |                    | (6,631  | )                  |  |   | (16,013 | )
|                                    |  |                    |         |                    |  |   |         |  
|Income before income taxes          |  |                    | 12,141  |                    |  |   | 35,257  |  
|Income tax expense                  |  |                    | (4,723  | )                  |  |   | (13,757 | )
|                                    |  |                    |         |                    |  |   |         |  
|Income from discontinued operations |  | $                  | 7,418   |                    |  | $ | 21,500  |  
|                                    |  |                    |         |                    |  |   |         |  

Note 4  Derivative Instruments and Hedging Activities

We have entered into various derivative instruments to reduce our exposure
to fluctuations in the market price of oil. The derivative instruments consist
primarily of oil swap and option contracts entered into with financial
institutions. Derivative instruments are accounted for in accordance with SFAS
No. 133 Accounting for Derivative Instruments and Hedging Activities as
amended by SFAS 137, SFAS 138 and SFAS 149, or SFAS 133. All derivative
instruments are recorded on the balance sheet at fair value. If the derivative
does not qualify as a hedge or is not designated as a hedge, the gain or loss
on the derivative is recognized currently in earnings. If the derivative
qualifies for hedge accounting, the gain or loss on the derivative is deferred
in Accumulated Other Comprehensive Income (OCI), a component of our
stockholders equity, to the extent the hedge is effective. Gains and losses on
oil hedging instruments related to OCI and adjustments to carrying amounts on
hedged volumes are included in oil revenues in the period that the related
volumes are delivered.

The relationship between the hedging instrument and the hedged item must
be highly effective in achieving the offset of changes in cash flows
attributable to the hedged risk both at the inception of the contract and on an
ongoing basis. Hedge accounting is discontinued prospectively when a hedge
instrument becomes ineffective. Gains and losses deferred in OCI related to
cash flow hedges that become ineffective remain unchanged until the related
product is delivered. If it is determined that it is probable that a hedged
forecasted transaction will not occur, deferred gains or losses on the hedging
instrument are recognized in earnings immediately.

We formally document all relationships between hedging instruments and
hedged items, as well as our risk management objectives and strategy for
undertaking the hedge. Hedge effectiveness is measured at least on a quarterly
basis. This process includes specific identification of the hedging instrument
and the hedged item, the nature of the risk being hedged and how the hedging
instruments effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis, we assess whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows
of hedged items.

In the first quarter of 2003, the NYMEX oil price and the price we
received for our Florida oil production did not correlate closely enough for
the hedges to qualify for hedge accounting. As a result, we were required to
discontinue hedge accounting effective February 1, 2003 and reflect the
mark-to-market value of the hedges in earnings prospectively from that date. In
the first nine months of 2003, we recorded $3.0 million loss on derivatives
that consisted of a $1.3 million loss for the decrease in the fair value of our
derivatives and a $1.7 million loss on cash settlements of such derivatives. In
addition a $0.3 million loss on cash settlements for January 2003 is reflected
as a reduction of revenues. None of our current hedges qualify for hedge
accounting.

11



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##### 



At September 30, 2003, Accumulated OCI consisted of unrealized losses of
$0.5 million ($0.3 million, net of tax) on our oil hedging instruments
generated prior to the discontinuation of hedge accounting, unrealized losses
of $0.5 million ($0.3 million, net of tax) related to pension liabilities and
an unrealized gain of $10.8 million ($6.0 million, net of tax) related to our
equity in the OCI gains of PAA. At September 30, 2003, the liability related to
our open oil hedging instruments was included in current liabilities ($1.1
million), other long-term liabilities ($0.6 million), and deferred income taxes
(a tax benefit of $0.2 million).

As of September 30, 2003, $0.5 million ($0.3 million, net of tax) of
deferred net losses on our oil derivative instruments recorded in OCI are
expected to be reclassified to earnings during the following twelve month
period as the hedged volumes are produced and sold.

At September 30, 2003, we had the following open oil derivative positions:

|      |                          |  |                 |       |      |  |      |       |      |  |  |     |  |  |  |     | 
|----- | ------------------------ |  | --------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | --- |  |  |  | --- | 
|      |                          |  | Barrels per Day
|      |                          |  |                
|      |                          |  | 2003            |       | 2004 |  | 2005 |       | 2006
|      |                          |  |                 |       |      |  |      |       |     
|Swaps |                          |  |                 |       |      |  |      |       |      |  |  |     |  |  |  |    
|      | Average price $26.10/bbl |  |                 | 1,500 |      |  |      |      |      |  |  |    |  |  |  |    | 
|      | Average price $24.07/bbl |  |                 |      |      |  |      | 1,000 |      |  |  |    |  |  |  |    | 
|      | Average price $24.30/bbl |  |                 |      |      |  |      |      |      |  |  | 500 |  |  |  |    | 
|      | Average price $23.85/bbl |  |                 |      |      |  |      |      |      |  |  |    |  |  |  | 500 | 

Location and quality differentials attributable to our properties are not
included in the foregoing prices. Because of the quality and location of our
oil production, these adjustments will reduce our net price per barrel.

Note 5  Long-Term Debt and Credit Facilities

Secured Term Loan Facility

In December 2002, we entered into a $45 million secured term loan facility
with a group of banks. We used proceeds from the term loan and cash on hand to
make a $40 million capital contribution and repay a $7.2 million note payable
to PXP. In June 2003, the facility was restructured to allow us to borrow an
additional $24 million that was used to repurchase the 46,600 outstanding
shares of our Series D Cumulative Convertible Preferred Stock and pay accrued
dividends and related expenses. At September 30, 2003, $55.0 million was
outstanding under the secured term loan facility. The term loan is repayable in
twelve quarterly installments of $5.0 million commencing in August 2003 with a
final maturity of May 31, 2006. Amounts outstanding under the term loan bear an
annual interest rate, at our election, equal either to the Base Rate (as
defined in the agreement) plus 1.5%, or LIBOR plus 3%. The term loan requires
that we maintain $5.0 million on deposit in a debt service reserve account with
one of the lending banks. Our average borrowing rate for the nine months ended
September 30, 2003 was 4.3% (4.1% at September 30, 2003).

To secure the term loan, we pledged 100% of the shares of stock of our
subsidiaries and pledged 5.2 million of our PAA common units. To the extent
that the outstanding principal under the term loan exceeds the balance in the
debt service reserve account plus 50% of the fair market value of the pledged
common units, we are required to repay the excess. The fair market value of the
pledged units is determined based on the closing price of PAA common units as
reported on the New York Stock Exchange.

The term loan contains covenants that limit our ability, as well as the
ability of our subsidiaries, to incur additional debt, make investments, create
liens, enter into leases, sell assets, change the nature of our business or
operations, guarantee other indebtedness, enter into certain types of hedge
agreements, enter into take-or-pay arrangements, merge or consolidate and enter
into transactions with affiliates. In addition, if an event of default exists,
the term loan prohibits us from paying dividends or repurchasing or redeeming
shares of any class of capital stock. The term loan requires us to maintain a
minimum consolidated tangible net worth (as defined) and a consolidated debt
service coverage ratio (as defined in the agreement) of 1.0 to 1.0. At
September 30, 2003, we were in compliance with the covenants contained in the
term loan facility.

12



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##### 



Note 6  Earnings Per Share

The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for income from
continuing operations before the cumulative effect of accounting changes for
the three months and nine months ended September 30, 2003 and 2002 (in
thousands, except per share amounts):

|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |      | 
|------------------------------------------------------------------ | --------------------------------------- | - | -------------------------------- | ---- | ------------------------------- | - | ------ | ---- | ------- | - | ------ | ---- | ------- | - | ------ | ---- | ------- | - | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                   |                                         |   | Three Months Ended September 30, |      | Nine Months Ended September 30,
|                                                                   |                                         |   |                                  |      |                                
|                                                                   |                                         |   | 2003                             |      | 2002                            |   | 2003   |      | 2002   
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |        
|                                                                   |                                         |   | Basic                            |      | Diluted                         |   | Basic  |      | Diluted |   | Basic  |      | Diluted |   | Basic  |      | Diluted
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |        
|Income from continuing operations                                  |                                         | $ | 5,825                            |      |                                 | $ | 5,825  |      |         | $ | 3,767  |      |         | $ | 3,767  |      |         | $ | 13,312 |      |  | $ | 13,312 |      |  | $ | 5,955  |      |  | $ | 5,955  |     
|Preferred dividends                                                |                                         |   |                                 |      |                                 |   |       |      |         |   | (350   | )    |         |   | (350   | )    |         |   | (603   | )    |  |   | (603   | )    |  |   | (1,050 | )    |  |   | (1,050 | )   
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|Income from continuing operations
available to common stockholders |                                         |   | 5,825                            |      |                                 |   | 5,825  |      |         |   | 3,417  |      |         |   | 3,417  |      |         |   | 12,709 |      |  |   | 12,709 |      |  |   | 4,905  |      |  |   | 4,905  |     
|Income from discontinued operations,
net of tax                    |                                         |   |                                 |      |                                 |   |       |      |         |   | 7,418  |      |         |   | 7,418  |      |         |   |       |      |  |   |       |      |  |   | 21,500 |      |  |   | 21,500 |     
|Effect of accounting changes, net of tax                           |                                         |   |                                 |      |                                 |   |       |      |         |   |       |      |         |   |       |      |         |   | 933    |      |  |   | 933    |      |  |   |       |      |  |   |       |     
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|Income available to common stockholders                            |                                         | $ | 5,825                            |      |                                 | $ | 5,825  |      |         | $ | 10,835 |      |         | $ | 10,835 |      |         | $ | 13,642 |      |  | $ | 13,642 |      |  | $ | 26,405 |      |  | $ | 26,405 |     
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|Weighted average number of shares of
common stock outstanding      |                                         |   | 23,381                           |      |                                 |   | 23,381 |      |         |   | 23,956 |      |         |   | 23,956 |      |         |   | 23,610 |      |  |   | 23,610 |      |  |   | 23,826 |      |  |   | 23,826 |     
|Effect of dilutive securities                                      |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|                                                                   | Convertible preferred stock             |   |                                  |     |                                 |   |        |     |         |   |        |     |         |   |        |     |         |   |        |     |  |   |        | 943  |  |   |        |     |  |   |        |     | 
|                                                                   | Stock options and restricted stock      |   |                                  |     |                                 |   |        | 594  |         |   |        |     |         |   |        | 661  |         |   |        |     |  |   |        | 487  |  |   |        |     |  |   |        | 629  | 
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|Weighted average common shares                                     |                                         |   | 23,381                           |      |                                 |   | 23,975 |      |         |   | 23,956 |      |         |   | 24,617 |      |         |   | 23,610 |      |  |   | 25,040 |      |  |   | 23,826 |      |  |   | 24,455 |     
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|Earnings per share                                                 |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|                                                                   | Continuing operations                   |   | $                                | 0.25 |                                 |   | $      | 0.24 |         |   | $      | 0.14 |         |   | $      | 0.14 |         |   | $      | 0.54 |  |   | $      | 0.53 |  |   | $      | 0.21 |  |   | $      | 0.20 | 
|                                                                   | Discontinued operations                 |   |                                  |     |                                 |   |        |     |         |   |        | 0.31 |         |   |        | 0.30 |         |   |        |     |  |   |        |     |  |   |        | 0.90 |  |   |        | 0.88 | 
|                                                                   | Effect of accounting changes            |   |                                  |     |                                 |   |        |     |         |   |        |     |         |   |        |      |         |   |        | 0.04 |  |   |        | 0.04 |  |   |        |     |  |   |        |     | 
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     
|                                                                   | Income available to common stockholders |   | $                                | 0.25 |                                 |   | $      | 0.24 |         |   | $      | 0.45 |         |   | $      | 0.44 |         |   | $      | 0.58 |  |   | $      | 0.57 |  |   | $      | 1.11 |  |   | $      | 1.08 | 
|                                                                   |                                         |   |                                  |      |                                 |   |        |      |         |   |        |      |         |   |        |      |         |   |        |      |  |   |        |      |  |   |        |      |  |   |        |     

In the nine months ended September 30, 2003 and the three months and nine
months ended September 30, 2002, our cumulative convertible preferred stock was
not included in the computation of diluted earnings per share because the
effect was antidilutive.

Note 7  Stockholders Equity

In June 2003, we paid $23.3 million to retire the 46,600 outstanding
shares of our Series D Cumulative Convertible Preferred Stock, or Series D
Preferred. The Series D Preferred was convertible into 1,671,416 shares of
common stock at a price of $13.94 per share and paid an annual dividend of
$30.00 per share.

Our Board of Directors has authorized the repurchase of up to eight
million shares of our common stock. Through December 31, 2002, we had
repurchased a total of 4.1 million shares at a total cost of approximately
$91.3 million. In the first nine months of 2003, we have repurchased an
additional 0.8 million shares at a total cost of $9.0 million.

13



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Note 8  Related Party Transactions

Governance of PAA

We, along with Sable Investments, L.P. (which is owned by Mr. Flores, our
Chairman, and Mr. Raymond, our Chief Executive Officer and President), Kafu
Holdings, L.P. (which is controlled by Kayne Anderson Capital Advisors, L.P.
and Kayne Anderson Investment Management, Inc., of which Mr. Sinnott, one of
our directors, is Senior Vice President), and E-Holdings III, L.P. (which is
controlled by EnCap Investments L.L.C. and of which Mr. Phillips, one of our
directors, is a managing director and principal) are parties to agreements
governing Plains All American GP LLC, which is the general partner of Plains
AAP, L.P., and Plains AAP, L.P., which is the general partner of PAA. These
agreements govern the ongoing management and control of PAA.

In addition, Plains AAP, L.P., the general partner of PAA, is owned as
follows:

|                        |  |  |        |  
|----------------------- |  |  | ------ | -
|Plains Resources        |  |  | 44.00  | %
|Sable Investments, L.P. |  |  | 20.00  | %
|Kafu Holdings, L.P.     |  |  | 16.42  | %
|E-Holdings, L.P.        |  |  | 9.00   | %
|Others                  |  |  | 10.58  | %
|                        |  |  |        |  
|                        |  |  | 100.00 | %
|                        |  |  |        |  

Also, each of we, Sable Investments, Kafu Holdings, and E-Holdings may
appoint one member of the Plains All American GP LLC board of directors.

Value Assurance Agreements

We entered into value assurance agreements with Sable Investments, Kafu
Holdings, E-Holdings and other parties with respect to the 5.2 million
subordinated units they acquired from us in our June 2001 strategic
restructuring. The value assurance agreements require us to pay to them an
amount per fiscal year, payable on a quarterly basis, equal to the difference
between $1.85 per unit and the actual amount distributed during that period.
The value assurance agreements will expire upon the earlier of the conversion
of the subordinated units to common units, or June 8, 2006.

Oil Marketing Agreement

PAA is the exclusive marketer/purchaser for all of our equity oil
production. The marketing agreement provides that PAA will purchase for resale
at market prices all of our equity oil production for which PAA charges a fee
of $0.20 per barrel. For the nine months ended September 30, 2003 and 2002,
sales of oil to PAA under the agreement totaled $19.5 million and $16.6
million, respectively, including the royalty share of production. For the nine
months ended September 30, 2003 and 2002, PAA charged us $0.1 million in each
period in marketing fees.

Agreements with PXP

In connection with the reorganization and the spin-off we entered into
certain agreements with PXP, including a master separation agreement; an
intellectual property agreement; the Plains Exploration & Production transition
services agreement; the Plains Resources transition services agreement; and a
technical services agreement. For the nine months ended September 30, 2003, PXP
billed us $0.4 million for services provided to us under these agreements and
we billed PXP $0.1 million for services we provided under these agreements.

Other

From time to time we charter private aircraft from Gulf Coast Aviation
Inc. (Gulf Coast), which is not affiliated with us or our employees. On
certain occasions, the aircraft that Gulf Coast charters is owned by our
Chairman of the Board. In the nine months ended September 30, 2003 and 2002, we
paid Gulf Coast $10,000 and $425,000, respectively, for aircraft chartering
services provided by Gulf Coast using an aircraft owned by our Chairman. The
charters were arranged through arms-length dealings with Gulf Coast and the
rates were market based.

14



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Note 9  Commitments and Contingencies

On September 18, 2002, Stocker Resources Inc., or Stocker, the general
partner of PXP before it was converted from a limited partnership to a
corporation, filed a declaratory judgment action against Commonwealth Energy
Corporation, or Commonwealth, in the Superior Court of Orange County,
California relating to the termination of an electric service contract. Stocker
is seeking a declaratory judgment that it was entitled to terminate the
contract and that Commonwealth has no basis for proceeding against Stockers
related $1.5 million performance bond. Also on September 18, 2002, Stocker was
named a defendant in an action brought by Commonwealth in the Superior Court of
Orange County, California for breach of the electric service contract.
Commonwealth is seeking unspecified damages. The two cases have been
consolidated and set for trial in December 2003. Stocker was merged into us in
December 2002. Under our master separation agreement with PXP, we are
indemnified for damages we incur as a result of this action. We intend to
defend our rights vigorously in this matter.

We, in the ordinary course of business, are a claimant and/or defendant in
various other legal proceedings. While the outcome of these lawsuits cannot be
predicted with certainty and could have a material adverse effect on our
financial position, we do not believe that the outcome of these legal
proceedings, individually and in the aggregate, will have a materially adverse
effect on our financial condition, results of operations or cash flows.

Note 10  Supplemental Disclosures of Cash Flow Information

Selected cash payments and noncash activities, including amounts
attributable to discontinued operations, were as follows (in thousands):

|                                                       |                                                     |   |                     |     |                     |   |        |     |      |   |       |     |  |   |        |       | 
|------------------------------------------------------ | --------------------------------------------------- | - | ------------------- | --- | ------------------- | - | ------ | --- | ---- | - | ----- | --- |  | - | ------ | ----- | 
|                                                       |                                                     |   | Three Months        |     | Nine Months        
|                                                       |                                                     |   | Ended September 30, |     | Ended September 30,
|                                                       |                                                     |   |                     |     |                    
|                                                       |                                                     |   | 2003                |     | 2002                |   | 2003   |     | 2002
|                                                       |                                                     |   |                     |     |                     |   |        |     |     
|Cash paid for interest                                 |                                                     | $ | 728                 |     |                     | $ | 10,688 |     |      | $ | 1,612 |     |  | $ | 25,581 |      
|                                                       |                                                     |   |                     |     |                     |   |        |     |      |   |       |     |  |   |        |      
|Cash paid for taxes                                    |                                                     | $ | 206                 |     |                     | $ | 474    |     |      | $ | 1,738 |     |  | $ | 3,746  |      
|                                                       |                                                     |   |                     |     |                     |   |        |     |      |   |       |     |  |   |        |      
|Noncash sources of investing and financing activities: |                                                     |   |                     |     |                     |   |        |     |      |   |       |     |  |   |        |      
|                                                       | Tax benefit from exercise of employee stock options |   | $                   | 129 |                     |   | $      | 512 |      |   | $     | 247 |  |   | $      | 2,248 | 
|                                                       |                                                     |   |                     |     |                     |   |        |     |      |   |       |     |  |   |        |      

15



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ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in connection with the
information contained in the consolidated financial statements and notes
thereto included elsewhere in this report.

We are an independent energy company. We are principally engaged in the
midstream activities of marketing, gathering, transporting, terminalling, and
storage of oil through our equity ownership in Plains All American Pipeline,
L.P., or PAA. PAA is a publicly traded master limited partnership actively
engaged in the midstream energy markets. As of September 30, 2003, we owned 44%
of the general partner of PAA and 12.4 million limited partner units of PAA,
which represented approximately 23% aggregate ownership interest in PAA. We
also participate in the upstream activities of acquiring, exploiting,
developing, exploring for and producing oil through our wholly owned
subsidiary, Calumet Florida L.L.C., which has producing properties in the
Sunniland Trend in south Florida.

At September 30, 2003, the book value of our ownership interest in PAA
represents 57% of our total assets, the book value of our Florida oil
properties represents 33% of our total assets and our current assets and other
assets (including $5.0 million of restricted cash) represent 10% of our total
assets. As of December 31, 2002, the present value of our proved oil reserves
was approximately $87.9 million. We own 6.6 million common units, 1.3 million
Class B common units and 4.5 million subordinated units of PAA. The closing
price of publicly traded PAA common units, as reported on the New York Stock
Exchange, was $30.05 on September 30, 2003. The Class B common units and the
subordinated units are not publicly traded but do receive cash distributions
from PAA. PAAs partnership agreement contains provisions which, upon the
occurrence of certain future events, will result in the conversion of the
subordinated units to common units. During the first nine months of 2003 we had
oil sales of $16.5 million and distributions received from PAA attributable to
our general and limited partner interests totaled $23.1 million. PAAs
financial performance directly impacts our financial performance and the market
value performance of PAAs limited partner interests directly impacts the value
of our assets. As a result, we encourage you to review PAAs SEC filings,
including its Annual Report on Form 10-K for the year ended December 31, 2002
and it Quarterly Report on Form 10-Q for the quarter ended September 30, 2003,
to review and assess, among other things, PAAs financial performance and
financial condition, PAAs business, operations, and competition, and risk
factors associated with PAAs business.

Spin-off of Plains Exploration & Production Company

On December 18, 2002, we distributed 100 percent of the common shares of
Plains Exploration & Production Company, or PXP, our wholly owned subsidiary
that owned oil and gas properties offshore and onshore California and in
Illinois, to our stockholders, the spin-off. As a result of the spin-off, the
historical results of the operations of PXP are reflected in our financial
statements as discontinued operations. Except where noted, discussions in
this Form 10-Q with respect to oil and gas operations relate to our activities
other than the discontinued operations.

General

Upstream Operations

We follow the full cost method of accounting whereby all costs associated
with property acquisition, exploration, exploitation and development activities
are capitalized. Our revenues are derived from the sale of oil. We recognize
revenues when our production is sold and title is transferred. Our revenues are
highly dependent upon the prices of, and demand for oil. Historically, the
markets for oil have been volatile and are likely to continue to be volatile in
the future. The prices we receive for our oil and our levels of production are
subject to wide fluctuations and depend on numerous factors beyond our control,
including supply and demand, economic conditions, foreign imports, the actions
of OPEC, political conditions in other oil-producing countries, and
governmental regulation, legislation and policies. Under the SECs full cost
accounting rules, we review the carrying value of our proved oil and gas
properties each quarter. These rules generally require that we price our future
oil and gas production at the oil and gas prices, adjusted for cash flow
hedges, in effect at the end of each fiscal quarter to determine a ceiling
value of our properties. The rules require a write-down if our capitalized
costs exceed the allowed ceiling. We have had no write-downs due to these
ceiling test limitations since 1998. Given the volatility of oil prices, it is
likely that our estimate of discounted future net revenues from proved oil and
gas reserves will fluctuate in the near term. If oil prices decline in the
future, write-downs of our oil and gas properties could occur. Write-downs
required by these rules do not directly impact our cash flows from operating
activities. Decreases in oil and gas prices have had, and will likely have in
the future, an adverse effect on the carrying value of our proved reserves and our revenues, profitability and cash flow.

16



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To manage our exposure to commodity price risks, we use various derivative
instruments to hedge our exposure to oil sales price fluctuations. Our hedging
arrangements provide us protection on the hedged volumes if oil prices decline
below the prices at which these hedges are set. However, if oil prices
increase, ceiling prices in our hedges may cause us to receive lower revenues
on the hedged volumes than we would receive in the absence of hedges. Gains and
losses from hedging transactions are recognized as revenues when the associated
production is sold. The relationship between the hedging instrument and the
hedged item must be highly effective in achieving the offset of changes in cash
flows attributable to the hedged risk both at the inception of the contract and
on an ongoing basis. Hedge accounting is discontinued prospectively when a
hedge instrument becomes ineffective and changes in value are reflected in
earnings prospectively from the date the hedge becomes ineffective. Gains and
losses deferred in other comprehensive income, or OCI, related to cash flow
hedges that become ineffective remain unchanged until the related product is
delivered.

In the first quarter of 2003, the NYMEX oil price and the price we
received for our Florida oil production did not correlate closely enough for
our hedges to qualify for hedge accounting. As a result, we were required to
discontinue hedge accounting effective February 1, 2003 and reflect the
mark-to-market value of the hedges in earnings prospectively from that date.
None of our current hedges qualify for hedge accounting.

Our oil production expenses include salaries and benefits of personnel
involved in production activities, electric costs, maintenance costs, and other
costs necessary to operate our producing properties. Depletion of capitalized
costs of producing oil and gas properties is provided using the units of
production method based upon proved reserves. For the purposes of computing
depletion, proved reserves are redetermined as of the end of each year and on
an interim basis when deemed necessary. General and administrative expenses
consist primarily of salaries and related benefits of administrative personnel,
office rent, systems costs and other administrative costs.

Midstream Operations

We account for our ownership interest in PAA using the equity method of
accounting. We record equity in earnings of PAA based on our aggregate
ownership interest, as adjusted for general partner incentive distributions.
Equity in earnings for our general partner interest is based on our 44% share
of 2% of PAAs net income plus the amount of the general partner incentive
distribution. Equity in earnings for our limited partner units is based on our
ownership percentage of limited partner units (23% at September 30, 2003)
multiplied by 98% of PAAs net income less the general partner incentive
distribution. Increased earnings attributable to the general partner incentive
distributions will be somewhat offset because of our ownership of limited
partner units. Cash distributions received from PAA are not reflected in
earnings, but reduce our ownership interest in PAA.

When PAA sells additional limited partner units and we do not purchase
additional units, our ownership interest in PAA is reduced, creating an
implied sale of a portion of our ownership interest. We have recognized gains
from PAA equity issuances representing the difference between our carrying cost
and the fair value of the interest deemed sold.

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Results of Operations

The following table reflects the components of our oil revenues from
continuing operations and sets forth our revenues and costs and expenses from
continuing operations on a BOE basis:

|                           |                                 |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |       |  
|-------------------------- | ------------------------------- |  | ------------------ | ----- | ----------------- |  | ----- | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | -
|                           |                                 |  | Three Months Ended |       | Nine Months Ended
|                           |                                 |  | September 30,      |       | September 30,    
|                           |                                 |  |                    |       |                  
|                           |                                 |  | 2003               |       | 2002              |  | 2003  |       | 2002
|                           |                                 |  |                    |       |                   |  |       |       |     
|Production (MBbls)         |                                 |  | 197                |       |                   |  | 231   |       |      |  | 635   |       |   |  | 708   |      
|Sales (MBbls)              |                                 |  | 211                |       |                   |  | 225   |       |      |  | 690   |       |   |  | 643   |      
|Sales price per bbl        |                                 |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |      
|                           | Average NYMEX price             |  | $                  | 30.21 |                   |  | $     | 28.25 |      |  | $     | 30.94 |   |  | $     | 25.45 |  
|                           | Differential                    |  |                    | (6.90 | )                 |  |       | (4.60 | )    |  |       | (6.97 | ) |  |       | (3.23 | )
|                           |                                 |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |      
|                           |                                 |  | 23.31              |       |                   |  | 23.65 |       |      |  | 23.97 |       |   |  | 22.22 |      
|                           | Hedging                         |  |                    |      |                   |  |       | (0.76 | )    |  |       | (0.43 | ) |  |       | (0.66 | )
|                           |                                 |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |      
|                           |                                 |  | 23.31              |       |                   |  | 22.89 |       |      |  | 23.54 |       |   |  | 21.56 |      
|                           | Derivative cash settlements     |  |                    | (2.70 | )                 |  |       |      |      |  |       | (2.45 | ) |  |       |      |  
|                           |                                 |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |      
|                           |                                 |  | 20.61              |       |                   |  | 22.89 |       |      |  | 21.09 |       |   |  | 21.56 |      
|Costs and expenses per bbl |                                 |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |      
|                           | Production expenses             |  |                    | 9.05  |                   |  |       | 7.13  |      |  |       | 7.66  |   |  |       | 6.69  |  
|                           | Production and ad valorem taxes |  |                    | 1.19  |                   |  |       | 0.65  |      |  |       | 1.29  |   |  |       | 0.58  |  
|                           | Oil transportation expenses     |  |                    | 4.35  |                   |  |       | 4.20  |      |  |       | 4.27  |   |  |       | 4.32  |  
|                           | DD&A (oil & gas properties)     |  |                    | 4.68  |                   |  |       | 3.76  |      |  |       | 4.74  |   |  |       | 3.83  |  

In the first quarter of 2003, the NYMEX oil price and the price we receive
for our Florida oil production did not correlate closely enough for our hedges
to qualify for hedge accounting. As a result, we were required to discontinue
hedge accounting effective February 1, 2003 and reflect the mark-to-market
value of the derivatives in earnings prospectively from that date. The $2.1
million ($1.0 million, net of tax) net loss in OCI at January 31, 2003 ($0.5
million, $0.3 million net of tax at September 30, 2003) related to these hedges
will be recognized in earnings as the related production is delivered. In 2003
the hedging amount relates only to oil sold in January 2003. None of our
current derivatives qualify for hedge accounting. Derivative instruments that
we enter into in the future may or may not qualify for hedge accounting.

Comparison of Three Months Ended September 30, 2003 to Three Months Ended
September 30, 2002

Net income was $5.8 million for the third quarter of 2003 compared to
income from continuing operations of $3.8 million for the third quarter of
2002. Including income from discontinued operations, net income was $11.2
million for the third quarter of 2002.

Oil revenues.Oil revenues, excluding the effect of hedging, decreased
8%, or $0.4 million, from $5.3 million for the third quarter of 2002 to $4.9
million for the third quarter of 2003. Our average sales price for oil
excluding hedging decreased 1%, or $0.34, to $23.31 per Bbl for the third
quarter of 2003 from $23.65 per Bbl for the third quarter of 2002. An increase
in the NYMEX price to $30.21 per Bbl was more than offset by an increase in the
average differential for location and quality from $4.60 per Bbl in 2002 to
$6.90 in 2003. Including the effect of hedging, our average realized price for
the 2002 period was $22.89 per barrel. After deducting our $2.70 per barrel
loss on cash settlements of derivatives our average realized price for the 2003
period was $20.61 per barrel.

Reported sales volumes from our Florida properties were 211 MBbls in 2003
compared to 225 MBbls in 2002. In accordance with SEC Staff Accounting Bulletin
101 we reflect revenue from oil production in the period it is sold as opposed
to when it is produced. Oil volumes decreased 15% on an as produced basis,
with production volumes of 197 MBbls in 2003 compared to 231 MBbls in 2002. The
location of our Florida properties and the timing of the barges that transport
the oil to market cause reported sales volumes to differ from production
volumes. Actual timing of sales volumes is difficult to predict. In addition, our Florida properties consist of a
relatively low number of higher volume wells and downtime due to equipment
failures and other operational issues can cause production from this area to be
volatile.

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Production expenses.Production expenses increased 19%, or $0.3 million,
to $1.9 million ($9.05 per Bbl) for the third quarter of 2003 from $1.6 million
($7.13 per Bbl) for the third quarter of 2002. The increase is primarily
attributable to increased fuel and electricity costs and repairs and
maintenance.

Production and ad valorem taxes. Production and ad valorem taxes
increased $0.1 million, to $0.3 million for the third quarter of 2003 from $0.2
million for the third quarter of 2002 primarily due to the expiration of
severance tax exemptions for several wells in the third quarter of 2002. Unit
production and ad valorem taxes for 2003 were $1.19 per Bbl compared to $0.65
per Bbl in 2002.

Oil transportation expenses. Oil transportation expenses was $0.9 million
in the third quarter of 2003 and 2002. On a per Bbl basis, gathering and
transportation expenses increased to $4.35 per Bbl in 2003 from $4.20 per Bbl
in 2002 due to decreased sales volumes.

Depreciation, depletion and amortization.Depreciation, depletion and
amortization, or DD&A expense, increased 22%, or $0.2 million, to $1.1 million
for the third quarter of 2003 from $0.9 million for the third quarter of 2002.
The increase is due to an increase in the per unit DD&A rate ($4.68 per Bbl in
2003 versus $3.76 per Bbl in 2002).

Accretion of asset retirement obligation.Accretion expense for the third
quarter of 2003 was $0.1 million. Accretion expense represents the adjustment
of our asset retirement obligation to its present value at the end of the
period.

Equity in earnings of Plains All American Pipeline, L.P.Our equity in
earnings of PAA decreased $1.4 million to $3.1 million for the third quarter of
2003 from $4.5 million for the third quarter of 2002. PAA reported net income
of $11.9 million in the third quarter of 2003 compared to $16.3 million in the
third quarter of 2002. Our equity in earnings of PAA was reduced by
approximately $1.7 million as a result of a $7.4 million compensation accrual
by PAA associated with its long term incentive plan and approximately $0.6
million pre-tax as a result of a $2.9 million noncash, derivative
mark-to-market loss recognized by PAA. Our ownership interest in PAA averaged
24% in the third quarter of 2003 compared to 27% in the third quarter of 2002.

Gain on Plains All American Pipeline, L.P. unit offerings.In the third
quarter of 2003 and 2002 we recognized noncash gains of $9.1 million and $14.5
million, respectively, related to PAAs public equity offerings in these
periods. The gains are recognized to reflect our proportionate share of the
increase in the underlying net assets of PAA resulting from the equity
offerings.

Gain (loss) on derivatives. As previously discussed, we were required to
discontinue hedge accounting effective February 1, 2003. As a result, in the
third quarter of 2003 we recorded a $1.2 million loss on derivatives that
consisted of a $0.6 million loss reflecting the decrease in the fair value of
our derivatives and a $0.6 million loss on cash settlements.

Loss on debt extinguishment.In 2002 we incurred a $10.3 million loss
from the early retirement of $267.5 million of outstanding 10.25% notes. The
expense included a call premium of 3.4167% on the outstanding principal amount
of the 10.25% notes, or $9.1 million, and approximately $1.2 million related to
unamortized premiums on the 10.25% notes and unamortized issue costs on the
10.25% notes and our credit facility.

Interest expense.Interest expense decreased $1.7 million, to $0.6
million for the third quarter of 2003 from $2.3 million for the third quarter
of 2002, primarily reflecting lower outstanding debt.

Income tax expense.Income tax expense increased $0.8 million to $3.8
million for the third quarter of 2003 from $3.0 million for the third quarter
of 2002. The increase was primarily due to higher pre-tax income from
continuing operations.

Our effective tax rate was 40% in the third quarter of 2003 compared to
44% in the third quarter of 2002. Our effective tax rate reflects the Canadian
taxes attributable to our share of PAAs earnings related to their Canadian
operations. For U.S. federal income tax purposes, we utilize net operating loss
carryforwards, or NOLs, to reduce our currently payable taxes. As a result, we
receive a deduction rather than a credit for Canadian income taxes. Our
effective rate for the third
quarter of 2003 is lower than our nine months effective rate of 45% due to
a downward revision of our estimated annual effective rate in the third
quarter.

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Income from discontinued operations.Income from discontinued operations
of $7.4 million in the third quarter of 2002 reflects the net after tax
earnings of PXP, which was spun off in the fourth quarter of 2002.

Comparison of Nine Months ended September 30, 2003 to Nine Months ended
September 30, 2002

Net income was $14.2 million for the first nine months of 2003 compared to
income from continuing operations of $6.0 million for the first nine months of
2002. Including income from discontinued operations net income was $27.5
million in the first nine months of 2002.

Oil revenues.Oil revenues, excluding the effect of hedging, increased
16%, or $2.3 million, from $14.2 million for the first nine months of 2002 to
$16.5 million for the first nine months of 2003. The increase was due to
increased sales volumes. Our average sales price for oil excluding hedging
increased 8%, or $1.75, to $23.97 per Bbl in 2003 from $22.22 per Bbl in 2002.
An increase in the NYMEX price to $30.94 per Bbl was partially offset by an
increase in the average differential for location and quality from $3.23 per
Bbl in 2002 to $6.97 in 2003. Including the effect of hedging our average
realized price for 2002 was $21.56 per barrel and our 2003 average realized
price was $23.54 per barrel. After deducting our $2.45 per barrel loss on cash
settlements of derivatives our average realized price for the 2003 period was
$21.09 per barrel.

We reported sales volumes from our Florida properties of 690 MBbls in 2003
compared to 643 MBbls in 2002. In accordance with SEC Staff Accounting Bulletin
101 we reflect revenue from oil production in the period it is sold as opposed
to when it is produced. Oil volumes decreased 10% on an as produced basis,
with production volumes of 635 MBbls in 2003 compared to 708 MBbls in 2002.

Production expenses.Production expenses increased 23%, or $1.0 million,
to $5.3 million ($7.66 per Bbl) for the first nine months of 2003 from $4.3
million ($6.69 per Bbl) for the first nine months of 2002. The increase is
primarily attributable to increased fuel and electricity costs and higher costs
for maintenance and repairs.

Production and ad valorem taxes. Production and ad valorem taxes
increased $0.5 million, to $0.9 million for the first nine months of 2003 from
$0.4 million for the first nine months of 2002 primarily due to increased sales
volumes and the expiration of severance tax exemptions for several wells in the
third quarter of 2002. Unit production and ad valorem taxes for 2003 were $1.29
per Bbl compared to $0.58 per Bbl in 2002.

Oil transportation expenses. Oil transportation expenses increased 6%, or
$0.2 million, from $2.8 million in the first nine months of 2002 to $3.0
million in the first nine months of 2003. On a per Bbl basis, oil
transportation expenses decreased from $4.32 per Bbl in 2002 to $4.27 per Bbl
in 2003.

Accretion of asset retirement obligation.Accretion expense for the first
nine months of 2003 was $0.2 million. Accretion expense represents the
adjustment of our asset retirement obligation to its present value at the end
of the period.

Other operating expenses.Other operating expenses for 2003 include a $0.1
million loss on the disposition of materials and supplies inventory.

Equity in earnings of Plains All American Pipeline, L.P.Our equity in
earnings of PAA increased $0.8 million to $14.9 million for the first nine
months of 2003 from $14.1 million for the first nine months of 2002. PAA
reported net income of $59.6 million in the first nine months of 2003 compared
to $47.5 million in the first nine months of 2002. Our equity in earnings of
PAA was reduced by approximately $1.7 million as a result of a $7.4 million
compensation accrual by PAA associated with its long term incentive plan and
approximately $0.7 million pre-tax as a result of a $2.9 million noncash,
derivative mark-to-market loss recognized by PAA in the third quarter of 2003.
Our ownership interest in PAA averaged 24% in 2003 compared to 28% in 2002. The
reduction in ownership primarily reflects the effect of PAAs public unit
offerings.

Gain on Plains All American Pipeline, L.P. unit offerings.In the first
nine months of 2003 and 2002 we recognized noncash gains of $15.2 million and
$14.5 million, respectively, related to PAAs public equity offerings in these
periods.
The gains are recognized to reflect our proportionate share of the
increase in the underlying net assets of PAA resulting from the equity
offerings.

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Gain (loss) on derivatives. As previously discussed, we were required to
discontinue hedge accounting effective February 1, 2003. As a result, in the
first nine months of 2003 we recorded a $3.0 million loss on derivatives that
consisted of a $1.3 million loss reflecting the decrease in the fair value of
our derivatives and a $1.7 million loss on cash settlements.

Loss on debt extinguishment.In 2002 we incurred a $10.3 million loss
from the early retirement of $267.5 million of outstanding 10.25% notes. The
expense included a call premium of 3.4167% on the outstanding principal amount
of the 10.25% notes, or $9.1 million, and approximately $1.2 million related to
unamortized premiums on the 10.25% notes and unamortized issue costs on the
10.25% notes and our credit facility.

Interest expense.Interest expense decreased $4.2 million, to $1.6
million for the first nine months of 2003 from $5.8 million for the first nine
months of 2002, primarily reflecting lower outstanding debt.

Income tax expense.Income tax expense increased $5.5 million to $10.7
million for the first nine months of 2003 from $5.2 million for the first nine
months of 2002. The increase was primarily due to higher pre-tax income from
continuing operations as our effective tax rate was 45% in the first nine
months of 2003 compared to 47% in the first nine months of 2002.

Our effective tax rate reflects the Canadian taxes attributable to our
share of PAAs earnings related to their Canadian operations. For U.S. federal
income tax purposes, we utilize net operating loss carryforwards, or NOLs, to
reduce our currently payable taxes. As a result, we receive a deduction rather
than a credit for Canadian income taxes. Current income tax expense for the
nine months of 2002 includes a benefit of approximately $2.9 million
representing tax paid in 2001 that was refunded to us as the result of certain
legislation that allowed us to offset 100% of alternative minimum taxable
income with NOLs. Previously, we could only offset 90% of AMT income with NOLs.
The current income tax benefit is offset by a corresponding charge to deferred
income tax expense. This change in the regulations did not change our overall
effective tax rate and had no effect on net income.

Cumulative effect of accounting change. In the first quarter of 2003 we
recognized a $0.9 million net of tax gain related to the adoption of Statement
of Accounting Standards, or SFAS, No. 143, Accounting for Asset Retirement
Obligations. See Recent Accounting Pronouncements for a discussion of the
adoption of SFAS No. 143.

Income from discontinued operations.Income from discontinued operations
of $21.5 million in the first nine months of 2002 reflects the net after tax
earnings of PXP, which was spun off in the fourth quarter of 2002.

Liquidity and Capital Resources

General

At September 30, 2003, we had negative working capital of $20.2 million,
primarily reflecting $20.0 million of current maturities of long-term debt.
Cash generated from our upstream operations and PAA distributions are our
primary sources of liquidity. We believe that we have sufficient liquid assets
and cash from operations and PAA distributions to meet our short term and
long-term normal recurring operating needs, debt service obligations,
contingencies and anticipated capital expenditures.

If PAA could not, for any reason, make its minimum quarterly distribution
payments on its limited partnership interests, this would impair our cash flows
and our ability to meet our short and long-term cash needs. In addition, this
would trigger our payment obligations under the value assurance agreements (see
 Related Party Transactions  Value Assurance Agreements), which would
compound the negative impact on our cash flows and our ability to meet our
short and long-term cash needs. Thus, PAAs financial and operational
performance directly affects our financial and operational performance. We
encourage you to review PAAs SEC filings, including its Annual Report on Form
10-K for the year ended December 31, 2002 and its Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003.

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PAA Cash Distributions

PAAs partnership agreement requires that it distribute 100% of available
cash within 45 days after the end of each quarter to unitholders of record and
to its general partner. Available cash is generally defined as all cash and
cash equivalents on hand at the end of each quarter less reserves established
by PAAs general partner for future requirements.

Distributions to holders of subordinated units are subject to the rights
of holders of common units to receive the minimum quarterly distribution, or
MQD, of $0.45 per unit ($1.80 per unit on an annual basis). Common units accrue
arrearages with respect to distributions for any quarter during the
subordination period and subordinated units do not accrue any arrearages. The
subordination period will end if PAA meets certain financial tests for three
consecutive four-quarter periods. If PAA meets certain financial requirements,
25% of the subordinated units will convert in the fourth quarter of 2003 and
the remainder will convert in the first quarter of 2004.

Class B common units are initially pari passu with common units with
respect to distributions, and are convertible into common units upon approval
of a majority of the common unitholders. If we request that PAA call a meeting
of common unitholders to consider approval of the conversion of Class B units
into common units and the approval is not obtained within 120 days, each Class
B common unitholder will be entitled to receive distributions, on a per unit
basis, equal to 110% of the amount of distributions paid on a common unit, with
such distribution right increasing to 115% if such approval is not secured
within 90 days after the end of the 120-day period. Except for the vote to
approve the conversion, Class B common units have the same voting rights as the
common units.

PAAs general partner is entitled to receive incentive distributions if
the amount distributed with respect to any quarter exceeds levels specified in
its partnership agreement. Generally the general partner is entitled, without
duplication, to 15% of amounts PAA distributes in excess of $0.450 per unit,
25% of the amounts PAA distributes in excess of $0.495 per unit and 50% of
amounts PAA distributes in excess of $0.675 per unit.

Based on PAAs recently declared distribution of $0.55 per unit (an annual
distribution rate of $2.20 per unit), which will be paid on November 14, 2003,
we would receive an annual distribution from PAA of approximately $31.4
million, including $3.5 million for our 44% share of the general partner
distributions (including $2.4 million for the general partner incentive
distributions).

Cash distributions per unit on PAAs outstanding common units, Class B
common units and subordinated units and the portion of the distributions
representing an excess over the MQD in 2003, 2002 and 2001 were as follows:

|               |  |              |        |                 |  |              |        |                 |  |              |        |                 |  |   |        |  |  |   |        |  |  |   |        | 
|-------------- |  | ------------ | ------ | --------------- |  | ------------ | ------ | --------------- |  | ------------ | ------ | --------------- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|               |  | Year        
|               |  |             
|               |  | 2003         |        | 2002            |  | 2001        
|               |  |              |        |                 |  |             
|               |  | Distribution |        | Excess over MQD |  | Distribution |        | Excess over MQD |  | Distribution |        | Excess over MQD
|               |  |              |        |                 |  |              |        |                 |  |              |        |                
|First Quarter  |  | $            | 0.5375 |                 |  | $            | 0.0875 |                 |  | $            | 0.5250 |                 |  | $ | 0.0750 |  |  | $ | 0.4750 |  |  | $ | 0.0250 | 
|Second Quarter |  | $            | 0.5500 |                 |  | $            | 0.1000 |                 |  | $            | 0.5375 |                 |  | $ | 0.0875 |  |  | $ | 0.5000 |  |  | $ | 0.0500 | 
|Third Quarter  |  | $            | 0.5500 |                 |  | $            | 0.1000 |                 |  | $            | 0.5375 |                 |  | $ | 0.0875 |  |  | $ | 0.5125 |  |  | $ | 0.0625 | 
|Fourth Quarter |  | $            | 0.5500 |                 |  | $            | 0.1000 |                 |  | $            | 0.5375 |                 |  | $ | 0.0875 |  |  | $ | 0.5125 |  |  | $ | 0.0625 | 

PAA Subordinated Units

We currently hold approximately 45%, or 4.5 million, of the 10.0 million
PAA subordinated units outstanding. The subordination period for these units
will end if certain financial tests are met for three consecutive,
non-overlapping four-quarter periods (the testing period). During the first
quarter after the end of the subordination period, all of the subordinated
units will convert into common units, and will participate pro rata with all
other common units in future distributions. Early conversion of a portion of
the subordinated units may occur if the testing period is satisfied before
December 31, 2003. According to PAAs SEC filings, PAA is now in the testing
period and, in connection with the payment of the quarterly distribution in
November 2003, 25% of the outstanding subordinated units will convert into
common units
and the remaining subordinated units would convert into common units in
the first quarter of 2004. Based on PAAs September 30, 2003 financial
statements, upon the conversion of the subordinated units in the fourth quarter
of 2003 we

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estimate we would recognize a noncash
pre-tax gain of $0 to $10 million. If
PAA continues to meet the tests, we estimate we would recognize an additional
noncash pre-tax gain of $0 to $25 million when the remaining subordinated units convert
to common units in the first quarter of 2004. The actual amount of the gains
will be determined based on PAAs financial statements at the time the
subordinated units convert. Such gains are similar to the gains that we have
recognized in the past when PAA issues common equity and would be recognized
because when the subordinated units are converted to common units they will
have all the rights of the current common units, including the right to
participate pro rata in future distributions.

Financing Activities

In December 2002, we entered into a $45 million secured term loan facility
with a group of banks. We used proceeds from the term loan and cash on hand to
make a $40 million capital contribution and repay a $7.2 million note payable
to PXP. In June 2003, the facility was restructured to allow us to borrow an
additional $24 million that was used to repurchase the 46,600 outstanding
shares of our Series D Cumulative Convertible Preferred Stock and pay accrued
dividends and related expenses. At September 30, 2003, $55.0 million was
outstanding under the secured term loan facility. The term loan is repayable in
twelve quarterly installments of $5.0 million each, commencing on August 31,
2003 with a final maturity of May 31, 2006. Amounts outstanding under the term
loan bear an annual interest rate, at our election, equal to either the Base
Rate (as defined in the agreement) plus 1.5%, or LIBOR plus 3%. The term loan
requires that we maintain $5.0 million on deposit in a debt service reserve
account with one of the lending banks. Our average borrowing rate for the first
nine months of 2003 was 4.3% (4.1% at September 30, 2003).

To secure the term loan, we pledged 100% of the shares of stock of our
subsidiaries and pledged 5.2 million of our PAA common units. To the extent the
outstanding principal under the term loan exceeds the balance in the debt
service reserve account plus 50% of the fair market value of the pledged common
units, we are required to repay the excess. The fair market value of the
pledged units is determined based on the closing price of PAA common units as
reported on the New York Stock Exchange.

The term loan contains covenants that limit our ability, as well as the
ability of our subsidiaries, to incur additional debt, make investments, create
liens, enter into leases, sell assets, change the nature of our business or
operations, guarantee other indebtedness, enter into certain types of hedge
agreements, enter into take-or-pay arrangements, merge or consolidate and enter
into transactions with affiliates. In addition, if an event of default exists,
the term loan prohibits us from paying dividends or repurchasing or redeeming
shares of any class of capital stock. The term loan requires us to maintain a
minimum consolidated tangible net worth (as defined) and a consolidated debt
service coverage ratio (as defined in the agreement) of 1.0 to 1.0. At
September 30, 2003, we were in compliance with the covenants contained in the
term loan facility.

Cash Flows from Continuing Operations

|                            |                      |  |                                 |       |      |  |   |        |  
|--------------------------- | -------------------- |  | ------------------------------- | ----- | ---- |  | - | ------ | -
|                            |                      |  | Nine Months Ended September 30,
|                            |                      |  |                                
|                            |                      |  | 2003                            |       | 2002
|                            |                      |  |                                 |       |     
|                            |                      |  | (in millions)                  
|Cash provided by (used in): |                      |  |                                 |       |      |  |   |       
|                            | Operating activities |  | $                               | 18.6  |      |  | $ | (4.2   | )
|                            | Investing activities |  |                                 | (3.9  | )    |  |   | (7.0   | )
|                            | Financing activities |  |                                 | (22.1 | )    |  |   | (274.9 | )

Operating Activities.Net cash provided by (used in) operating activities
in the first nine months of 2003 totaled $18.6 million compared to $(4.2)
million in the first nine months of 2003. The increase primarily reflects
higher revenues in excess of operating costs from our oil and gas operations,
higher distributions from PAA and lower interest expense.

Investing Activities.In the first nine months of 2003 net cash used in
investing activities totaled $3.9 million compared to $7.0 million in the first
nine months of 2002. Oil and gas capital expenditures were $2.4 million in the
first nine months
of 2003 compared to $5.6 million in the first nine months of 2002. In the
first nine months of 2003 we made capital contributions to PAA of $1.5 million,
compared to $1.3 million in the first nine months of 2002, to maintain our proportionate general partner share interest as a result of an equity offering
by PAA.

23



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Financing activities.Cash used in financing activities in the first nine
months of 2003 included a net increase in long-term debt of $10.0 million, $1.5
million in proceeds from issuances of our common stock, expenditures of $9.0
million for the repurchase of 0.8 million shares of our common stock, $23.3
million to redeem our outstanding Series D preferred stock, $0.7 million for
the payment of costs incurred in connection with our term loan and $0.6 million
for the payment of preferred stock dividends. Cash used in financing activities
in the first nine months of 2002 included a net increase in our credit facility
of $11.5 million, $267.5 million in payments to retire long-term debt, $4.7
million in proceeds from issuances of our common stock and $0.7 million for the
payment of preferred stock dividends.

Capital Expenditures

We have made and will continue to make capital expenditures with respect
to our oil properties. In the first nine months of 2003 we made aggregate
capital expenditures of $2.4 million for exploitation of our existing
properties and expect such expenditures to total $3.5 to $4.0 million in 2003.

When PAA issues equity, the general partner is required to contribute cash
to maintain its 2% general partner interest. In March and September 2003, PAA
issued units in public equity offerings. We were required to make cash capital
contributions to the general partner of PAA totalling $1.5 million for our 44%
interest in the general partner. If PAA issues equity in the future, we will be
required to make additional cash capital contributions.

We also have an active treasury share repurchase program. Our Board of
Directors has authorized the repurchase of up to eight million shares of our
common stock. Through December 31, 2001, we had repurchased a total of 4.1
million shares at a total cost of approximately $91.3 million. No shares were
repurchased in 2002. We have resumed making purchases under the treasury share
program and through September 30, 2003, we have repurchased an additional 0.8
million shares at a total cost of $9.0 million. We intend to make additional
repurchases in 2003 and expect to fund the repurchases from cash flows.

Contractual Obligations

At September 30, 2003, the aggregate amounts of contractually obligated
payment commitments for the next five years are as follows (in thousands):

|                 |  |      |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |   |  |  |   |   | 
|---------------- |  | ---- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | - | ------ |  |  | - | - |  |  | - | - | 
|                 |  | 2003 |       | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter
|                 |  |      |       |      |  |      |        |      |  |      |        |           
|Long-term debt   |  | $    | 5,000 |      |  | $    | 20,000 |      |  | $    | 20,000 |            |  | $ | 10,000 |  |  | $ |  |  |  | $ |  | 
|Operating leases |  |      | 6     |      |  |      | 23     |      |  |      | 23     |            |  |   | 6      |  |  |   |  |  |  |   |  | 
|                 |  |      |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |   |  |  |   |   | 
|                 |  | $    | 5,006 |      |  | $    | 20,023 |      |  | $    | 20,023 |            |  | $ | 10,006 |  |  | $ |  |  |  | $ |  | 
|                 |  |      |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |   |  |  |   |   | 

Commitments and Contingencies

In connection with our June 2001 strategic restructuring, we entered into
value assurance agreements with the purchasers of the subordinated units in the
restructuring, under the terms of which we will pay the purchasers an amount
per fiscal year, payable on a quarterly basis, equal to $1.85 per unit less the
actual amount distributed during that year. The value assurance agreements will
expire upon the earlier of (a) the conversion of all of the subordinated units
to common units or (b) June 8, 2006. In the second quarter of 2003 PAA paid a
quarterly distribution of $0.55 per unit ($2.20 annualized).

Also in connection with the June 2001 strategic restructuring, we entered
into a separation agreement with PAA whereby, among other things, (1) we agreed
to indemnify PAA, its general partner, and its subsidiaries against (a) any
claims related to the upstream business, whenever arising, and (b) any claims
related to federal or state securities laws or the regulations of any
self-regulatory authority, or other similar claims, resulting from alleged acts
or omissions by us, our subsidiaries, PAA, or PAAs subsidiaries occurring on
or before June 8, 2001, and (2) PAA agreed to indemnify us and our subsidiaries
against any claims related to the midstream business, whenever arising.

24



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In connection with the reorganization and the spin-off we entered into
certain agreements with PXP, including a master separation agreement; an
intellectual property agreement; the Plains Exploration & Production transition
services agreement; the Plains Resources transition services agreement; and a
technical services agreement. The master separation agreement provides for
cross-indemnities intended to place sole financial responsibility on PXP for
all liabilities associated with the current and historical businesses and
operations PXP conducts after giving effect to the spin-off (and related
reorganization), regardless of the time those liabilities arise, and to place
sole financial responsibility for liabilities associated with our businesses
with us and our subsidiaries. We agree to indemnify PXP and PXP agreed to
indemnify us against liabilities arising from misstatements or omissions in the
various offering documents for the exchange offer related to PXPs 8.75% notes
or the spin-off, if such information was prepared by us or PXP, as the case may
be.

In the ordinary course of business, we are a claimant and/or defendant in
various legal proceedings. In particular, we are a party to a lawsuit (as a
result of Stocker Resources, Inc.s merger into us) regarding an electric
services contract with Commonwealth Energy Corporation. In this lawsuit, we are
seeking a declaratory judgment that we are entitled to terminate the contract
and that Commonwealth has no basis for proceeding against a related $1.5
million performance bond. In a countersuit against us, Commonwealth is seeking
unspecified damages. The two cases have been consolidated and set for trial in
December 2003. We intend to defend our rights vigorously in this matter. Under
the spin-off agreements, PXP will indemnify us against this lawsuit. While the
outcome of these lawsuits cannot be predicted with certainty and could have a
material adverse effect on our financial position, we do not believe that the
outcome of these legal proceedings, individually or in the aggregate, will have
a material adverse effect on our financial condition, results of operations or
cash flows.

PAAs Commitments and Contingencies

For a discussion of PAAs commitments and contingencies, we recommend you
review PAAs Annual Report on Form 10-K for the year ended December 31, 2002
and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2003,
and other applicable SEC filings by PAA.

Related Party Transactions

Governance of PAA

We, along with Sable Investments, L.P. (which is owned by Mr. Flores, our
Chairman, and Mr. Raymond, our Chief Executive Officer and President), Kafu
Holdings, L.P. (which is controlled by Kayne Anderson Capital Advisors, L.P.
and Kayne Anderson Investment Management, Inc., of which Mr. Sinnott, one of
our directors, is Senior Vice President), and E-Holdings III, L.P. (which is
controlled by EnCap Investments L.L.C. and of which Mr. Phillips, one of our
directors, is a managing director and principal) are parties to agreements
governing Plains All American GP LLC, which is the general partner of Plains
AAP, L.P., and Plains AAP, L.P., which is the general partner of PAA. These
agreements govern the ongoing management and control of PAA.

In addition, Plains AAP, L.P., the general partner of PAA, is owned as
follows:

|                        |  |  |        |  
|----------------------- |  |  | ------ | -
|Plains Resources        |  |  | 44.00  | %
|Sable Investments, L.P. |  |  | 20.00  | %
|Kafu Holdings, L.P.     |  |  | 16.42  | %
|E-Holdings, L.P.        |  |  | 9.00   | %
|Others                  |  |  | 10.58  | %
|                        |  |  |        |  
|                        |  |  | 100.00 | %
|                        |  |  |        |  

Also, each of we, Sable Investments, Kafu Holdings, and E-Holdings may
appoint one member of the Plains All American GP LLC board of directors.

Value Assurance Agreements

We entered into value assurance agreements with Sable Investments, Kafu
Holdings, E-Holdings and other parties with respect to the 5.2 million
subordinated units they acquired from us in our June 2001 strategic
restructuring. The value assurance agreements require us to pay to them an
amount per fiscal year, payable on a quarterly basis, equal to the difference
between $1.85 per unit and the actual amount distributed during that period.
The value assurance agreements will expire upon the earlier of the conversion
of the subordinated units to common units, or June 8, 2006.

25



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Our Relationship with PAA

We have ongoing relationships with PAA, including:



| |  |  | a marketing agreement that provides that PAA will purchase all of
our equity oil production at market prices for a fee of $.20 per
barrel. In the first nine months of 2003, sales to PAA under the
agreement totaled $19.5 million, including the royalty share of
production and PAA charged us $0.1 million in marketing fees; and                                                                                                                                                                                                                                                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a separation agreement whereby, among other things, (1) we agreed
to indemnify PAA, its general partner, and its subsidiaries against (a)
any claims related to the upstream business, whenever arising, and (b)
any claims related to federal or state securities laws or the
regulations of any self-regulatory authority, or other similar claims,
resulting from alleged acts or omissions by us, our subsidiaries, PAA,
or PAAs subsidiaries occurring on or before June 8, 2001, and (2) PAA
agreed to indemnify us and our subsidiaries against any claims related
to the midstream business, whenever arising.

Spin-off Agreements

In connection with the reorganization and the spin-off we entered into
certain agreements with PXP, including a master separation agreement; an
intellectual property agreement; the Plains Exploration & Production transition
services agreement; the Plains Resources transition services agreement; and a
technical services agreement. For the nine months ended September 30, 2003, PXP
billed us $0.4 for services provided to us under these agreements and we billed
PXP $0.1 for services we provided under these agreements.

The master separation agreement provides that for a period of three years,
(1) we and our subsidiaries will be prohibited from engaging in or acquiring
any business engaged in any of the upstream activities of acquiring,
exploiting, developing, exploring for and producing oil and gas in any state in
the United States (except Florida), and (2) PXP will be prohibited from
engaging in any of the midstream activities of marketing, gathering,
transporting, terminalling and storing oil and gas (except to the extent any
such activities are ancillary to, or in support of, any of PXPs upstream
activities).

Critical Accounting Policies and Factors That May Affect Future Results

Based on the accounting policies that we have in place, certain factors
may impact our future financial results. The most significant of these factors
relate to our commodity pricing and risk management activities, write-downs
under full cost ceiling test rules and oil and gas reserves. These policies and
their effect on certain of our accounting policies are discussed in our Annual
Report on Form 10-K for the year ended December 31, 2002.

Write-downs under full cost ceiling test rules.Based on the book value
of our proved oil and gas properties (including related deferred income taxes)

and our estimated proved reserves as of September 30, 2003, we believe that we
would have a write-down under the full cost ceiling test rules at a net
realized price for our oil production of approximately $17.00 per barrel. Based
on an estimated oil differential including oil transportation totaling $11.00
per barrel on September 30, 2003, we would have a write-down at a NYMEX crude
oil index price of approximately $28.00 per barrel. The NYMEX crude oil price
on September 30, 2003 was $29.20 per barrel.

PAAs Critical Accounting Policies.For a discussion of PAAs critical
accounting policies, we recommend you review PAAs Annual Report on Form 10-K
for the year ended December 31, 2002 and Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, and other applicable SEC filings by PAA.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149) on April 30, 2003.
SFAS 149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The statement is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No.149 had no effect on our financial
statements.

26



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In May 2003, the FASB issued Statement No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
(SFAS 150). SFAS 150 establishes standards for how an issuer classified and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 had no effect on our financial statements.

In January 2003 FASB Interpretation 46, or FIN 46, Consolidation of
Variable Interest Entities was issued. FIN 46 identifies certain off-balance
sheet arrangements that meet the definition of a variable interest entity
(VIE). The primary beneficiary of a VIE is the party that is exposed to the
majority of the risks and/or returns of the VIE. In future accounting periods,
the primary beneficiary will be required to consolidate the VIE. In addition,
more extensive disclosure requirements apply to the primary beneficiary, as
well as other significant investors. We do not believe we participate in any
arrangement that would be subject to the provisions of FIN 46.

Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements
based on our current expectations and projections about future events.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions, or that include words such as will, would, should,
plans, likely, expects, anticipates, intends, believes,
estimates, thinks, may, and similar expressions, are forward-looking
statements. These statements involve known and unknown risks, uncertainties,
and other factors that may cause our actual results and performance to be
materially different from any future results or performance expressed or
implied by these forward-looking statements. These factors include, among other
things:



| |  |  | the consequences of any potential change in the relationship between
us and PXP;                                                                                                                                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the consequences of our and PXPs officers and employees providing
services to both us and PXP and not being required to spend any
specified percentage or amount of time on our business;                                                                                                                    
|
| |  |  | risks, uncertainties and other factors that could have an impact on
PAA which could in turn impact the value of our holdings in PAA (for a
discussion of these risks, uncertainties and other factors, see PAAs
filings with the SEC);                                                                       
|
| |  |  | the effects of our indebtedness, which could adversely restrict our
ability to operate, could make us vulnerable to general adverse economic
and industry conditions, could place us at a competitive disadvantage
compared to our competitors that have less debt, and could have other
adverse consequences;
|
| |  |  | uncertainties inherent in the development and production of oil and
gas and in estimating reserves;                                                                                                                                                                                                           
|
| |  |  | unexpected future capital expenditures (including the amount and
nature thereof);                                                                                                                                                                                                                             
|
| |  |  | impact of oil and gas price fluctuations;                                                                                                                                                                                                                                                                     
|
| |  |  | the effects of competition;                                                                                                                                                                                                                                                                                   
|
| |  |  | the success of our risk management activities;                                                                                                                                                                                                                                                                
|
| |  |  | the availability (or lack thereof) of acquisition or combination
opportunities;                                                                                                                                                                                                                               
|
| |  |  | the impact of current and future laws and governmental regulations;                                                                                                                                                                                                                                           
|
| |  |  | environmental liabilities that are not covered by an effective
indemnity or insurance, and                                                                                                                                                                                                                    
|
| |  |  | general economic, market, industry or business conditions.                                                                                                                                                                                                                                                    

All forward-looking statements in this report are made as of the date
hereof, and you should not place undue certainty on these statements without
also considering the risks and uncertainties associated with these statements
and our

27



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business that are discussed in this report. Moreover, although we
believe the expectations reflected in the forward-looking
statements are based upon reasonable assumptions, we can give no assurance
that we will attain these expectations or that any deviations will not be
material. Except as required by applicable securities laws, we do not intend to
update these forward-looking statements and information. See Critical
Accounting Policies and Factors That May Affect Future Results in this report
for additional discussions of risks and uncertainties.




ITEM 3.  Quantitative and Qualitative Disclosures About Market Risks

We are exposed to various market risks, including volatility in oil
commodity prices and interest rates. To manage our exposure, we monitor current
economic conditions and our expectations of future commodity prices and
interest rates when making decisions with respect to risk management. We do not
enter into derivative transactions for speculative trading purposes.

We utilize various derivative instruments to hedge our exposure to price
fluctuations on oil sales. The derivative instruments consist primarily of
cash-settled oil option and swap contracts entered into with financial
institutions. The agreements provide for monthly cash settlement based on the
differential between the agreement price and the actual NYMEX price. Derivative
instruments are accounted for in accordance with SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities as amended by SFAS 137, SFAS 138
and SFAS 149, or SFAS 133. All derivative instruments are recorded on the
balance sheet at fair value. If the derivative does not qualify as a hedge or
is not designated as a hedge, the gain or loss on the derivative is recognized
currently in earnings. To qualify for hedge accounting, the derivative must
qualify either as a fair value hedge, cash flow hedge or foreign currency
hedge. Currently, we use only cash flow hedges and the remaining discussion
will relate exclusively to this type of derivative instrument. If the
derivative qualifies for hedge accounting, the gain or loss on the derivative
is deferred in Accumulated Other Comprehensive Income, or OCI, a component of
our stockholders equity, to the extent the hedge is effective.

We formally document all relationships between hedging instruments and
hedged items, as well as our risk management objectives and strategy for
undertaking the hedge. Hedge effectiveness is measured at least on a quarterly
basis. This process includes specific identification of the hedging instrument
and the hedged item, the nature of the risk being hedged and how the hedging
instruments effectiveness will be assessed. The relationship between the
hedging instrument and the hedged item must be highly effective in achieving
the offset of changes in cash flows attributable to the hedged risk both at the
inception of the contract and on an ongoing basis. Hedge accounting is
discontinued prospectively when a hedge instrument becomes ineffective. Gains
and losses deferred in OCI related to cash flow hedges that become ineffective
remain unchanged until the related product is delivered. If it is determined
that it is probable that a hedged forecasted transaction will not occur,
deferred gains or losses on the hedging instrument are recognized in earnings
immediately.

In the first quarter of 2003, the NYMEX oil price and the price we
received for our Florida oil production did not correlate closely enough for
the hedges to qualify for hedge accounting. As a result, we were required to
discontinue hedge accounting effective February 1, 2003 and reflect the
mark-to-market value of the hedges in earnings prospectively from that date. In
the first nine months of 2003, we recorded $3.0 million loss on derivatives
that consisted of a $1.3 million loss for the decrease in the fair value of our
derivatives and a $1.7 million loss on cash settlements of such derivatives. In
addition a $0.3 million loss on cash settlements for January 2003 is reflected
as a reduction of revenues. None of our current hedges qualify for hedge
accounting.

At September 30, 2003, Accumulated OCI consisted of unrealized losses of
$0.5 million ($0.3 million, net of tax) on our oil hedging instruments
generated prior to the discontinuation of hedge accounting, unrealized losses
of $0.5 million ($0.3 million, net of tax) related to pension liabilities and
an unrealized gain of $10.8 million ($6.0 million, net of tax) related to our
equity in the OCI gains of PAA. At September 30, 2003, the liability related to
our open oil hedging instruments was included in current liabilities ($1.1
million), other long-term liabilities ($0.6 million), and deferred income taxes
(a tax benefit of $0.2 million).

As of September 30, 2003, $0.5 million ($0.3 million, net of tax) of
deferred net losses on our oil derivative instruments recorded in OCI are
expected to be reclassified to earnings during the following twelve month
period as the hedged volumes are produced and sold.

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Commodity Price Risk.At October 31, 2003, we had the following open oil
derivative positions:

|      |                          |  |                 |       |      |  |      |       |      |  |  |       |  |  |  |       | 
|----- | ------------------------ |  | --------------- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|      |                          |  | Barrels per Day
|      |                          |  |                
|      |                          |  | 2003            |       | 2004 |  | 2005 |       | 2006
|      |                          |  |                 |       |      |  |      |       |     
|Swaps |                          |  |                 |       |      |  |      |       |      |  |  |       |  |  |  |      
|      | Average price $26.10/bbl |  |                 | 1,500 |      |  |      |      |      |  |  |      |  |  |  |      | 
|      | Average price $25.01/bbl |  |                 |      |      |  |      | 1,500 |      |  |  |      |  |  |  |      | 
|      | Average price $24.70/bbl |  |                 |      |      |  |      |      |      |  |  | 1,000 |  |  |  |      | 
|      | Average price $24.43/bbl |  |                 |      |      |  |      |      |      |  |  |      |  |  |  | 1,000 | 

Assuming our third quarter 2003 production volumes are held constant in
subsequent periods, these positions represent approximately 70%, 70%, 47%, and
47% of oil production in 2003, 2004, 2005 and 2006, respectively. Location and
quality differentials attributable to our properties are not included in the
foregoing prices. Because of the quality and location of our oil production,
these adjustments will reduce our net realized price per barrel.

Our management intends to continue to maintain derivative arrangements for
a significant portion of our production. These contracts may expose us to the
risk of financial loss in certain circumstances. Such arrangements provide us
protection if oil prices decline below the prices at which the derivatives are
set, but ceiling prices in our derivatives may cause us to receive less revenue
on the specified volumes than we would receive in the absence of the
derivatives. Such arrangements may or may not qualify for hedge accounting. The
contract counterparties for our current derivative commodity contracts are all
major financial institutions with Standard & Poors ratings of A or better.

Interest Rate Risk.Our debt instruments are sensitive to market
fluctuations in interest rates. At September 30, 2003 we had $55.0 million
outstanding under our term loan, repayable $5.0 million in 2003, $20.0 million
in 2004, $20.0 million in 2005 and $10.0 million in 2006. Our term loan bears
interest at a base rate (as defined) or LIBOR plus 3%. The carrying value of
our term loan approximates fair value because interest rates are variable,
based on prevailing market rates.




ITEM 4.  Controls and Procedures

Under the supervision and with the participation of our management,
including our Chief Executive Officer (our principal executive officer) and our
Chief Financial Officer (our principal financial officer), we evaluated the
effectiveness of our disclosure controls and procedures (as defined under Rule
13a-14(c) of the Securities Exchange Act of 1934, as amended (the Exchange
Act)). Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures as of
September 30, 2003 are effective to ensure that information we are required to
disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of such evaluation.

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PART II. OTHER INFORMATION

Item 1  Legal Proceedings

We, in the ordinary course of business, are a claimant and/or defendant in
various legal proceedings. While the outcome of these lawsuits cannot be
predicted with certainty and could have a material adverse effect on our
financial position, we do not believe that the outcome of these legal
proceedings, individually and in the aggregate, will have a materially adverse
effect on our financial condition, results of operations or cash flows.

We are a party to a lawsuit (as a result of Stocker Resources, Inc.s
merger into us) regarding an electric services contract with Commonwealth
Energy Corporation. In this lawsuit, we are seeking a declaratory judgment that
we are entitled to terminate the contract and that Commonwealth has no basis
for proceeding against a related $1.5 million performance bond. In a
countersuit against us, Commonwealth is seeking unspecified damages. The two
cases have been consolidated and set for trial in December 2003. We intend to
defend our rights vigorously in this matter. Under the spin-off agreements, PXP
will indemnify us against this lawsuit.

Item 6  Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

| |      |  |                                                                                                                                              
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 |  | Employment Agreement, dated as of September 8, 2003, by and
between Stephen A. Thorington and the Company.                                   
| |      |  |                                                                                                                                              
| | 31.1 |  | Certification of Chief Executive Officer, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                              
| |      |  |                                                                                                                                              
| | 31.2 |  | Certification of Chief Financial Officer, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                              
| |      |  |                                                                                                                                              
| | 32.1 |  | Chief Executive Officer Certification Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
| |      |  |                                                                                                                                              
| | 32.2 |  | Chief Financial Officer Certification Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------

A Current Report on Form 8-K was filed on August 12, 2003 with respect to
(i) estimates of certain results for the three months ended September 30, 2003
and the year ended December 31, 2003; and (ii) the Companys press release
reporting second quarter 2003 earnings.

Items 2, 3, 4 & 5 are not applicable and have been omitted.

30



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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 the
undersigned and thereunto duly authorized.

|                        |  |                       |  |                                                                                                                        
|----------------------- |  | --------------------- |  | -----------------------------------------------------------------------------------------------------------------------
|                        |  | PLAINS RESOURCES INC.
|                        |  |                       |  |                                                                                                                        
|Date: November 13, 2003 |  | By:                   |  | /s/ Stephen A. Thorington                                                                                              
|                        |  |                       |  |                                                                                                                        
|                        |  |                       |  | Stephen A. Thorington
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

31



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##### 






Exhibit Index

|              |  |                                                                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                  
|              |  |                                                                                                                                              
|10.1          |  | Employment Agreement, dated as of September 8, 2003, by and
between Stephen A. Thorington and the Company.                                   
|              |  |                                                                                                                                              
|31.1          |  | Certification of Chief Executive Officer, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                              
|              |  |                                                                                                                                              
|31.2          |  | Certification of Chief Financial Officer, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                              
|              |  |                                                                                                                                              
|32.1          |  | Chief Executive Officer Certification Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|              |  |                                                                                                                                              
|32.2          |  | Chief Financial Officer Certification Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002