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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


|                                                |  |                                                                                             
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF
    THE SECURITIES EXCHANGE ACT OF 1934       
|                                               
|For the fiscal year ended December 31,
    2002
|                                               
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-9808



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Plains Resources Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                                 |  |                                         
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Delaware                                                                                                         |  | 13-2898764                              
|(State or other jurisdiction of
    incorporation or organization)                                               |  | (I.R.S. Employer
    Identification No.)
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|500 Dallas Street, Suite 700
    Houston, Texas 77002(Address of principal executive
    offices)
    (Zip Code)
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|(713) 739-6700(Registrants telephone
    number, including area code)                                          
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Securities registered pursuant to
    Section 12(b) of the Act:                                                 

|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|                                        |  |                                          
|Common Stock, par value $0.10 per share |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act:

None


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 if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

On February 28, 2003, there were 24,167,935
shares of the registrants Common Stock outstanding. The
aggregate market value of the Common Stock held by
non-affiliates of the registrant (treating all executive
officers and directors of the registrant, for this purpose, as
if they may be affiliates of the registrant) was approximately
$592,221,000 on June 28, 2002 (based on $26.75 per share,
the last sale price of the Common Stock as reported on the New
York Stock Exchange on such date). On December 18, 2002 we
completed the spin-off of Plains Exploration
& Production Company (PXP). At the close of
business on such date, our closing price per share as reported
on the NYSE (on a with dividend basis) was $23.05.
The closing price per share of PXP on such date as reported on
the NYSE (on a when issued basis) was $9.10. Our
closing price on December 19, 2002 and February 28,
2003, as reported on the NYSE, was $12.51 and $11.39,
respectively. The aggregate market value of the common stock
held by non-affiliates of the registrant was approximately
$252,165,000 on February 28, 2003 (based on the closing
price on that date).

DOCUMENTS INCORPORATED BY
REFERENCE:The information required in
Part III of the Annual Report on Form 10-K is incorporated
by reference to the registrants definitive proxy statement
to be filed pursuant to Regulation 14A for the
registrants 2003 Annual Meeting of Stockholders.



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TABLE OF CONTENTS



|                                                           |  |  |  |  |  |  |  | 
|---------------------------------------------------------- |  |  |  |  |  |  |  | 
|STATEMENT REGARDING FORWARD-LOOKING STATEMENTS            
|AVAILABLE INFORMATION                                     
|GLOSSARY OF OIL AND GAS TERMS                             
|PART I                                                    
|PART II                                                   
|PART III                                                  
|PART IV                                                   
|SIGNATURES                                                
|CERTIFICATION                                             
|CERTIFICATION                                             
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                
|REPORT OF INDEPENDENT ACCOUNTANTS                         
|CONSOLIDATED BALANCE SHEETS                               
|CONSOLIDATED STATEMENTS OF INCOME                         
|CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME           
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|EXHIBIT INDEX                                             
|Form of Officer Restricted Stock Award Agmt.              
|Form of Restricted Stock Unit Agreement                   
|Form of Incentive Stock Option Agreement                  
|Form of Non-Qualified Stock Option Agreement              
|2nd Amendment to 2001 Stock Incentive Plan                
|Subsidiaries of the Company                               
|Consent of PricewaterhouseCoopers LLP                     
|Consent of PricewaterhouseCooper LLP                      
|Consent of Netherland, Sewell and Associates, Inc.        
|Certification of CEO Pursuant to Section 906              
|Certification of CFO Pursuant to Section 906              



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##### Table of Contents



PLAINS RESOURCES INC.

2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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|------------ |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|             |  |                                                                                                    |  | Page
|             |  |                                                                                                    |  |     
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|PART I      
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|Items 1 & 2. |  | Business and Properties                                                                            |  |      | 7  | 
|            
|            
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|            
|Item 3.      |  | Legal Proceedings                                                                                  |  |      | 30 | 
|            
|            
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|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 31 | 
|            
|            
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|PART II     
|            
|            
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|            
|Item 5.      |  | Market for Registrants Common Stock and
    Related Stockholder Matters                           |  |      | 33 | 
|            
|            
|            
|            
|Item 6.      |  | Selected Financial Data                                                                            |  |      | 34 | 
|            
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|Item 7.      |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 35 | 
|            
|            
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|            
|Item 7A.     |  | Quantitative and Qualitative Disclosures About
    Market Risks                                    |  |      | 51 | 
|            
|            
|            
|            
|Item 8.      |  | Financial Statements and Supplementary Data                                                        |  |      | 53 | 
|            
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|Item 9.      |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 53 | 
|            
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|PART III    
|            
|            
|            
|            
|Item 10.     |  | Directors and Executive Officers                                                                   |  |      | 53 | 
|            
|            
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|            
|Item 11.     |  | Executive Compensation                                                                             |  |      | 53 | 
|            
|            
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|Item 12.     |  | Security Ownership of Certain Beneficial Owners
    and Management And Related Stockholder Matters |  |      | 53 | 
|            
|            
|            
|            
|Item 13.     |  | Certain Relationships and Related Transactions                                                     |  |      | 53 | 
|            
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|Item 14.     |  | Controls and Procedures                                                                            |  |      | 54 | 
|            
|            
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|PART IV     
|            
|            
|            
|            
|Item 15.     |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |      | 55 | 

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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS


This Annual Report on Form 10-K 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 Plains Exploration & Production Company;                                                                                                                                                                                                      
|
| |  | the consequences of our and Plains Explorations officers
    and employees providing services to both us and Plains
    Exploration 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 Plains All American Pipeline, L.P., or 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 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 Items 1 &
2.  Business and Properties  Risk
Factors and Item 7. 
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Critical
Accounting Policies and Factors That May Affect Future
Results in this report for additional discussions of risks
and uncertainties.

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AVAILABLE INFORMATION


We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any
document we file at the SECs Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
SECs Public Reference Room. Our SEC filings are also
available to the public at the SECs web site at
www.sec.gov. No information from such web site is
incorporated by reference herein. Our web site is
www.plainsresources.com. You may also obtain copies of
our annual, quarterly and current reports, proxy statements and
certain other information filed with the SEC, as well as
amendments thereto, free of charge from our web site. These
documents are posted to our web site as soon as reasonably
practicable after we have filed or furnished these documents
with the SEC.

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GLOSSARY OF OIL AND GAS TERMS


The following are abbreviations and definitions of certain terms
commonly used in the oil and gas industry and this
Form 10-K:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | API gravity.A system of classifying oil based on its
    specific gravity, whereby the greater the gravity, the lighter
    the oil.                                                                                                                                                                                                                                                                                                        
|
| | Bbl.One stock tank barrel, or 42 U.S. gallons
    liquid volume, used in reference to oil or other liquid
    hydrocarbons.                                                                                                                                                                                                                                                                                                                 
|
| | BOE.One stock tank barrel equivalent of oil, calculated
    by converting gas volumes to equivalent oil volumes based on
    relative heat content, at a ratio of 6 Mcf to 1 Bbl of
    oil.                                                                                                                                                                                                                                                
|
| | Developed acreage.The number of acres which are
    allocated or assignable to producing wells or wells capable of
    production.                                                                                                                                                                                                                                                                                                          
|
| | Development well.A well drilled within the proved area
    of an oil or gas reservoir to the depth of a stratigraphic
    horizon known to be productive.                                                                                                                                                                                                                                                                                   
|
| | Differential.An adjustment to the price of oil from an
    established spot market price to reflect differences in the
    quality and/or location of oil.                                                                                                                                                                                                                                                                                  
|
| | Exploratory well.A well drilled to find and produce oil
    or gas in an unproved area, to find a new reservoir in a field
    previously found to be productive of oil or gas in another
    reservoir, or to extend a known reservoir.                                                                                                                                                                                                    
|
| | Farm-in.An agreement between a participant who brings a
    property into the venture and another participant who agrees to
    spend an agreed amount to explore and develop the property and
    has no right of reimbursement but may gain a vested interest in
    the venture. A farm-in describes the position of the
    participant who agrees to spend the agreed-upon sum of money to
    gain a vested interest in the venture.
|
| | Gas. Natural gas.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Gross acres.The total acres in which a person or entity
    has a working interest.                                                                                                                                                                                                                                                                                                                                                         
|
| | Gross oil and gas wells.The total wells in which a
    person or entity owns a working interest.                                                                                                                                                                                                                                                                                                                                            
|
| | Infill drilling.A drilling operation in which one or
    more development wells is drilled within the proven boundaries
    of a field.                                                                                                                                                                                                                                                                                                     
|
| | LPG. Liquefied petroleum gas.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | MBbl.One thousand barrels of oil or other liquid
    hydrocarbons.                                                                                                                                                                                                                                                                                                                                                                          
|
| | MBOE.One thousand BOE.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Mcf.One thousand cubic feet of gas.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Midstream.The portion of the oil and gas industry
    focused on marketing, gathering, transporting and storing oil.                                                                                                                                                                                                                                                                                                                        
|
| | MMBbl.One million barrels of oil or other liquid
    hydrocarbons.                                                                                                                                                                                                                                                                                                                                                                          
|
| | MMBOE.One million BOE.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | MMcf.One million cubic feet of gas.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Net acres.Gross acres multiplied by the percentage
    working interest.                                                                                                                                                                                                                                                                                                                                                                    
|
| | Net oil and gas wells.Gross wells multiplied by the
    percentage working interest.                                                                                                                                                                                                                                                                                                                                                        
|
| | Net production.Production that is owned, less royalties
    and production due others.                                                                                                                                                                                                                                                                                                                                                      

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net revenue interest.Our share of petroleum after
    satisfaction of all royalty and other non-cost-bearing interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | NYMEX. New York Mercantile Exchange.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Oil.Crude oil, condensate and natural gas liquids.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Operator.The individual or company responsible for the
    exploration and/or exploitation and/or production of an oil or
    gas well or lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | PV-10.The pre-tax present value, discounted at 10% per
    year, of estimated future net revenues from the production of
    proved reserves, computed by applying sales prices in effect as
    of the dates of such estimates and held constant throughout the
    productive life of the reserves (except for consideration of
    price changes to the extent provided by contractual
    arrangements), and deducting the estimated future costs to be
    incurred in developing, producing and abandoning the proved
    reserves (computed based on current costs and assuming
    continuation of existing economic conditions).                                      
|
| | Proved developed reserves.Proved developed oil and gas
    reserves are reserves that can be expected to be recovered
    through existing wells with existing equipment and operating
    methods. Additional oil and gas expected to be obtained through
    the application of fluid injection or other improved recovery
    techniques for supplementing the natural forces and mechanisms
    of primary recovery should be included as proved developed
    reserves only after testing by a pilot project or after
    the operation of an installed program has confirmed through
    production response that increased recovery will be achieved.                 
|
| | Proved reserves.Per Article 4-10(a)(2) of
    Regulation S-X, the SEC defines proved oil and gas reserves
    as the estimated quantities of oil, gas and gas liquids which
    geological and engineering data demonstrate with reasonable
    certainty to be recoverable in future years from known
    reservoirs under existing economic and operating conditions,
    i.e., prices and costs as of the date the estimate is made.
    Prices include consideration of changes in existing prices
    provided only by contractual arrangements, but not on
    escalations based upon future conditions.                                                                 
|
| | Reservoirs are considered proved if economic producibility is
    supported by either actual production or conclusive formation
    test. The area of a reservoir considered proved includes:
    (i) that portion delineated by drilling and defined by
    gas-oil and/or oil-water contacts, if any; and (ii) the
    immediately adjoining portions not yet drilled, but which can be
    reasonably judged as economically productive on the basis of
    available geological and engineering data. In the absence of
    information on fluid contacts, the lowest known structural
    occurrence of hydrocarbons controls the lower proved limit of
    the reservoir.
|
| | Reserves which can be produced economically through application
    of improved recovery techniques (such as fluid injection) are
    included in the proved classification when
    successful testing by a pilot project, or the operation of an
    installed program in the reservoir, provides support for the
    engineering analysis on which the project or program was based.                                                                                                                                                                                                                                                                                      
|
| | Estimates of proved reserves do not include: (i) oil that
    may become available from known reservoirs but is classified
    separately as indicated additional reserves;
    (ii) oil, gas, and gas liquids, the recovery of which is
    subject to reasonable doubt because of uncertainty as to
    geology, reservoir characteristics, or economic factors;
    (iii) oil, gas, and gas liquids, that may occur in
    undrilled prospects; and (iv) oil, gas, and gas liquids,
    that may be recovered from oil shales, coal, gilsonite and other
    such sources.                                                                                                
|
| | Proved reserve additions.The sum of additions to proved
    reserves from extensions, discoveries, improved recovery,
    acquisitions and revisions of previous estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Proved undeveloped reserves.Proved undeveloped oil and
    gas reserves are reserves that are expected to be recovered from
    new wells on undrilled acreage, or from existing wells where                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a relatively major expenditure is required for recompletion.
    Reserves on undrilled acreage shall be limited to those drilling
    units offsetting productive units that are reasonably certain of
    production when drilled. Proved reserves for other undrilled
    units can be claimed only where it can be demonstrated with
    certainty that there is continuity of production from the
    existing productive formation. Under no circumstances should
    estimates for proved undeveloped reserves be attributable to any
    acreage for which an application of fluid injection or other
    improved recovery technique is contemplated, unless such
    techniques have been proved effective by actual tests in the
    area and in the same reservoir.                                                                                                                                                     
|
| | Reserve life.A measure of the productive life of an oil
    and gas property or a group of properties, expressed in years.
    Reserve life is calculated by dividing proved reserve volumes at
    year-end by production for that year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Reserve replacement cost.The cost per BOE of reserves
    added during a period calculated by using a fraction, the
    numerator of which equals the costs incurred for the relevant
    property acquisition, exploration, exploitation and development
    and the denominator of which equals changes in proved reserves
    due to revisions of previous estimates, extensions, discoveries,
    improved recovery and other additions and purchases of reserves
    in-place.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Reserve replacement ratio.The proved reserve additions
    for the period divided by the production for the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Royalty.An interest in an oil and gas lease that gives
    the owner of the interest the right to receive a portion of the
    production from the leased acreage (or of the proceeds of the
    sale thereof), but generally does not require the owner to pay
    any portion of the costs of drilling or operating the wells on
    the leased acreage. Royalties may be either landowners
    royalties, which are reserved by the owner of the leased acreage
    at the time the lease is granted, or overriding royalties, which
    are usually reserved by an owner of the leasehold in connection
    with a transfer to a subsequent owner.                                                                                                                                                                                                                                                                            
|
| | Standardized measure.The present value, discounted at
    10% per year, of estimated future net revenues from the
    production of proved reserves, computed by applying sales prices
    in effect as of the dates of such estimates and held constant
    throughout the productive life of the reserves (except for
    consideration of price changes to the extent provided by
    contractual arrangements), and deducting the estimated future
    costs to be incurred in developing, producing and abandoning the
    proved reserves (computed based on current costs and assuming
    continuation of existing economic conditions). Future income
    taxes are calculated by applying the statutory federal and state
    income tax rate to pre-tax future net cash flows, net of the tax
    basis of the properties involved and utilization of available
    tax carryforwards related to oil and gas operations.
|
| | Undeveloped acreage.Acreage held under lease, permit,
    contract or option that is not in a spacing unit for a producing
    well.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Upstream.The portion of the oil and gas industry focused
    on acquiring, exploiting, developing, exploring for and
    producing oil and gas.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Waterflood.A secondary recovery operation in which water
    is injected into the producing formation to maintain reservoir
    pressure and force oil toward and into the producing wells.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Working interest.An interest in an oil and gas lease
    that gives the owner of the interest the right to drill for and
    produce oil and gas on the leased acreage and requires the owner
    to pay a share of the costs of drilling and production
    operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

References herein to Plains Resources,
Plains, the Company, we,
us and our mean Plains Resources Inc.

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PART I


Items 1 and 2.     Business and
Properties.

General

We are an independent energy company. We are principally engaged
in the midstream activities of marketing, gathering,
transporting, terminaling, 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 March 15, 2003 we owned
44% of the general partner of PAA and 12.4 million, or 24%,
of the limited partner units of PAA, which represented
approximately 24% aggregate ownership interest in PAA. See
 Plains All American Pipeline, L.P.. 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.

The book value of our investment in PAA represents 43% of our
total assets as of December 31, 2002 and the book value of
our Florida oil properties represents 31%. As of
December 31, 2002, the present value of our proved oil
reserves was approximately $87.9 million (see
  Oil Production Operations). 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 $24.40 on December 31,
2002. 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.
See  Plains All American Pipeline,
L.P.  PAA Cash Distributions. 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, 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.

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 March 15, 2003 we have
repurchased an additional 142,700 shares at a total cost of
$1.6 million. We intend to make additional repurchases in
2003 and expect to fund the purchases from cash flows.

Spin-off of Plains Exploration & Production Company

Prior to December 18, 2002 Plains Exploration &
Production Company, or PXP, was our wholly owned subsidiary. On
December 18, 2002 we distributed the issued and outstanding
shares of PXP common stock to the holders of record of our
common stock as of the close of business on December 11,
2002. Each of our stockholders received one share of PXP common
stock for each share of our common stock held. Prior to the
spin-off, we made an aggregate of $52.2 million in cash
contributions to PXP and transferred certain assets and
liabilities to PXP, primarily related to land, unproved oil and
gas properties, office equipment and pension obligations.

In contemplation of the spin-off, under the terms of a Master
Separation Agreement between us and PXP, on July 3, 2002 we
contributed to PXP 100% of the capital stock of our wholly owned
subsidiaries that own oil and gas properties in offshore
California and Illinois. As a result, PXP indirectly owned our
offshore California and Illinois properties and directly owned
our onshore California properties. We also contributed
$256.0 million of intercompany receivables that PXP and its
subsidiaries owed to us. On July 3, 2002 PXP issued
$200 million of 8.75% Senior Subordinated

7



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##### Table of Contents





We received a letter ruling from the IRS on May 22, 2002,
as supplemented on November 5, 2002, to the effect that the
spin-off will qualify as a tax-free distribution. A letter
ruling from the IRS, while generally binding on the IRS, may
under certain circumstances be retroactively revoked or modified
by the IRS. A letter ruling is based on the facts and
representations presented in the request for that ruling.
Generally, an IRS letter ruling will not be revoked or modified
retroactively if there has been no misstatement or omission of
material facts, the facts at the time of the transaction are not
materially different from the facts upon which the IRS letter
ruling was based, and there has been no change in the applicable
law. We are not aware of any facts or circumstances that would
cause the representations in the ruling request to be untrue or
incomplete in any material respect.

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 as noted,
discussions in this Form 10-K with respect to oil and gas
operations relate to our activities other than the discontinued
operations of PXP. In connection with the spin-off, we entered
into certain agreements with PXP, see  Spin-off
Agreements and  Discontinued
Operations.

Plains All American Pipeline, L.P.

As of March 15, 2003, our aggregate ownership interest in
PAA was approximately 24%, which was comprised of (1) a 44%
interest in the general partner of PAA, (2) 45%, or
approximately 4.5 million, of the subordinated units and
(3) 24%, or approximately 7.9 million, of the common
units, including approximately 1.3 million class B
common units.

As a result of our June 2001 strategic restructuring (see
 Our June 2001 Strategic Restructuring),
our minority interest in PAA is accounted for using the equity
method of accounting effective January 1, 2001. Under this
method, we no longer consolidate the assets, liabilities and
operating activities of PAA. Rather, our ownership interest in
PAA is reflected as an investment in the balance sheet and we
record our share of PAAs results of operations.

Operations

PAA is a publicly traded master limited partnership that is
engaged in the marketing, transportation and terminalling of oil
and the marketing of liquefied petroleum gas. Terminals are
facilities where oil is transferred to or from storage or a
transportation system, such as a pipeline, to another
transportation system, such as trucks or another pipeline. The
operation of these facilities is called
terminalling. PAA is the exclusive
purchaser/marketer of all of our equity oil production.

PAAs operations are concentrated in Texas, Oklahoma,
California and Louisiana and in the Canadian provinces of
Alberta and Saskatchewan, and can be categorized into two
primary business activities:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Oil Pipeline Transportation Operations.PAA owns and
    operates over 5,600 miles of gathering and mainline oil
    pipelines located throughout the United States and Canada. Its
    activities from pipeline operations generally consist of
    transporting oil for a fee, third party leases of pipeline
    capacity, barrel exchanges and buy/sell arrangements.                                                                                                      
|
| |  | Gathering, Marketing, Terminalling and Storage Operations.PAA owns and operates approximately 22.7 million
    barrels of above-ground oil terminalling and storage facilities,
    including tankage associated with its pipeline systems. These
    facilities include an oil terminalling and storage facility at
    Cushing, Oklahoma. Cushing is one of the largest oil market hubs
    in the United States and the designated delivery point for NYMEX
    oil futures

8



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##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | contracts. PAAs terminalling and storage operations
    generate revenue through a combination of storage and throughput
    charges to third parties. PAA also utilizes its storage tanks to
    counter-cyclically balance its gathering and marketing
    operations and to execute different hedging strategies to
    stabilize profits and reduce the negative impact of oil market
    volatility. PAAs gathering and marketing operations
    include:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the purchase of oil at the wellhead and the bulk purchase of oil
    at pipeline and terminal facilities;                                        
|
| |  | the transportation of oil on trucks, barges and pipelines;                                                                                       
|
| |  | the subsequent resale or exchange of oil at various points along
    the oil distribution chain; and                                             
|
| |  | the purchase of LPG from producers, refiners and other
    marketers, and the sale of LPG to wholesalers, retailers and
    industrial end users.

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 current annual distribution rate of $2.15
per unit, we would receive for 2003 an annual distribution from
PAA of approximately $30.1 million, including
$2.8 million for our general partner distribution
(including $1.8 million for the general partner incentive
distribution).

Our June 2001 Strategic Restructuring

On June 8, 2001, we sold a portion of our interests in PAA
to a group of investors and management of PAA for approximately
$155.2 million. The assets we sold in this restructuring
included 52%, or approximately 5.2 million, of the
subordinated units of PAA, at $22 per unit, and an aggregate 54%
ownership interest in the general partner of PAA. We received
approximately $110 million in cash and 23,108 shares of our
series F preferred stock valued at $45.2 million as

9



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As a result of our strategic restructuring, all of our
series F preferred stock and all but approximately 36,000
shares of our series H preferred stock were retired or
converted. The remaining outstanding shares of our series H
preferred stock were converted into 1.2 million shares of
our common stock during the third quarter of 2001.

The excess of the fair value of our Series F preferred
stock redeemed as consideration over the carrying value of such
series F preferred stock ($21.4 million) was deemed for
accounting purposes to be a dividend to our preferred
stockholders. As a result, for purposes of determining our basic
and diluted earnings per share, we deducted this amount in
determining our income available to our common stockholders.

In exchange for the significant value we received for the
subordinated units (which are subordinated in right to
distributions from PAA and are not publicly traded) relative to
the then current market price of the publicly traded common
units, we entered into a value assurance agreement with each of
the purchasers of the subordinated units. The value assurance
agreements require us to pay to the holders 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.

Also in connection with our strategic restructuring:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we appointed James C. Flores as our Chairman of the Board and
    Chief Executive Officer and we appointed a new Chief Operating
    Officer, Chief Financial Officer, and General Counsel and
    Secretary;                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | certain of our employees received transaction-related bonuses
    and other payments and vested in benefits in accordance with the
    terms of our employee benefit plans;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | 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;
|
| |  | we entered into a pension and employee benefits assumption and
    transition agreement pursuant to which we and the general
    partner of PAA agreed to the transition of certain employees to
    the general partner, our provision of certain benefits with
    respect to the transfer, and our provision of transition-related
    services; and                                                                                                                                                                                                                                                                                                                                 
|
| |  | we agreed to contribute 287,500 subordinated units to the
    general partner of PAA to be used for performance option grants
    to officers and key employees of the general partner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

10



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##### Table of Contents



Oil Production Operations

We have a 100% working interest in five producing fields in the
Sunniland Trend in south Florida. We acquired 50% of our
interest in these fields in 1993 and the remaining 50% in 1994.
At the time of our initial acquisition, production net to the
100% working interest averaged approximately 1,800 barrels of
oil per day and proved reserves were approximately 10 MMBbls. In
2002 net production from these properties averaged 2,658 barrels
of oil per day and proved reserves were 16.3 MMBbls at
December 31, 2002. In 2002 we spent $3.4 million on capital
projects, primarily facility enhancements and abandonment of
inactive wells. In 2003 we expect to spend $3.7 million on
artificial lift projects, facility upgrades and idle well
abandonments.

The following tables set forth certain information with respect
to the reserves of our Florida properties based upon reserve
reports prepared by the independent petroleum consulting firm of
Netherland, Sewell & Associates, Inc. The reserve volumes
and values were determined under the method prescribed by the
Securities and Exchange Commission, or SEC, which requires the
application of year-end prices for each year, held constant
throughout the projected reserve life. The amounts presented
exclude reserves attributable to discontinued operations (see
Note 20 to the consolidated financial statements).

|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |        |  
|----------------------------------------------- | ------------------------------------------------------------------ | --------------------------- | ----- | ------ | - | ---- | ----- | ------ | - | - | ----- | ------ | -
|                                                |                                                                    |                            
|                                                |                                                                    | As of or for the Year Ended
|                                                |                                                                    | December 31,               
|                                                |                                                                    |                            
|                                                |                                                                    | 2002                        |       | 2001   |   | 2000
|                                                |                                                                    |                             |       |        |   |     
|                                                |                                                                    |                            
|                                                |                                                                    | Oil (MBbls)                
|                                               
|                                               
|                                               
|                                               
|Proved Reserves                                 |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Beginning balance                                                  |                             |       | 17,343 |   |      |       | 18,775 |   |   |       | 23,709 |  
|                                               
|                                               
|                                               
|                                               
|                                                | Revision of previous estimates                                     |                             |       | (60    | ) |      |       | (2,470 | ) |   |       | (4,092 | )
|                                               
|                                               
|                                               
|                                               
|                                                | Extensions, discoveries, improved recovery and
    other additions |                             |       |       |   |      |       | 1,992  |   |   |       |       |  
|                                               
|                                               
|                                               
|                                               
|                                                | Production                                                         |                             |       | (970   | ) |      |       | (954   | ) |   |       | (842   | )
|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|                                                | Ending balance                                                     |                             |       | 16,313 |   |      |       | 17,343 |   |   |       | 18,775 |  
|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|Proved Developed Reserves                       |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Beginning balance                                                  |                             |       | 15,456 |   |      |       | 17,853 |   |   |       | 19,383 |  
|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|                                                | Ending balance                                                     |                             |       | 14,499 |   |      |       | 15,456 |   |   |       | 17,853 |  
|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|PV-10 ($/000s)(1)                               |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Proved developed                                                   |                             | $     | 73,656 |   |      | $     | 21,124 |   |   | $     | 37,271 |  
|                                               
|                                               
|                                               
|                                               
|                                                | Proved undeveloped                                                 |                             |       | 14,258 |   |      |       | 5,421  |   |   |       | 3,939  |  
|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|                                                | Total Proved                                                       |                             | $     | 87,914 |   |      | $     | 26,545 |   |   | $     | 41,210 |  
|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|                                                | Standardized measure                                               |                             | $     | 73,339 |   |      | $     | 26,545 |   |   | $     | 41,210 |  
|                                                |                                                                    |                             |       |        |   |      |       |        |   |   |       |       
|Average year-end realized oil price, per Bbl(2) |                                                                    | $                           | 20.25 |        |   | $    | 9.82  |        |   | $ | 11.03 |       
|                                               
|                                               
|                                               
|                                               
|December 31 NYMEX WTI spot price, per Bbl       |                                                                    | $                           | 31.20 |        |   | $    | 19.84 |        |   | $ | 26.80 |       



---



|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The PV-10 and standardized measure have been reduced to reflect
    applicable abandonment costs. PV-10 represents the standardized
    measure before deducting estimated future income taxes.
|   
|(2) | Price in effect at year end with adjustments based on location
    and quality of oil.                                                                                                         

11



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##### Table of Contents



There are numerous uncertainties inherent in estimating
quantities and values of proved reserves and in projecting
future rates of production and timing of development
expenditures, including many factors beyond our control.
Reservoir engineering is a subjective process of estimating the
recovery from underground accumulations of oil that cannot be
measured in an exact manner, and the accuracy of any reserve
estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Because
all reserve estimates are to some degree speculative, the
quantities of oil and gas that are ultimately recovered,
production and operating costs, the amount and timing of future
development expenditures and future oil sales prices may all
differ from those assumed in these estimates. In addition,
different reserve engineers may make different estimates of
reserve quantities and cash flows based upon the same available
data. Therefore, the Present Value of Proved Reserves shown
above represents estimates only and should not be construed as
the current market value of the estimated oil reserves
attributable to our properties. The information set forth in the
preceding tables includes revisions of reserve estimates
attributable to proved properties included in the preceding
years estimates. Such revisions reflect additional
information from subsequent exploitation and development
activities, production history of the properties involved and
any adjustments in the projected economic life of such
properties resulting from changes in product prices. See
Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Critical Accounting Policies and Factors
That May Affect Future Results.

In accordance with the SEC guidelines, the reserve
engineers estimates of future net revenues from our
properties and the present value thereof are made using oil
sales prices in effect as of the dates of such estimates and are
held constant throughout the life of the properties, except
where such guidelines permit alternate treatment, including the
use of fixed and determinable contractual price escalations. The
oil price in effect at December 31, 2002 is based on the
year-end oil price with variations based on location and quality
of oil. The overall average year-end price used in the reserve
report as of December 31, 2002 was $20.25 per barrel of
oil. See Product Markets and Major Customers.
Historically, the prices for oil have been volatile and are
likely to continue to be volatile in the future. See
Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Critical Accounting Policies and Factors
That May Affect Future Results.

Since December 31, 2001, we have not filed any estimates of
total proved net oil reserves with any federal authority or
agency other than the SEC.

Productive Wells and Acreage

As of December 31, 2002, we had working interests in
16 gross (16 net) active producing oil wells. At
December 31, 2002 we had working interests in 12,025 gross,
12,025 net, developed acres and 73,842 gross, 71,627 net,
undeveloped acres, all located in the state of Florida. Less
than 10% of total net undeveloped acres are covered by leases
that expire in the next five years.

Drilling Activities

No wells were drilled in 2002. In 2001 we participated in
1 gross (0.5 net) dry exploratory well on a property
outside Florida. In 2000 we drilled 2 gross (2 net)
productive oil development wells on our Florida properties.

Production and Sales

The following table presents certain information with respect to
oil production and sales attributable to our properties, the
revenue derived from the sale of such production, average sales

12



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##### Table of Contents





|                                |                      |                         |       |       |   |      |       |       |   |   |       |       |  
|------------------------------- | -------------------- | ----------------------- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- | -
|                                |                      |                        
|                                |                      | Year Ended December 31,
|                                |                      |                        
|                                |                      | 2002                    |       | 2001  |   | 2000
|                                |                      |                         |       |       |   |     
|Production (MBbls)              |                      |                         | 970   |       |   |      | 954   |       |   |   | 842   |      
|                               
|                               
|                               
|                               
|Sales (MBbls)                   |                      |                         | 869   |       |   |      | 1,060 |       |   |   | 701   |      
|                               
|                               
|                               
|                               
|Average NYMEX price per Bbl     |                      | $                       | 26.15 |       |   | $    | 26.01 |       |   | $ | 30.25 |      
|                               
|                               
|                               
|                               
|Average hedge cost per Bbl      |                      |                         | (0.71 | )     |   |      | (1.11 | )     |   |   | (9.37 | )    
|Average differential per Bbl(1) |                      |                         |       |       |   |      |       |       |   |   |       |      
|                               
|                               
|                               
|                               
|                                | Quality              |                         |       | (3.97 | ) |      |       | (9.77 | ) |   |       | (5.70 | )
|                               
|                               
|                               
|                               
|                                | Transportation costs |                         |       | (4.34 | ) |      |       | (4.20 | ) |   |       | (5.35 | )
|                                |                      |                         |       |       |   |      |       |       |   |   |       |      
|Average realized price per Bbl  |                      |                         | 17.13 |       |   |      | 10.93 |       |   |   | 9.83  |      
|                               
|                               
|                               
|                               
|Production expenses per Bbl     |                      |                         | (7.52 | )     |   |      | (6.98 | )     |   |   | (8.43 | )    
|                                |                      |                         |       |       |   |      |       |       |   |   |       |      
|Gross margin per Bbl            |                      | $                       | 9.61  |       |   | $    | 3.95  |       |   | $ | 1.40  |      
|                                |                      |                         |       |       |   |      |       |       |   |   |       |      



---



|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(1) | Oil transportation costs are included in costs and expenses in
    the consolidated statement of income.

PAA is the exclusive purchaser of all of our equity oil
production. We are currently negotiating a new oil marketing
agreement with PAA to, among other things, add a definitive term
to the agreement and provide that PAA will use its reasonable
best efforts to obtain the best price for our oil production.
There can be no assurance, however, that we will enter into a
new oil marketing agreement with PAA.

Product Markets and Major Customers

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 production and the levels of such
production are subject to wide fluctuations and depend on
numerous factors beyond our control, including the condition of
the United States and world economies (particularly the
manufacturing sector), foreign imports, political conditions in
other oil-producing countries, the actions of the Organization
of Petroleum Exporting Countries and domestic government
regulation, legislation and policies. Decreases in the prices of
oil have had, and could have in the future, an adverse effect on
the carrying value of our proved reserves and our revenues,
profitability and cash flow. See Item 7. 
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Critical
Accounting Policies and Factors That May Affect Future
Results.

To manage our exposure to commodity price risks, we utilize
various derivative instruments to hedge our exposure to price
fluctuations on oil sales. Our hedging arrangements provide us
protection on the hedged volumes if oil prices decline below the
prices at which these hedges are set, however, ceiling prices in
our hedges may cause us to receive less revenue on the hedged
volumes than we would receive in the absence of hedges. See
Item 7A  Quantitative and Qualitative
Disclosures about Market Risks.

Substantially all of our production is transported by pipelines,
trucks and barges owned by third parties. The inability or
unwillingness of these parties to provide transportation
services to us for a reasonable fee could result in our having
to find transportation alternatives, increased transportation
costs or involuntary curtailment of a significant portion of our
oil production.

PAA is the exclusive purchaser of all of our equity oil
production. The following table reflects for the year ended
December 31, 2000, during which period PAA was consolidated
in our financial

13



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##### Table of Contents





|                           |  |               |    |  
|-------------------------- |  | ------------- | -- | -
|                           |  | Percentage of
|                           |  | Consolidated 
|                           |  | Sales(1)     
|                           |  |              
|                          
|                          
|                          
|                          
|Marathon Ashland Petroleum |  |               | 12 | %

|            |  |               |    |  
|----------- |  | ------------- | -- | -
|            |  | Percentage of
|            |  | Oil Sales(2) 
|            |  |              
|           
|           
|           
|           
|Conoco Inc. |  |               | 55 | %
|           
|           
|           
|           
|ExxonMobil  |  |               | 33 | %



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pertains to operations of PAA. Represents percent of oil and gas
    sales revenues plus marketing, transportation, storage and
    terminalling revenues.
|   
|(2) | Represents entities that purchased our equity oil production
    from PAA.                                                                                

If we were to lose PAA as the exclusive purchaser of our equity
production, we believe such loss would not have a material
adverse effect on our results of operations. We believe PAA
could be replaced by other purchasers under contracts with
similar terms and conditions.

We recommend you review PAAs Annual Report on
Form 10-K for the year ended December 31, 2002, and
other applicable SEC filings by PAA, for a discussion of
PAAs major customers.

Competition

Competitors of our upstream activities include major integrated
oil and gas companies, and numerous independent oil and gas
companies, individuals and drilling and income programs. Many of
our larger upstream competitors possess and employ financial and
personnel resources substantially greater than those available
to us. Such companies are able to pay more for productive oil
and gas properties and exploratory prospects and to define,
evaluate, bid for and purchase a greater number of properties
and prospects than our financial or human resources permit. Our
ability to acquire additional properties and to discover
reserves in the future will depend on our ability to evaluate
and select suitable properties and to consummate transactions in
a highly competitive environment. In addition, there is
substantial competition for capital available for investment in
the oil and gas industry.

We recommend you review PAAs Annual Report on
Form 10-K for the year ended December 31, 2002, and
other applicable SEC filings by PAA, for a discussion of
PAAs competition.

Regulation

We recommend you review PAAs Annual Report on
Form 10-K for the year ended December 31, 2002, and
other applicable SEC filings by PAA, for a discussion of
regulations related to the midstream business. Our discussion on
regulation below relates primarily to our upstream business.

Our upstream operations are subject to extensive regulations.
Many federal, state and local departments and agencies are
authorized by statute to issue and have issued laws and
regulations binding on the oil and gas industry and its
individual participants. The failure to comply with such rules
and regulations can result in substantial penalties. The
regulatory burden on the oil industry increases our cost of
doing business and, consequently, affects our profitability.
However, we do not believe that we are affected in a
significantly different manner by these laws and regulations
than are our competitors. Due to the myriad of complex federal,
state and local regulations that may affect us, directly or
indirectly, you should not rely on the following discussion of
certain laws and regulations as an exhaustive review of all
regulatory considerations affecting our operations.

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OSHA

We are subject to the requirements of the federal Occupational
Safety and Health Act, as amended, or OSHA, and comparable state
statutes that regulate the protection of the health and safety
of workers. In addition, the OSHA hazard communication standard,
the U.S. Environmental Protection Agency, or EPA,
community-right-to-know regulations, and similar state statutes
require that we maintain certain information about hazardous
materials used or produced in our operations and that we provide
this information to our employees, state and local government
authorities and citizens. We believe that our operations are in
substantial compliance with OSHA requirements, including general
industry standards, record keeping requirements and monitoring
of occupational exposure to regulated substances.

Regulation of
Production

The production of oil and gas is subject to regulation under a
wide range of federal and state statutes, rules, orders and
regulations. State and federal statutes and regulations require
permits for drilling operations, drilling bonds and reports
concerning operations. The State of Florida has regulations
governing conservation matters, including provisions for the
unitization or pooling of oil and gas properties, the
establishment of maximum rates of production from oil and gas
wells and the regulation of the spacing, plugging and
abandonment of wells. Florida also has the right to restrict
production to the market demand for oil and gas. Moreover,
Florida imposes an ad valorem, production or severance tax with
respect to production and sale of oil and gas within its
jurisdiction.

Pipeline Regulation

In our upstream business, we have pipelines to deliver our
production to sales points. Our pipelines are subject to certain
regulations of the U.S. Department of Transportation, or DOT. In
addition, we must permit access to and copying of records, and
must make certain reports and provide information as required by
the Secretary of Transportation. We believe that our pipeline
operations are in substantial compliance with applicable
requirements.

Environmental

Our operations and properties are subject to extensive and
changing federal, state and local laws and regulations relating
to safety, health and environmental protection, including the
generation, storage, handling, emission, and transportation of
materials and discharge of materials into the environment. Other
statutes that provide protection to animal and plant species and
which may apply to our operations include, but are not
necessarily limited to, the Marine Mammal Protection Act, the
Marine Protection, Research and Sanctuaries Act, the Fish and
Wildlife Coordination Act, the Fishery Conservation and
Management Act, the Migratory Bird Treaty Act and the National
Historic Preservation Act. These laws and regulations may
require the acquisition of a permit or other authorization
before construction or drilling commences and for certain other
activities; limit or prohibit construction, drilling and other
activities on certain lands lying within wilderness or wetlands
and other protected areas; and impose substantial liabilities
for pollution resulting from our operations. The permits
required for various of our operations are subject to
revocation, modification and renewal by issuing authorities.

As with the oil and gas industry generally, our compliance with
existing and anticipated laws and regulations increases our
overall cost of business, including our capital costs to
construct, maintain, upgrade and close equipment and facilities.
Although these regulations affect our capital expenditures and
earnings, we believe that they do not affect our competitive
position because our competitors that comply with such laws and
regulations are similarly affected. Environmental laws and
regulations have historically been subject to change, and we are
unable to predict the ongoing cost to us of complying with these
laws and regulations or the future impact of such laws and
regulations on our operations. If a person violates these
environmental laws and regulations and any

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Although we obtained environmental studies on our properties in
Florida, and we believe that such properties have been operated
in accordance with standard oil field practices, current or
future local, state and federal environmental laws and
regulations may require substantial expenditures to remediate
the properties or to otherwise comply with such rules and
regulations.

A portion of our Florida properties are located within the Big
Cypress National Preserve and our operations therein are subject
to regulations administered by the National Park Service, or
NPS. Under such regulations, a master plan of operations has
been approved by the Regional Director of the NPS. The master
plan of operations is a comprehensive plan of practices and
procedures for our drilling and production operations designed
to minimize the effect of such operations on the environment. We
must modify the master plan of operations and secure permits
from the NPS for new wells that require the use of additional
land for drilling operations. The master plan of operations also
requires that we restore the surface property affected by
drilling and production operations upon cessation of these
activities. We do not anticipate that expenditures required to
comply with such regulations will have a material adverse effect
on our operations.

Other Business Matters

Without successful drilling, acquisition or exploitation
operations, our oil and gas reserves and revenues will decline.
Drilling activities are subject to numerous risks, including the
risk that no commercially viable oil or gas production will be
obtained. Our decision to purchase, explore, exploit or develop
an interest or property will depend in part on the evaluation of
data obtained through geophysical and geological analyses and
engineering studies, the results of which are often inconclusive
or subject to varying interpretations. See  Oil
and Gas Reserves. The cost of drilling, completing and
operating wells is often uncertain. Drilling may be curtailed,
delayed or canceled as a result of many factors, including title
problems, weather conditions, compliance with government
permitting requirements, shortages of or delays in obtaining
equipment, reductions in product prices or limitations in the
market for products. The availability of a ready market for our
oil production also depends on a number of factors, including
the demand for and supply of oil and the proximity of reserves
to pipelines or trucking and terminal facilities. See
 Product Markets and Major Customers.

Substantially all of our oil production is transported by
pipelines, trucks and barges owned by third parties. The
inability or unwillingness of these parties to provide
transportation services to us for a reasonable fee could cause
us to seek transportation alternatives, which in turn could
result in increased transportation costs to us or involuntary
curtailment of a significant portion of our oil and gas
production.

Our operations are subject to all of the risks normally incident
to the exploration for and the production of oil and gas,
including blowouts, cratering, oil spills and fires, each of
which could result in damage to or destruction of oil and gas
wells, production facilities or other property, or injury to
persons. The relatively deep drilling conducted by us from time
to time involves increased drilling risks of high pressures and
mechanical difficulties, including stuck pipe, collapsed casing
and separated cable.

Our upstream properties may experience damage as a result of an
accident or other natural disaster. These hazards can cause
personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or
environmental damages and suspension of operations. We maintain
insurance of various types that we consider to be adequate to
cover our upstream operations and properties. The insurance
covers all of our upstream assets in amounts

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The occurrence of a significant event not fully insured or
indemnified against, or the failure of a party to meet its
indemnification obligations, could materially and adversely
affect our operations and financial condition. We believe that
we are adequately insured for public liability and property
damage to others with respect to our operations. With respect to
all of our coverage, no assurance can be given that we will be
able to maintain adequate insurance in the future at rates we
consider reasonable.

Title to Properties

Our properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and
other burdens, including other mineral encumbrances and
restrictions. We do not believe that any of these burdens
materially interferes with the use of such properties in the
operation of our business.

We believe that we have generally satisfactory title to or
rights in all of our producing properties. As is customary in
the oil and gas industry, minimal investigation of title is made
at the time of acquisition of undeveloped properties. Title
investigation is made and title opinions of local counsel are
generally obtained only before commencement of drilling
operations. We believe that we have satisfactory title to all of
our other assets. Although title to such properties are subject
to encumbrances in certain cases, such as customary interests
generally retained in connection with acquisition of real
property, liens related to environmental liabilities associated
with historical operations, liens for current taxes and other
burdens and minor easements, restrictions and other encumbrances
to which the underlying properties were subject at the time of
acquisition by us, we believe that none of such burdens will
materially detract from the value of such properties or from our
interest therein or will materially interfere with their use in
the operation of our business.

Spin-off Agreements

In connection with the spin-off of PXP, we entered into the
following agreements:

Master Separation
Agreement

Overview.We entered into a master separation agreement
on July 3, 2002 with PXP. The master separation agreement
provides for the separation of substantially all of our upstream
assets and liabilities, other than our Florida operations. The
master separation agreement provides for, among other things:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the separation;                                                                                                                                                 
|
| |  | cross-indemnification provisions;                                                                                                                               
|
| |  | allocation of fees related to these transactions between us and
    PXP;                                                                                        
|
| |  | other provisions governing our relationship with PXP, including
    mandatory dispute arbitration, sharing information,
    confidentiality and other covenants;
|
| |  | a noncompetition provision; and                                                                                                                                 
|
| |  | us entering into the ancillary agreements discussed below with
    PXP.                                                                                         

Separation.To effect the separation, on July 3,
2002, we transferred to PXP assets and liabilities related to
our upstream business other than our Florida operations,
including the capital stock of Arguello Inc., Plains Illinois
Inc., PMCT, Inc. and Plains Resources International Inc.,

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We agreed to take such further actions as PXP may reasonably
request to more effectively complete the transfers of assets and
liabilities described above, to protect and enjoy all rights and
benefits we had with respect thereto and as otherwise
appropriate to carry out the transactions contemplated by the
master separation agreement.

Indemnification.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 separation, regardless of the time
those liabilities arise, and to place sole financial
responsibility for liabilities associated with our other
businesses with us and our other subsidiaries. The master
separation agreement also contains indemnification provisions
under which we and PXP each indemnify the other with respect to
breaches by the indemnifying party of the master separation
agreement or any of the ancillary agreements described below. We
agree to indemnify PXP 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, including related prospecti or in documents to be
filed with the SEC in connection therewith if such information
was provided by us. PXP agrees to indemnify us and our other
subsidiaries 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
including related prospecti or in documents to be filed with the
SEC in connection therewith, except for information regarding
and provided by us for inclusion in such documents.

The master separation agreement contains a general release under
which we released PXP, and PXP released us and our subsidiaries,
affiliates, successors and assigns from any liabilities arising
from events between us or our subsidiaries on the one hand, and
PXP on the other hand, occurring on or before the separation,
including events in connection with activities to implement the
separation and the spin-off. The general release does not apply
to obligations under the master separation agreement or any
ancillary agreement, to liabilities transferred to PXP, to
future transactions between us and PXP, or to specified
contractual arrangements.

Other provisions.The master separation agreement also
provides for: (1) mandatory arbitration to settle disputes
between us, and our subsidiaries, and PXP; (2) exchange of
information between PXP and us for purposes of conducting our
operations, meeting regulatory requirements, responding to
regulatory or judicial proceedings, meeting SEC filing
requirements, and other reasons; (3) coordination of the
conduct of our annual audits and quarterly reviews so that we
may both file our annual and quarterly reports in a timely
manner; (4) preservation of legal privileges and
(5) maintaining confidentiality of each others
information.

In addition, we and PXP agree to use reasonable efforts to amend
the omnibus agreement with PAA to terminate the noncompetition
provisions therein and to enter into a new oil marketing
agreement with PAA so that the agreement only applies to PXP and
to add a definite term to the agreement, and other amendments.

Non-competition.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

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Employee Matters
Agreement

The employee matters agreement provided that those employees who
work for PXP after the spin-off were transferred to PXP
immediately before the spin-off. Neither their transfer nor the
spin-off was treated as a termination of their employment for
purposes of any benefits under any plans.

Stock options and restricted stock awards.Under the
employee matters agreement, as a result of the spin-off, all
outstanding options to acquire our common stock at the time of
the spin-off were split into (1) an equal
number of options to acquire our common stock and (2) an
equal number of stock appreciation rights, or SARs, with respect
to PXP common stock.

The exercise price for our original stock options was also
split between our new stock options and the SARs
based on the relationship of the closing price (with dividend)
of our common stock on the spin-off date ($23.05 per share) less
the closing price (on a when-issued basis) of PXP
common stock on the spin-off date ($9.10 per share), both as
reported on the NYSE, and such closing price of PXP common stock
($9.10 per share).

Also, unless otherwise provided for in the agreement governing
the restricted stock award, at the time of the spin-off all
restricted stock awards for our common stock were
split into (1) restricted stock awards for an
equal number of shares of our common stock and
(2) restricted stock awards for an equal number of shares
of PXP common stock. An employees or a directors
service with PXP counts towards the vesting of their
split Plains Resources stock options and restricted
stock awards even though the employee is no longer employed by
us or the director no longer serves on our board of directors.
With respect to employees and directors who stay with us, their
service at Plains Resources counts towards the vesting of their
SARs even though they are not employed by PXP or do not serve on
PXP board of directors.

Unless a person is employed by or serves as a director for both
PXP and us, termination of employment or service as a director
for any reason at either company will count as termination for
the same reason at the other company for purposes of vesting and
termination of options, SARs, and restricted stock awards. If a
person is employed by or serves as a director for both PXP and
us, termination for any reason at one company will not count as
termination at the other company.

Other plans.Under the employee matters agreement
(1) PXP established a nonqualified deferred compensation
plan for certain executive officers and, to the extent that any
of the executives are participants in our deferred compensation
plan, the related assets and liabilities under our plan were
transferred to the PXP plan, (2) we transferred our 401(k)
plan and welfare benefit plans to PXP and formed a similar
401(k) plan and similar welfare benefit plans, and (3) PXP
established plans that mirror our fringe benefits and company
policies.

Other.Under the employee matters agreement, we retained
liability for all incurred but not reported claims occurring
before the spin-off, and PXP is liable for all claims incurred
on or after the spin-off related to its employees.

Tax Allocation
Agreement

On July 3, 2002, we entered into the tax allocation
agreement, which we and PXP amended and restated on
November 20, 2002. This agreement provides that, until the
spin-off, PXP continued to be included in our consolidated
federal income tax group, and PXPs federal income tax
liability was included in our consolidated federal income tax
liability. The amount of taxes that PXP pays or receives with
respect to our consolidated or combined returns in which PXP is
included generally are to be determined by multiplying
PXPs net taxable income included in our consolidated tax
return by the highest marginal tax rate applicable to the
income. We are not required to pay PXP for the use

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In general, the agreement provides that PXP is included in our
consolidated group for federal income tax purposes until the
time of the spin-off. Each member of a consolidated group is
jointly and severally liable for the federal income tax
liability of each other member of the consolidated group.
Accordingly, although this agreement allocates tax liabilities
between us and PXP during the period in which PXP is included in
our consolidated group, PXP could be liable if any federal tax
liability is incurred, but not discharged, by any other member
of our consolidated group. In addition, to the extent our net
operating losses are used in the consolidated return to offset
PXPs taxable income from operations during the period
January 1, 2002 through the spin-off, PXP will reimburse us
for the reduction in PXPs federal income tax liability
resulting from the utilization of such net operating losses, but
such reimbursement shall not exceed $3 million exclusive of
any interest accruing under the agreement. A receivable from PXP
for $3.0 million is reflected in Other Assets in our
consolidated balance sheet at December 31, 2002 for the use
of our net operating losses.

Under the terms of this agreement, PXP agrees to indemnify us if
the spin-off is not tax-free to us as a result of various
actions taken by PXP or with respect to PXPs failure to
take various actions.

In addition, PXP agrees that, during the three-year period
following the spin-off, without our prior written consent, PXP
will not engage in transactions that could adversely affect the
tax treatment of the spin-off unless it obtains a supplemental
tax ruling from the IRS or a tax opinion acceptable to us of
nationally recognized tax counsel to the effect that the
proposed transaction would not adversely affect the tax
treatment of the spin-off or provide adequate economic security
to us to ensure PXP would be able to comply with its obligation
under this agreement.

PXP also agrees to be liable for transfer taxes associated with
the transfer of assets and liabilities in connection with the
separation and the spin-off.

Intellectual Property
Agreement

On July 3, 2002 we entered into the intellectual property
agreement, which provides that we will transfer to PXP ownership
and all rights associated with certain trade names, trademarks,
service marks and associated goodwill, including Arguello,
Plains, Plains Energy, Plains E&P, Plains Exploration &
Production, Plains Illinois, Plains Petroleum, Plains Resources,
Plains Resources International, PLX, PMCT, Stocker Resources and
the Plains logo. In addition, PXP will grant to us a full
license to use certain trade names including Plains Energy and
Plains Resources, referred to as the Plains Marks, subject to
certain limitations. These licenses are not transferable or
assignable without PXPs written consent, except that we
may grant our subsidiaries sublicenses to use the Plains Marks.

We will not attempt to register a trade name or trademark that
incorporates or is confusingly similar to the Plains Marks.
Also, if we develop new trademarks using the name
Plains, we must first obtain PXPs written
approval. PXP will own such new trademarks and they will be
considered subject to the terms of this agreement.

The intellectual property agreement provides that we will
conform the nature and quality of our products and services
offered in connection with the Plains Marks to PXPs
reasonable design and quality standards. Further, we will use
the Plains Marks only in connection with our business.

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Plains Exploration &
Production Transition Services Agreement

On July 3, 2002 we entered into the Plains Exploration
& Production transition services agreement, which provides
that we will provide PXP the following services, on an interim
basis:



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | management services, including managing PXPs operations,
    evaluating investment opportunities for PXP, overseeing
    PXPs upstream activities, and staffing;
|
| |  | tax services, including preparing tax returns and preparing
    financial statement disclosures;                                                                  
|
| |  | accounting services, including maintaining general ledgers,
    preparing financial statements and working with PXPs
    auditors;                               
|
| |  | payroll services, including payment processing and complying
    with regulations relating to payroll services;                                                   
|
| |  | insurance services, including maintaining for the interim period
    the existing insurance that we provide for PXP;                                              
|
| |  | employee benefits services, including administering and
    maintaining the employee benefit plans that cover PXPs
    employees;                                
|
| |  | legal services, including typical and customary legal services;
    and                                                                                           
|
| |  | financial services, including helping PXP raise capital,
    preparing budgets and executing hedges.                                                              

Through December 31, 2002 we have charged PXP
$10.8 million of the $30.0 million allowed under this
agreement to reimburse us for our costs of providing such
services. We will continue to provide services under this
agreement until June 16, 2003, unless we and PXP decide to
terminate the agreement earlier. We do not expect to make
significant additional charges to PXP under this agreement.

This transition services agreement provides that we will not be
liable to PXP with respect to the performance of the services,
except in the case of gross negligence or willful misconduct in
providing the services. We will indemnify PXP for any
liabilities arising from such gross negligence or misconduct.
PXP will indemnify us for any liabilities arising directly from
the performance of the services by us, except for liabilities
caused by our gross negligence or willful misconduct. We
disclaim all warranties and make no representations as to the
quality, suitability or adequacy of the services provided.

Plains Resources Transition
Services Agreement

On July 3, 2002 we entered into the Plains Resources
transition services agreement, under which PXP will provide us
the following services on an interim basis beginning on a date
to be determined by both us and PXP upon the transfer by us of
substantially all of our employees to PXP:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | tax services, including preparing tax returns and preparing
    financial statement disclosures;                             
|
| |  | accounting services, including maintaining general ledgers,
    preparing financial statements and working with our auditors;
|
| |  | payroll services, including payment processing and complying
    with regulations relating to payroll services;              
|
| |  | employee benefits services, including administering and
    maintaining the employee benefit plans that cover our employees; 

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| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | legal services, including typical and customary legal services;
    and                            
|
| |  | financial services, including helping us raise capital,
    preparing budgets and executing hedges.

The services provided by PXP under the Plains Resources
transition services agreement and the services provided by us
under the Plains Exploration & Production transition
services agreement are substantially similar, except that:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Plains Resources transition services agreement does not
    cover management services, insurance services or operational
    services;                                                        
|
| |  | the tax services provided under the Plains Resources transition
    services agreement are not subject to the tax allocation
    agreement; and                                                   
|
| |  | the legal services provided under the Plains Exploration &
    Production transition services agreement include legal services
    that we have historically provided for us and our subsidiaries.

PXP will charge us on a monthly basis its costs of providing
such services. No amounts had been charged under this agreement
through December 31, 2002.

In addition, we and PXP may identify additional services that
PXP will provide to us under this agreement in the future. The
terms and costs of these additional services will be mutually
agreed upon by us and Plains Resources. PXP may allow one of its
subsidiaries or a qualified third party to provide the services
under this agreement, but PXP will be responsible for the
performance of the services.

PXP will be obligated to provide the services with substantially
the same degree of care as it employs for its own operations.
PXP may change the manner in which it provides the services so
long as it deems such change to be necessary or desirable for
its own operations.

This transition services agreement provides that PXP will not be
liable to us with respect to the performance of the services,
except in the case of gross negligence or willful misconduct in
providing the services. PXP will indemnify us for any
liabilities arising from such gross negligence or misconduct. We
will indemnify PXP for any liabilities arising directly from
PXPs performance of the services, except for liabilities
caused by PXPs gross negligence or willful misconduct. PXP
disclaims all warranties and makes no representations as to the
quality, suitability or adequacy of the services provided.

The term of this agreement expires on June 8, 2003 unless
we and PXP decide to terminate the agreement earlier. We and PXP
may agree to extend the term if necessary or desirable.

Technical Services
Agreement

On July 3, 2002 we entered into the technical services
agreement, which provides that, beginning on a date to be
determined by us and PXP, PXP will provide Calumet Florida
certain engineering and technical support services required to
support operation and maintenance of the oil and gas properties
owned by Calumet, including geological, geophysical, surveying,
drilling and operations services, environmental and other
governmental or regulatory compliance related to oil and gas
activities and other oil and gas engineering services as
requested, and accounting services.

We will reimburse PXP for its costs to provide these services.
No amounts had been charged under this agreement through
December 31, 2002.

In addition, we and PXP may identify additional services that
PXP will provide to us under this agreement in the future. The
terms and costs of these additional services will be mutually
agreed upon by us and PXP. PXP may allow one of its subsidiaries
or a qualified third party to provide the services under this
agreement, but PXP will be responsible for the performance of
the services.

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We and PXP may agree to specific performance metrics that it
must meet. Where no metrics are provided, PXP will
(1) perform the services in accordance with the policies
and procedures in effect before this agreement,
(2) exercise the same care and skill as it exercises in
performing similar services for its subsidiaries, and
(3) in cases where there is common personnel, equipment or
facilities for services provided to PXPs subsidiaries and
us, not favor us or PXPs subsidiaries over the other. PXP
may change the manner in which it provides the services so long
as it is making similar changes to the services it provides to
its subsidiaries. PXP is not obligated to provide any service to
the extent it is impracticable as a result of causes outside of
its control.

The technical services agreement provides that PXP will not be
liable to us or Calumet with respect to the performance of the
services, except in the case of gross negligence or willful
misconduct in providing the services. PXP will indemnify us and
Calumet for any liabilities arising from such gross negligence
or misconduct. We will indemnify PXP for any liabilities arising
directly from the performance of the services, except for
liabilities caused by PXPs gross negligence or willful
misconduct. PXP disclaims all warranties and makes no
representations as to the quality, suitability or adequacy of
the services provided.

PXP will provide the services until (1) Calumet is no
longer our subsidiary, (2) Calumet transfers substantially
all of its assets to a person that is not a subsidiary of us,
(3) the third anniversary of the date of this agreement or
(4) when all the services are terminated as provided in the
agreement. We may terminate the agreement as to some or all of
the services at any time by giving PXP at least
90 days written notice.

Employees

As of February 28, 2003, we had 14 full-time employees
(not including our Chief Executive Officer and Chief Financial
Officer, who also devote a portion of their time and efforts to
PXP), none of whom is represented by any labor union. Of such
full-time employees, 12 are field personnel involved in oil
and gas producing activities.

Risk Factors

You should carefully consider the following risk factors in
addition to the other information included in this report. Each
of these risk factors could adversely affect our business,
operating results ad financial condition, as well as adversely
affect the value of an investment in our common stock.



| |                                                                        
| | -----------------------------------------------------------------------
| | We are highly dependent upon the earnings and
    distributions of PAA.

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 $24.40 on
December 31, 2002. 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. In 2002, we had oil revenues of
$18.7 million while distributions received from PAA
attributable to our general and limited partner interests
totaled $29.1 million.

PAAs financial performance will directly affect our
financial performance and the market value performance of
PAAs limited partner interests will directly impact the
value of our assets. A significant decline in PAAs
earnings would have a corresponding negative impact on our
earnings. Likewise, a significant decline in the value of
PAAs common units would have a corresponding negative
impact on the value of our assets.

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In addition, cash from PAA distributions on its general partner
and limited partner interests is one of our primary sources of
liquidity. If PAA could not, for any reason, make its minimum
quarterly distribution payments on its limited partner and
general partner interests, this would impair our ability to meet
our short and long-term cash needs, including normal recurring
operating needs, debt service obligations, contingencies and
capital expenditures. Further, PAAs inability to make its
minimum quarterly distribution payments would trigger our
payment obligations under the value assurance agreements, which
would compound the negative impact on our ability to meet our
short and long-term capital needs.

We have also entered into an oil marketing agreement with PAA
under which PAA is the exclusive purchaser of all of our net oil
production. We generally do not require letters of credit or
other collateral form PAA to support our trade receivables.
Accordingly, a material adverse change in PAAs financial
condition could adversely impact our ability to collect our
receivables from PAA and thereby affect our financial condition.

We urge you to review PAAs SEC filings, including its
Annual Report on Form 10-K for the year ended
December 31, 2002, for risks associated with PAAs
business.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Our levels of indebtedness may limit our financial and
    operating flexibility.

We have a substantial amount of debt and the ability to incur
substantially more debt. We have a $45.0 million secured
term loan facility, which is collateralized by a pledge of the
equity of our subsidiaries and 4,950,000 of our PAA common
units. The term loan is repayable in 10 quarterly
installments of $4.5 million each commencing on
February 28, 2003 with a final maturity on May 31,
2005.

We and all of our subsidiaries must comply with various
covenants contained in our secured term loan facility, which,
among other things, limit the ability of us and our subsidiaries
to:



| |   |                                                 
| | - | ------------------------------------------------
| |  | incur additional debt or liens;                 
|
| |  | enter into leases;                              
|
| |  | sell assets;                                    
|
| |  | make loans or investments;                      
|
| |  | 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 our capital stock.

Our substantial debt could have important consequences to you.
For example, it could:



| |   |                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase our vulnerability to general adverse economic and
    industry conditions;                                                                                                                                                                                                                                                                                                   
|
| |  | limit our ability to fund future working capital and capital
    expenditures, to engage in future acquisitions or development
    activities, or to otherwise realize the value of our assets and
    opportunities fully because of the need to dedicate a
    substantial portion of our cash flow to payments on our debt or
    to comply with any restrictive terms of our debt;

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| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | limit our flexibility in planning for, or reacting to, changes
    in the industry in which we operate; and
|
| |  | place us at a competitive disadvantage as compared to our
    competitors that have less debt.             

In addition, if we fail to comply with the terms of our debt,
our lenders will have the right to accelerate the maturity of
that debt and foreclose upon the collateral securing that debt.
Realization of any of these factors could adversely affect our
financial condition.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Volatile oil and gas prices could adversely affect our
    financial condition and results of operations.

Our success is largely dependent on oil prices, which are
extremely volatile. Any substantial or extended decline in the
price of oil below current levels will have a material adverse
effect on our business operations and future revenues. Moreover,
oil prices depend on factors we cannot control, such as:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | supply and demand for oil and expectations regarding supply and
    demand;                                            
|
| |  | weather;                                                                                                               
|
| |  | actions by the Organization of Petroleum Exporting Countries, or
    OPEC;                                             
|
| |  | political conditions in other oil-producing countries including
    the possibility of insurgency or war in such areas;
|
| |  | general economic conditions in the United States and worldwide;
    and                                                
|
| |  | governmental regulations.                                                                                              

With respect to our business, prices of oil will affect:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | our revenues, cash flows and earnings;                                                    
|
| |  | our ability to attract capital to finance our operations and the
    cost of such capital;
|
| |  | the amount that we are allowed to borrow; and                                             
|
| |  | the value of our oil and gas properties.                                                  



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any prolonged, substantial reduction in the demand for
    oil, or distribution problems in meeting this demand, could
    adversely affect our business.

Our success is materially dependent upon the demand for oil. The
availability of a ready market for our oil production depends on
a number of factors beyond our control, including the demand for
and supply of oil and gas, the availability of alternative
energy sources, the proximity of reserves to, and the capacity
of, oil and gas gathering systems, pipelines or trucking and
terminal facilities. We may also have to shut-in some of our
wells temporarily due to a lack of market or adverse weather
conditions including hurricanes. If the demand for oil
diminishes, our financial results would be negatively impacted.

In addition, there are limitations related to the methods of
transportation for our production. Substantially all of our oil
production is transported by pipelines and trucks owned by third
parties. The inability or unwillingness of these parties to
provide transportation services to us for a reasonable fee could
result in our having to find transportation alternatives,
increased transportation costs or involuntary curtailment of a
significant portion of our oil production, any of which could
have a negative impact on our results of operation and cash
flows.

25



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| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | The war in Iraq, recent terrorist activities and the
    potential for other global events could adversely affect our
    business.

The United States is at war with Iraq. Additionally, on
September 11, 2001, the United States was the target of
terrorist attacks of unprecedented scope, and the United States
and other countries instituted military action in response.
These conditions have caused instability in the world financial
markets and may generate global economic instability. The
continued threat of terrorism and the impact of military or
other action have led to and will likely lead to increased
volatility in prices for oil and gas and could affect the
markets for our operations. In particular, it appears the price
of oil has become increasingly volatile since commencement of
war in Iraq. Further, the United States government has issued
public warnings that indicate that energy assets might be
specific targets of terrorist organizations. These developments
have subjected our operations to increased risk and, depending
on the ultimate magnitude, could have a material adverse affect
on our business.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | If we are unable to replace the reserves that we have
    produced, our reserves and revenues will decline.

Our future success depends in part on our ability to find,
develop and acquire additional oil and gas reserves that are
economically recoverable which, in itself, is dependent on oil
and gas prices. Without continued successful exploitation,
acquisition or exploration activities, our reserves and revenues
will decline as a result of our current reserves being depleted
by production. We may not be able to find or acquire additional
reserves at acceptable costs.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | We may not be successful in acquiring, exploiting,
    developing or exploring for oil and gas properties.

The successful acquisition, exploitation or development of, or
exploration for, oil and gas properties requires an assessment
of recoverable reserves, future oil and gas prices and operating
costs, potential environmental and other liabilities, and other
factors. These assessments are necessarily inexact. As a result,
we may not recover the purchase price of a property from the
sale of production from the property, or may not recognize an
acceptable return from properties we do acquire. In addition,
our exploitation and development and exploration operations may
not result in any increases in reserves. Our operations may be
curtailed, delayed or canceled as a result of:



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | inadequate capital or other factors, such as title problems;
|
| |  | weather;                                                    
|
| |  | compliance with governmental regulations or price controls; 
|
| |  | mechanical difficulties; or                                 
|
| |  | shortages or delays in the delivery of equipment.           

In addition, exploitation and development costs may greatly
exceed initial estimates. In that case, we would be required to
make unanticipated expenditures of additional funds to develop
these projects, which could materially adversely affect our
business, financial condition and results of operations.

Furthermore, exploration for oil and gas has inherent and
historically higher risk than exploitation and development
activities. Future reserve increases and production may be
dependent on our success in our exploration efforts, which may
be unsuccessful.

26



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| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Estimates of oil and gas reserves depend on many
    assumptions that may be inaccurate. Any material inaccuracies
    could adversely affect the quantity and value of our oil and gas
    reserves.

The proved oil reserve information included in this document
represents only estimates. These estimates are based on reports
prepared by independent petroleum engineers. The estimates were
calculated using oil prices in effect on the date indicated in
the reports. Any significant price changes will have a material
effect on the quantity and present value of our reserves.

Petroleum engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured
in an exact manner. Estimates of economically recoverable oil
and gas reserves and of future net cash flows depend upon a
number of variable factors and assumptions, including:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | historical production from the area compared with production
    from other comparable producing areas;                          
|
| |  | the assumed effects of regulations by governmental agencies;                                                                     
|
| |  | assumptions concerning future oil and gas prices; and                                                                            
|
| |  | assumptions concerning future operating costs, severance and
    excise taxes, development costs and workover and remedial costs.

Because all reserve estimates are to some degree subjective,
each of the following items may differ materially from those
assumed in estimating reserves:



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | the quantities of oil and gas that are ultimately recovered;
|
| |  | the timing of the recovery of oil and gas reserves;         
|
| |  | the production and operating costs incurred; and            
|
| |  | the amount and timing of future development expenditures.   

Furthermore, different reserve engineers may make different
estimates of reserves and cash flows based on the same available
data. Actual production, revenues and expenditures with respect
to reserves will vary from estimates and the variances may be
material.

The discounted future net revenues included in this document
should not be considered as the market value of the reserves
attributable to our properties. As required by the SEC, the
estimated discounted future net revenues from proved reserves
are generally based on prices and costs as of the date of the
estimate, while actual future prices and costs may be materially
higher or lower. Actual future net revenues will also be
affected by factors such as:



| |   |                                                 
| | - | ------------------------------------------------
| |  | the amount and timing of actual production;     
|
| |  | supply and demand for oil and gas; and          
|
| |  | changes in governmental regulations or taxation.

In addition, the 10% discount factor, which the SEC requires to
be used to calculate discounted future net revenues for
reporting purposes, is not necessarily the most appropriate
discount factor based on the cost of capital in effect from time
to time and risks associated with our business and the oil and
gas industry in general.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The geographic concentration and lack of marketable
    characteristics of our oil reserves may have a greater effect on
    our ability to sell our oil compared to other companies.

All of our oil reserves are located in Florida. Because our
reserves are not as diversified geographically as many of our
competitors, our business is more subject to local conditions
than other, more diversified companies. Any regional events,
including price fluctuations, natural disasters,

27



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| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating hazards, natural disasters or other
    interruptions of our operations could result in potential
    liabilities, which may not be fully covered by our
    insurance.

The oil and gas business involves certain operating hazards such
as:



| |   |                                                 
| | - | ------------------------------------------------
| |  | well blowouts;                                  
|
| |  | cratering;                                      
|
| |  | explosions;                                     
|
| |  | uncontrollable flows of oil, gas or well fluids;
|
| |  | fires;                                          
|
| |  | pollution; and                                  
|
| |  | releases of toxic gas.                          

Any of these operating hazards could cause serious injuries,
fatalities or property damage, which could expose us to
liabilities. The payment of any of these liabilities could
reduce, or even eliminate, the funds available for exploration,
development, and acquisition, or could result in a loss of our
properties.

Consistent with insurance coverage generally available to the
industry, our insurance policies provide limited coverage for
losses or liabilities relating to pollution, with broader
coverage for sudden and accidental occurrences. Our insurance
might be inadequate to cover our liabilities. The insurance
market in general and the energy insurance market in particular
have been difficult markets over the past several years. Upon
renewal in June 2002, our cost of insurance increased
substantially over the prior years amount. In addition, we
increased deductibles and decreased or eliminated certain types
of coverages to mitigate the cost increase. Insurance costs are
expected to continue to increase over the next few years and we
may decrease coverage and retain more risk to mitigate future
cost increases. If we incur substantial liability and the
damages are not covered by insurance or are in excess of policy
limits, or if we incur liability at a time when we are not able
to obtain liability insurance, then our business, results of
operations and financial condition could be materially adversely
affected.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Governmental agencies and other bodies, including those in
    Florida, might impose regulations that increase our costs and
    may terminate or suspend our operations.

Our business is subject to federal, state and local laws and
regulations as interpreted by governmental agencies and other
bodies, including those in Florida, vested with much authority
relating to the exploration for, and the development, production
and transportation of, oil and gas, as well as environmental and
safety matters. Existing laws and regulations could be changed,
and any changes could increase costs of compliance and costs of
operating drilling equipment or significantly limit drilling
activity.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Environmental liabilities could adversely affect our
    financial condition.

The oil and gas business is subject to environmental hazards,
such as oil spills, gas leaks and ruptures and discharges of
petroleum products and hazardous substances, and historic
disposal activities. These environmental hazards could expose us
to material liabilities for property damages, personal injuries
or other environmental harm, including costs of investigating
and remediating contaminated properties. In addition, we also
may be liable for environmental damages caused by the previous
owners or operators of properties we have purchased or are
currently operating. A

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| |   |                                                             
| | - | ------------------------------------------------------------
| |  | well drilling or workover, operation and abandonment;       
|
| |  | waste management;                                           
|
| |  | land reclamation;                                           
|
| |  | financial assurance under the Oil Pollution Act of 1990; and
|
| |  | controlling air, water and waste emissions.                 

Any noncompliance with these laws and regulations could subject
us to material administrative, civil or criminal penalties or
other liabilities. Additionally, our compliance with these laws
may, from time to time, result in increased costs to our
operations or decreased production, and may affect our costs of
acquisitions.

In addition, environmental laws may, in the future, cause a
decrease in our production or cause an increase in our costs of
production, development or exploration. Pollution and similar
environmental risks generally are not fully insurable.



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our acquisition strategy could fail or present
    unanticipated problems for our business in the future, which
    could adversely affect our ability to make acquisitions or
    realize anticipated benefits of those acquisitions.

Our growth strategy may include acquiring midstream and upstream
businesses and properties. We may not be able to identify
suitable acquisition opportunities or finance and complete any
particular acquisition successfully. Furthermore, acquisitions
involve a number of risks and challenges, including:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | diversion of managements attention;                                                           
|
| |  | the need to integrate acquired operations;                                                     
|
| |  | potential loss of key employees of the acquired companies;                                     
|
| |  | potential lack of operating experience in a geographic market of
    the acquired business; and
|
| |  | an increase in our expenses and working capital requirements.                                  

Any of these factors could adversely affect our ability to
achieve anticipated levels of cash flows from the acquired
businesses or realize other anticipated benefits of those
acquisitions.

In addition, under the spin-off agreements, until July 3,
2005, we are prohibited from acquiring any upstream business or
properties in the United States outside of Florida. Thus, until
after July 3, 2005, our upstream acquisition prospects are
limited to Florida and outside of the United States.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We intend to continue hedging a portion of our production,
    which may result in our making cash payments or prevent us from
    receiving the full benefit of increases in prices for oil and
    gas.

We reduce our exposure to the volatility of oil prices by
actively hedging a portion of our production. Hedging also
prevents us from receiving the full advantage of increases in
oil prices above the fixed amount specified in the hedge
agreement. In a typical hedge transaction, we have the right to
receive from the hedge counterparty the excess of the fixed
price specified in the hedge agreement over a floating price
based on a market index, multiplied by the quantity hedged. If
the floating price exceeds the fixed price, we must pay the
counterparty this difference multiplied by the quantity hedged
even if we had insufficient production to cover the quantities
specified in the hedge agreement. Accordingly, if we have less
production than we have hedged when the floating price exceeds
the fixed price, we must make payments against which there are
no offsetting sales of

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| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Loss of key executives and failure to attract qualified
    management could limit our growth and negatively impact our
    operations.

Successfully implementing our strategies will depend, in part,
on our management team. The loss of members of our management
team could have an adverse effect on our business. Our
exploration and exploitation success and the success of other
activities integral to our operations will depend, in part, on
our ability to attract and retain experienced engineers,
geoscientists and other professionals. Competition for
experienced professionals is extremely intense. If we cannot
attract or retain experienced technical personnel, our ability
to compete could be harmed.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We and PXP share and, therefore will compete for, the time
    and effort of our personnel who provide services to PXP,
    including directors and officers.

Because certain of our officers and directors provide services
to PXP, conflicts of interest could arise between PXP, on the
one hand, and us, on the other. Additionally, some of these
officers and directors own and are awarded from time to time
shares, or options to purchase shares, or stock appreciation
rights of PXP. Accordingly, their financial interests may not
always be aligned with ours and could create, or appear to
create, potential conflicts of interest when these officers and
directors are faced with decisions that could have different
implications for us and PXP.



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | To preserve the tax-free status of the spin off, we may be
    limited in taking future actions.

If we experience a change of control, fail to continue the
active conduct of our trade or business or fail to comply with
the representations underlying our tax ruling or supplemental
tax ruling relating to the spin-off, the tax-free treatment of
the spin off might be lost. If there are any corporate level
taxes incurred by us as a result of the spin-off for any other
reason, we would be responsible for 50% of any such liability
and PXP would be responsible for the remaining 50%. The amount
of any tax payments would be substantial and may result in
events of default under our loan facility. As a result, we
likely would not have sufficient financial resources to achieve
our growth strategy or, possibly, repay our indebtedness after
making these payments.

As a result of the tax principles discussed above, we may be
highly limited in our ability to take the following steps in the
future:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | issue equity in public or private offerings;                                          
|
| |  | issue equity as part of the consideration in acquisitions of
    additional assets; or
|
| |  | undergo a change of control.                                                          

Item 3.     Legal
Proceedings

On September 18, 2002 Stocker Resources Inc., or Stocker,
which was 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 filed 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. 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.

30



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In the ordinary course of our business, we are a claimant or
defendant in various legal proceedings. 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.

Item 4.     Submission of
Matters to a Vote of Security Holders

No matters were submitted to a vote of the security holders,
through solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year covered by this report.

Directors and Executive Officers of Plains Resources

Listed below are our directors and executive officers, their age
as of February 28, 2003, and their business experience for
the last five years.

Directors

James C. Flores, age 43, Executive Chairman of the Board
since December 2002. He was our Chairman of the Board and Chief
Executive Officer from May 2001 to December 2002. He was
President and Chief Executive Officer of Ocean Energy, Inc., an
oil and gas company, from July 1995 until March 1999, and a
director of Ocean Energy, Inc. from 1992 until March 1999. In
March 1999 Ocean Energy, Inc. was merged into Seagull Energy
Corporation, which was the surviving corporation of the merger,
and which was renamed Ocean Energy, Inc. Mr. Flores served
as Chairman of the Board of the new Ocean Energy, Inc. from
March 1999 until January 2000, and as Vice Chairman from January
2000 until January 2001. From January 2001 to May 2001
Mr. Flores managed various private investments.
Mr. Flores has been Chairman of the Board, Chief Executive
Officer and a Director of PXP since September 2002.

William M. Hitchcock,age 63, Director since 1977.
Mr. Hitchcock is a partner and has been President, since
December 1996, of Pembroke Capital LLC, an investment firm. In
addition, he is Chief Executive Officer of Camelot
Oil & Gas, a private oil and gas company. He is also a
director of Maxx Petroleum, Ltd., an oil and gas company,
Thoratec Laboratories Corporation, a medical device company, and
Luna Imaging, Inc., a digital imaging company. From 1992 to
1995, Mr. Hitchcock served as President of Plains Resources
International Inc., which was formerly one of our wholly-owned
subsidiaries. In addition, he was our Chairman of the Board from
August 1981 to October 1992, except for the period from April
1987 to October 1987, when he served as our Vice Chairman.

D. Martin Phillips,age 49, Director since June
2001. Mr. Phillips has been a Managing Director and
principal of EnCap Investments L.L.C., or EnCap, a funds
management and investment banking firm that focuses exclusively
on the oil and gas industry, since November 1989. From 1978 to
when he joined EnCap, Mr. Phillips served as Senior Vice
President in the Energy Banking Group of NCNB Texas National
Bank in Dallas, Texas. Mr. Phillips also serves as a
director of Mission Resources Corporation, Breitburn Energy
Company LLC, 3TEC Energy Corporation and the Houston
Producers Forum, of which he formerly served as president.

Robert V. Sinnott,age 53, Director since 1994.
Mr. Sinnott has been Senior Vice President of Kayne
Anderson Investment Management, Inc., an investment management
firm, since 1992. He is also a director of Glacier Water
Services, Inc., a vended water company, and Plains All American
GP LLC, which is the general partner of Plains AAP, L.P., which
is in turn the general partner of Plains All American Pipeline,
L.P., or PAA. Mr. Sinnott was Vice President and Senior
Securities Officer of the Investment Banking Division of
Citibank from 1986 to 1992.

J. Taft Symonds,age 63, Director since 1987.
Mr. Symonds has been Chairman of the Board of Symonds Trust
Co. Ltd., an investment firm, and Chairman of the Board of
Maurice Pincoffs Company, Inc., an international marketing firm,
since 1978. He is also Chairman of the Board of Tetra
Technologies, Inc., a specialty chemical and chemical process
company, and a director of

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Executive Officers

John T. Raymond,age 32, Chief Executive Officer and
President since December 2002. Mr. Raymond served as our
President and Chief Operating Officer from November 2001 to
December 2002 and as Executive Vice President and Chief
Operating Officer from May 2001 to November 2001. In addition,
Mr. Raymond served as Director of Corporate Development of
Kinder Morgan, Inc. from January 2000 to May 2001, and as Vice
President of Corporate Development of Ocean Energy, Inc. from
April 1998 to January 2000. Mr. Raymond also served as Vice
President of Howard Weil Labouisse Friedrichs, Inc., an energy
investment company, from 1992 to April 1998. In addition,
Mr. Raymond is a director of Plains All American GP LLC,
which is the general partner of Plains AAP LP, which is the
general partner of PAA. Mr. Raymond has also been President
and Chief Operating Officer of PXP since September 2002.

Stephen A. Thorington,age 47, Executive Vice
President and Chief Financial Officer since February 2003. He
served as Acting Executive Vice President and Chief Financial
Officer from December 2002 to February 2003 when he was
appointed to his current position. Mr. Thorington has also
been Executive Vice President and Chief Financial Officer of PXP
since September 2002. Mr. Thorington was Senior Vice
President  Finance and Corporate Development of Ocean
Energy, Inc. from July 2001 to September 2002 and Senior Vice
President  Finance, Treasury and Corporate
Development of Ocean Energy, Inc. from March 1999 to July 2001.
He also served as Vice President, Finance and Treasurer of
Seagull Energy Corporation from May 1996 to March 1999.

Franklin R. Bay,age 45, is our Senior Vice
President of Corporate Development, Chief Legal Officer and
Secretary. Mr. Bay has been our Senior Vice President of
Corporate Development since February 2002, and he was appointed
as Chief Legal Officer and Secretary in December 2002. Pursuant
to a transaction services agreement between us and PXP,
Mr. Bay also provides some corporate development services
to PXP. Prior to joining Plains, Mr. Bay served in various
capacities with Enron Corp. for approximately five years,
including Vice President of Commercial Operations for Northern
Natural Gas Pipeline Company, General Counsel of the Gas
Pipeline Group and Head of Broadband Services Emerging Business
Group. His previous experience also includes serving in the
first Bush Administration as the Deputy General Counsel at the
Department of Energy and Deputy Legal Adviser at the State
Department. Additionally, he practiced law for nine years with
Fulbright & Jaworski and Hutcheson & Grundy and he
previously served as a second lieutenant in the United States
Marine Corps.

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PART II


Item 5.     Market for
Registrants Common Stock and Related Stockholder
Matters

Price Range of Common Stock

Our common stock is listed and traded on the New York Stock
Exchange under the symbol PLX. Prior to
December 21, 2001 our common stock was traded on the
American Stock Exchange. The number of stockholders of record of
our common stock as of February 28, 2003 was 1,046.

The following table sets forth the range of high and low closing
sales prices for our common stock as reported on the applicable
Stock Exchange Composite Tapes for the periods indicated below.

|                |             |      |   |       |  |  |   |       | 
|--------------- | ----------- | ---- | - | ----- |  |  | - | ----- | 
|                |             | High |   | Low  
|                |             |      |   |      
|2002            |             |      |   |       |  |  |   |      
|Before Spin-off |             |      |   |       |  |  |   |      
|               
|               
|               
|               
|                | 1st Quarter |      | $ | 24.99 |  |  | $ | 22.35 | 
|               
|               
|               
|               
|                | 2nd Quarter |      |   | 27.75 |  |  |   | 24.60 | 
|               
|               
|               
|               
|                | 3rd Quarter |      |   | 26.95 |  |  |   | 21.92 | 
|               
|               
|               
|               
|                | 4th Quarter |      |   | 25.88 |  |  |   | 20.18 | 
|After Spin-off  |             |      |   |       |  |  |   |      
|               
|               
|               
|               
|                | 4th Quarter |      |   | 12.51 |  |  |   | 11.85 | 
|               
|               
|               
|               
|2001            |             |      |   |       |  |  |   |      
|               
|               
|               
|               
|                | 1st Quarter |      | $ | 23.65 |  |  | $ | 19.44 | 
|               
|               
|               
|               
|                | 2nd Quarter |      |   | 26.80 |  |  |   | 19.89 | 
|               
|               
|               
|               
|                | 3rd Quarter |      |   | 29.50 |  |  |   | 22.76 | 
|               
|               
|               
|               
|                | 4th Quarter |      |   | 27.70 |  |  |   | 22.20 | 

Dividend Policy

We have not paid cash dividends on shares of our common stock
since our inception and do not anticipate paying any cash
dividends on our common stock in the foreseeable future. In
addition, the amount of dividends we can pay is restricted by
provisions of our loan facility.

Series D Cumulative Convertible Preferred Stock

We have outstanding 46,600 shares of Series D Cumulative
Convertible Preferred Stock, or Series D Preferred, that
have an aggregate stated value of $23.3 million and are
redeemable at our option at 140% of stated value. If not
previously redeemed or converted, the Series D Preferred
will automatically convert into shares of common stock in 2012.
Each share of Series D Preferred has a stated value of $500
and bears an annual dividend of $30.00 per share, paid on a
quarterly basis.

As a result of the spin-off, the number of shares of our common
stock into which the Series D Preferred is convertible
increased from 932,000 shares to 1,671,416 shares as a result of
the reduction in the conversion price from $25.00 per share
of common stock to $13.94 per share. The reduction in the
conversion price of the Series D Preferred was determined
by multiplying the former conversion price of the Series D
Preferred ($25.00) by a fraction, the denominator of which was
$22.27 (the closing price per share of our common stock as of
the record date for the spin-off), and the numerator of which
was $12.42 (the closing price per share of our common stock as
of the record date for the spin-off less the agreed on fair
market value per share of the PXP common stock distributed in
the spin-off). The holder of the Series D Preferred did not
receive any PXP securities as a result of the spin off.

33



---



##### Table of Contents



Item 6.     Selected
Financial Data

The following selected financial information was derived from,
and is qualified by reference to, our consolidated financial
statements, including the notes thereto, appearing elsewhere in
this report. As a result of the reduction in our ownership
interest in PAA in 2001, our investment in PAA is accounted for
using the equity method of accounting effective January 1,
2001. In prior periods, PAA is included on a consolidated basis.
As a result of the spin-off the historical results of the
operations of PXP are reflected in our financial statements as
discontinued operations. This selected financial
data should be read in conjunction with the consolidated
financial statements, including the notes thereto, and
Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of Operations
(in thousands, except per share information).

|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |           |  
|----------------------------------------------- | ---------------------------------------------------------- | ----------------------- | ------ | ------- | - | ---- | ------- | ------- | - | ---- | --------- | --------- | - | - | ---------- | ---------- | - | - | --------- | --------- | -
|                                                |                                                            |                        
|                                                |                                                            | Year Ended December 31,
|                                                |                                                            |                        
|                                                |                                                            | 2002                    |        | 2001    |   | 2000 |         | 1999    |   | 1998
|                                                |                                                            |                         |        |         |   |      |         |         |   |     
|Revenues                                        |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | Oil sales to PAA                                           |                         | $      | 18,662  |   |      | $       | 16,030  |   |      | $         | 10,643    |   |   | $          | 12,478     |   |   | $         | 22,488    |  
|                                               
|                                               
|                                               
|                                               
|                                                | Marketing, transportation, storage and
    terminalling    |                         |        |        |   |      |         |        |   |      |           | 6,425,644 |   |   |            | 10,796,998 |   |   |           | 3,454,635 |  
|                                               
|                                               
|                                               
|                                               
|                                                | Gain on sale of assets(1)                                  |                         |        |        |   |      |         |        |   |      |           | 48,188    |   |   |            | 16,457     |   |   |           |          |  
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|                                                |                                                            |                         | 18,662 |         |   |      | 16,030  |         |   |      | 6,484,475 |           |   |   | 10,825,933 |            |   |   | 3,477,123 |          
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|Costs and Expenses                              |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | Production expenses                                        |                         |        | 6,536   |   |      |         | 7,397   |   |      |           | 5,912     |   |   |            | 5,118      |   |   |           | 8,004     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Oil transportation expenses                                |                         |        | 3,775   |   |      |         | 4,449   |   |      |           | 3,752     |   |   |            | 3,740      |   |   |           | 5,241     |  
|                                               
|                                               
|                                               
|                                               
|                                                | General and administrative                                 |                         |        | 5,747   |   |      |         | 11,083  |   |      |           | 44,468    |   |   |            | 27,035     |   |   |           | 7,560     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Marketing, transportation, storage and
    terminalling    |                         |        |        |   |      |         |        |   |      |           | 6,292,615 |   |   |            | 10,689,308 |   |   |           | 3,416,274 |  
|                                               
|                                               
|                                               
|                                               
|                                                | Unauthorized trading losses and related
    expenses(2)    |                         |        |        |   |      |         |        |   |      |           | 7,963     |   |   |            | 166,440    |   |   |           | 7,100     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Depreciation, depletion and amortization                   |                         |        | 4,139   |   |      |         | 4,816   |   |      |           | 28,362    |   |   |            | 23,669     |   |   |           | 17,119    |  
|                                               
|                                               
|                                               
|                                               
|                                                | Reduction in carrying cost of oil and gas
    properties   |                         |        |        |   |      |         |        |   |      |           |          |   |   |            |           |   |   |           | 130,954   |  
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|                                                |                                                            |                         | 20,197 |         |   |      | 27,745  |         |   |      | 6,383,072 |           |   |   | 10,915,310 |            |   |   | 3,592,252 |          
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|Other Income (Expense)                          |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | Equity in earnings of PAA                                  |                         |        | 18,807  |   |      |         | 18,540  |   |      |           |          |   |   |            |           |   |   |           |          |  
|                                               
|                                               
|                                               
|                                               
|                                                | Gains on PAA unit transactions and public
    offerings(3) |                         |        | 14,512  |   |      |         | 170,157 |   |      |           |          |   |   |            | 9,787      |   |   |           | 60,815    |  
|                                               
|                                               
|                                               
|                                               
|                                                | Loss on debt extinguishment                                |                         |        | (10,319 | ) |      |         |        |   |      |           | (15,148   | ) |   |            | (1,545     | ) |   |           |          |  
|                                               
|                                               
|                                               
|                                               
|                                                | Interest expense                                           |                         |        | (5,866  | ) |      |         | (8,974  | ) |      |           | (39,943   | ) |   |            | (31,466    | ) |   |           | (26,902   | )
|                                               
|                                               
|                                               
|                                               
|                                                | Interest and other income                                  |                         |        | 239     |   |      |         | (312    | ) |      |           | 7,068     |   |   |            | 1,150      |   |   |           | 760       |  
|                                               
|                                               
|                                               
|                                               
|                                                | Minority interest in PAA                                   |                         |        |        |   |      |         |        |   |      |           | (35,565   | ) |   |            | 40,911     |   |   |           | (786      | )
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax expense                                         |                         |        | (6,106  | ) |      |         | (67,072 | ) |      |           | (5,628    | ) |   |            | 26,104     |   |   |           | 37,930    |  
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|Income (Loss) From Continuing
    Operations    |                                                            |                         | 9,732  |         |   |      | 100,624 |         |   |      | 12,187    |           |   |   | (44,436    | )          |   |   | (43,312   | )        
|                                               
|                                               
|                                               
|                                               
|                                                | Income (loss) from discontinued operations,
    net of tax |                         |        | 27,800  |   |      |         | 54,693  |   |      |           | 28,749    |   |   |            | 19,105     |   |   |           | (19,034   | )
|                                               
|                                               
|                                               
|                                               
|                                                | Cumulative effect of accounting changes, net of
    tax    |                         |        |        |   |      |         | (1,986  | ) |      |           | (121      | ) |   |            |           |   |   |           |          |  
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|Net Income                                      |                                                            |                         | 37,532 |         |   |      | 153,331 |         |   |      | 40,815    |           |   |   | (25,331    | )          |   |   | (62,346   | )        
|                                               
|                                               
|                                               
|                                               
|                                                | Cumulative preferred dividends(4)                          |                         |        | (1,400  | ) |      |         | (27,245 | ) |      |           | (14,725   | ) |   |            | (10,026    | ) |   |           | (4,762    | )
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|Income Available to Common
    Stockholders     |                                                            | $                       | 36,132 |         |   | $    | 126,086 |         |   | $    | 26,090    |           |   | $ | (35,357    | )          |   | $ | (67,108   | )        
|                                                |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|Income From Continuing Operations
    Per Share |                                                            |                         |        |         |   |      |         |         |   |      |           |           |   |   |            |            |   |   |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | Basic                                                      |                         | $      | 0.35    |   |      | $       | 3.48    |   |      | $         | (0.14     | ) |   | $          | (3.16      | ) |   | $         | (2.86     | )
|                                               
|                                               
|                                               
|                                               
|                                                | Diluted                                                    |                         | $      | 0.34    |   |      | $       | 2.81    |   |      | $         | (0.14     | ) |   | $          | (3.16      | ) |   | $         | (2.86     | )

(table and footnotes continued on following
page)

34



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##### Table of Contents



|                          |                            |                               |        |         |   |      |        |         |   |      |        |           |  |  |        |           |  |  |   |         |  
|------------------------- | -------------------------- | ----------------------------- | ------ | ------- | - | ---- | ------ | ------- | - | ---- | ------ | --------- |  |  | ------ | --------- |  |  | - | ------- | -
|                          |                            |                              
|                          |                            | At or Year Ended December 31,
|                          |                            |                              
|                          |                            | 2002                          |        | 2001    |   | 2000 |        | 1999    |   | 1998
|                          |                            |                               |        |         |   |      |        |         |   |     
|Balance Sheet Data        |                            |                               |        |         |   |      |        |         |   |      |        |           |  |  |        |           |  |  |   |        
|                         
|                         
|                         
|                         
|                          | Working capital (deficit)  |                               | $      | (11,971 | ) |      | $      | (9,969  | ) |      | $      | 20,289    |  |  | $      | 115,867   |  |  | $ | (21,041 | )
|                         
|                         
|                         
|                         
|                          | Investment in PAA          |                               |        | 70,042  |   |      |        | 64,626  |   |      |        |          |  |  |        |          |  |  |   |        |  
|                         
|                         
|                         
|                         
|                          | Total assets               |                               |        | 161,412 |   |      |        | 648,788 |   |      |        | 1,394,329 |  |  |        | 1,689,560 |  |  |   | 972,838 |  
|                         
|                         
|                         
|                         
|                          | Long-term debt             |                               |        | 27,000  |   |      |        | 282,061 |   |      |        | 626,376   |  |  |        | 676,703   |  |  |   | 431,983 |  
|                         
|                         
|                         
|                         
|                          | Redeemable preferred stock |                               |        |        |   |      |        |        |   |      |        | 50,000    |  |  |        | 138,813   |  |  |   | 88,487  |  
|                         
|                         
|                         
|                         
|                          | Stockholders equity       |                               |        | 105,509 |   |      |        | 254,852 |   |      |        | 137,140   |  |  |        | 40,619    |  |  |   | 69,170  |  
|                         
|                         
|                         
|                         
|Distributions from PAA(5) |                            |                               | 29,063 |         |   |      | 31,553 |         |   |      | 30,134 |           |  |  | 29,472 |           |  |  |  |        



---



|    |                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Relates to the sale of assets by PAA.                                                                                                                                                                                                                                                                                   
|   
|(2) | Relates to losses resulting from unauthorized trading activity
    by a former employee of PAA.                                                                                                                                                                                                                         
|   
|(3) | Amounts in 2002 and 1999 relate to public offerings by PAA.
    Amount in 2001 relates to sale of a portion of our interest in
    PAA and public offering by PAA. Amount in 1998 relates to
    formation of PAA.                                                                                                      
|   
|(4) | Amount for 2001 includes a $21.4 million deemed dividend
    and a $2.5 million cash payment related to the redemption and
    conversion of series F preferred stock in connection with
    our strategic restructuring. See Items 1 and 2 
    Business and Properties  Our June 2001
    Strategic Restructuring.
|   
|(5) | PAA was formed in 1998 and its first distributions were paid in
    1999.                                                                                                                                                                                                                                               



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | 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 PAA. PAA is a publicly traded master limited
partnership actively engaged in the midstream energy markets. As
of March 15, 2003 we owned 44% of the general partner of
PAA and 12.4 million limited partner units of PAA, which
represented approximately 24% 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.

The book value of our investment in PAA represents 43% of our
total assets as of December 31, 2002 and the book value of
our Florida oil properties represents 31%. As of
December 31, 2002, the present value of our proved oil
reserves was approximately $87.9 million (see 
Oil Production Operations). 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 $24.40 on December 31, 2002. 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.
See  Plains All American Pipeline,
L.P.  PAA Cash Distributions. 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, 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.

35



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##### Table of Contents



Spin-off of Plains Exploration & Production Company

On December 18, 2002 we distributed 100% of the issued and
outstanding shares of common stock of PXP, to the holders of
record of our common stock as of the close of business on
December 11, 2002. Each stockholder received one share of
PXP common stock for each share of our common stock held. Prior
to the spin-off, we borrowed $45 million under a new term
loan facility and used a portion of the proceeds to make a
$40 million cash capital contribution to PXP. In addition,
prior to the spin-off we made a $7.2 million cash
contribution to PXP and transferred to PXP certain assets and
PXP assumed certain liabilities, primarily related to land,
unproved oil and gas properties, office equipment and pension
obligations.

We received a favorable private letter ruling from the IRS
stating that, for United States federal income tax purposes, the
distribution of our common stock qualified as a tax-free
distribution under Section 355 of the Internal Revenue
Code. The spin-off was completed to, among other things:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | allow us to obtain cost savings through improved access to
    capital markets for our midstream affiliate, PAA;
|
| |  | allow PXP and us to focus corporate strategies and management
    teams for each business; and                  
|
| |  | simplify our corporate structure.                                                                               

In contemplation of the spin-off, under the terms of a Master
Separation Agreement between us and PXP, on July 3, 2002 we
contributed to PXP 100% of the capital stock of our wholly owned
subsidiaries that own oil and gas properties in offshore
California and Illinois. We also contributed to PXP
$5.0 million in cash and $256.0 million of
intercompany payables that PXP or its subsidiaries owed to us.
On July 3, 2002 PXP issued $200 million of 8.75%
Senior Subordinated Notes due 2012, or the 8.75% Notes, and
entered into a $300 million revolving credit facility. PXP
distributed the net proceeds of $195.3 million from the
8.75% notes and $116.7 million of initial borrowings under
its credit facility to us. Of such distribution, we used:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | $287.0 million to redeem our 10.25% senior subordinated
    notes; and
|
| |  | $25 million to repay and terminate our revolving credit
    facility. 

As a result of the spin-off, the number of shares of our common
stock into which shares of our Series D Preferred Stock, or
Series D Preferred, is convertible increased from 932,000
shares to 1,671,416 shares as a result of the reduction in the
conversion price from $25.00 per share of common stock to $13.94
per share. We have 46,600 shares of Series D Preferred
outstanding with a stated value per share of $500
($23.3 million aggregate stated value) that bears an annual
dividend of $30.00 per share.

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-K 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 and gas 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,

36



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##### Table of Contents





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.

Our oil production expenses include salaries and benefits of
personnel involved in production activities, electric costs,
maintenance costs, production, ad valorem and severance taxes,
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 investment 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
(25% at December 31, 2002) 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 investment 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 investment. We have recognized gains from PAA equity
issuances representing the difference between our carrying cost
and the fair value of the interest deemed sold.

Results of Operations

Our 2001 and 2000 income statements reflect the results of
operations of PXP as discontinued operations. Also, as a result
of the sale of a portion of our interest in PAA and the
resulting change to the equity method of accounting for our
investment in PAA in 2001, our income statement presentation for
2000 is not comparable to our income statement presentations for
subsequent periods. The following table reflects our 2002 and
2001 income statements compared to a proforma income statement
for 2000 adjusted to reflect PAA on the equity method of
accounting. Our

37



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|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |         |  
|--------------------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------- | ------ | ------- | - | -------- | ------- | ------- | - | - | ------ | ------- | -
|                                                          |                                                                                        |                        
|                                                          |                                                                                        | Year Ended December 31,
|                                                          |                                                                                        |                        
|                                                          |                                                                                        | 2002                    |        | 2001    |   | 2000    
|                                                          |                                                                                        |                         |        |         |   |         
|                                                          |                                                                                        |                         |        |         |   | ProForma
|                                                          |                                                                                        |                        
|                                                          |                                                                                        | (in thousands)         
|                                                         
|                                                         
|                                                         
|                                                         
|Revenues                                                  |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Oil sales to Plains All American Pipeline, L.P.(1)                                     |                         | $      | 18,662  |   |          | $       | 16,030  |   |   | $      | 8,990   |  
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|Costs and Expenses                                        |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Production expenses                                                                    |                         |        | 6,536   |   |          |         | 7,397   |   |   |        | 5,912   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Oil transportation costs                                                               |                         |        | 3,775   |   |          |         | 4,449   |   |   |        | 3,752   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | General and administrative                                                             |                         |        | 5,747   |   |          |         | 11,083  |   |   |        | 4,647   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Depreciation, depletion and amortization                                               |                         |        | 4,139   |   |          |         | 4,816   |   |   |        | 3,840   |  
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|                                                          |                                                                                        |                         | 20,197 |         |   |          | 27,745  |         |   |   | 18,151 |        
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|Other Income (Expense)                                    |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity in earnings of Plains All American
    Pipeline, L.P.                           |                         |        | 18,807  |   |          |         | 18,540  |   |   |        | 41,937  |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Gains on Plains All American Pipeline, L.P. unit
    transactions and public offerings |                         |        | 14,512  |   |          |         | 170,157 |   |   |        |        |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Loss on debt extinguishment                                                            |                         |        | (10,319 | ) |          |         |        |   |   |        |        |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest expense                                                                       |                         |        | (5,866  | ) |          |         | (8,974  | ) |   |        | (14,523 | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest and other income                                                              |                         |        | 239     |   |          |         | (312    | ) |   |        | (438    | )
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|                                                          |                                                                                        |                         | 17,373 |         |   |          | 179,411 |         |   |   | 26,976 |        
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|Income From Continuing Operations Before
    Income Taxes |                                                                                        |                         | 15,838 |         |   |          | 167,696 |         |   |   | 17,815 |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Income tax expense                                                                     |                         |        | (6,106  | ) |          |         | (67,072 | ) |   |        | (5,628  | )
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|Income From Continuing Operations                         |                                                                                        |                         | 9,732  |         |   |          | 100,624 |         |   |   | 12,187 |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Income from discontinued operations, net of tax                                        |                         |        | 27,800  |   |          |         | 54,693  |   |   |        | 28,749  |  
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|Income Before Cumulative Effect of Accounting
    Changes |                                                                                        |                         | 37,532 |         |   |          | 155,317 |         |   |   | 40,936 |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Cumulative effect of accounting changes, net of
    tax benefit                        |                         |        |        |   |          |         | (1,986  | ) |   |        | (121    | )
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|Net Income                                                |                                                                                        |                         | 37,532 |         |   |          | 153,331 |         |   |   | 40,815 |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Cumulative preferred dividends                                                         |                         |        | (1,400  | ) |          |         | (27,245 | ) |   |        | (14,725 | )
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        
|Income Available to Common
    Stockholders               |                                                                                        | $                       | 36,132 |         |   | $        | 126,086 |         |   | $ | 26,090 |        
|                                                          |                                                                                        |                         |        |         |   |          |         |         |   |   |        |        



---



|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(1) | Revenues for 2000 are pro forma to reflect the $0.20/Bbl
    marketing fee paid to PAA that was eliminated in consolidation.

38



---



##### Table of Contents



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

|                                    |                      |                         |       |       |   |          |       |       |   |   |       |       |  
|----------------------------------- | -------------------- | ----------------------- | ----- | ----- | - | -------- | ----- | ----- | - | - | ----- | ----- | -
|                                    |                      |                        
|                                    |                      | Year Ended December 31,
|                                    |                      |                        
|                                    |                      | 2002                    |       | 2001  |   | 2000    
|                                    |                      |                         |       |       |   |         
|                                    |                      |                         |       |       |   | Proforma
|                                   
|                                   
|                                   
|                                   
|Production (MBbls)                  |                      |                         | 970   |       |   |          | 954   |       |   |   | 842   |      
|                                   
|                                   
|                                   
|                                   
|Sales (MBbls)                       |                      |                         | 869   |       |   |          | 1,060 |       |   |   | 701   |      
|                                   
|                                   
|                                   
|                                   
|Average NYMEX price per Bbl         |                      | $                       | 26.15 |       |   | $        | 26.01 |       |   | $ | 30.25 |      
|                                   
|                                   
|                                   
|                                   
|Average hedge cost per Bbl          |                      |                         | (0.71 | )     |   |          | (1.11 | )     |   |   | (9.37 | )    
|Average differential per Bbl(1)     |                      |                         |       |       |   |          |       |       |   |   |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Quality              |                         |       | (3.97 | ) |          |       | (9.77 | ) |   |       | (5.70 | )
|                                   
|                                   
|                                   
|                                   
|                                    | Transportation costs |                         |       | (4.34 | ) |          |       | (4.20 | ) |   |       | (5.35 | )
|                                    |                      |                         |       |       |   |          |       |       |   |   |       |      
|Average realized price per Bbl      |                      |                         | 17.13 |       |   |          | 10.93 |       |   |   | 9.83  |      
|                                   
|                                   
|                                   
|                                   
|Production expenses per Bbl         |                      |                         | (7.52 | )     |   |          | (6.98 | )     |   |   | (8.43 | )    
|                                    |                      |                         |       |       |   |          |       |       |   |   |       |      
|Gross margin per Bbl                |                      | $                       | 9.61  |       |   | $        | 3.95  |       |   | $ | 1.40  |      
|                                    |                      |                         |       |       |   |          |       |       |   |   |       |      
|DD&A per Bbl (oil & gas properties) |                      | $                       | 3.73  |       |   | $        | 2.74  |       |   | $ | 1.56  |      



---



|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(1) | Oil transportation costs are included in costs and expenses in
    the consolidated statement of income.                
|   
|(2) | Prices in 2000 are proforma to include the $0.20/ Bbl marketing
    fee paid to PAA that was eliminated in consolidation

Comparison of Year Ended December 31, 2002 to Year Ended
December 31, 2001

In 2002, we reported net income of $37.5 million compared
to net income of $153.3 million in 2001. Income from
continuing operations was $9.7 million in 2002 compared to
$100.6 million for 2001. Results for 2001 were affected by
special items including $170.2 million of pre-tax gains
related to the sale of a portion of our investment in PAA and
PAAs equity offerings.

Oil revenues.Our oil revenues increased 17%, or
$2.7 million, to $18.7 million for the year ended
December 31, 2002 from $16.0 million for the year
ended December 31, 2001. The increase was primarily due to
higher realized oil prices that increased revenues by
$6.8 million in 2002 versus 2001. This increase was offset
by lower sales volumes that decreased revenues by
$4.1 million in 2002.

We reported sales volumes from our Florida properties of 869
MBbls in 2002 compared to 1,060 MBbls in 2001. In
accordance with SEC Staff Accounting Bulletin 101, or
SAB 101, we reflect revenue from oil production in the
period it is sold as opposed to when it is produced. Oil volumes
increased 2% on an as produced basis, with
production volumes of 970 MBbls in 2002 compared to
954 MBbls in 2001. 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. The
Florida oil is typically sold in shipments that range from
approximately 110 MBbls to 140 MBbls and typically
occurs every 30-50 days. 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.

Our average realized price for oil excluding transportation
costs increased 42%, or $6.34, to $21.47 per Bbl for the
year ended December 31, 2002 from $15.13 per Bbl for the
prior year. The increase is primarily attributable to an
improvement in the location and quality differential to NYMEX,
which was $3.97 per Bbl in 2002 versus $9.77 per Bbl
in 2001. The average NYMEX oil price

39



---



##### Table of Contents





Production expenses .Our production expenses decreased
12%, or $0.9 million, to $6.5 million for the year
ended December 31, 2002 from $7.4 million for 2001 due
to lower reported sales volumes. Unit production expenses for
2002 were $7.52 per Bbl compared to $6.98 in 2001. The
per Bbl increase is primarily attributable to increased
severance taxes due to higher oil prices in 2002 as well as the
expiration of severance tax exemptions for several wells during
the second quarter of 2002.

Oil Transportation Costs.Our oil transportation costs
decreased 14% to $3.8 million in 2002 from
$4.4 million in 2001 primarily reflecting lower sales
volumes.

General and administrative expense.Our general and
administrative, or G&A expense, decreased 49%, or
$5.4 million, to $5.7 million for the year ended
December 31, 2002 from $11.1 million for the prior
year. The decrease primarily reflects the nonrecurring costs in
2001 related to our June 2001 strategic restructuring.

Depreciation, depletion and amortization. Our
depreciation, depletion and amortization, or DD&A expense
decreased 15%, or $0.7 million, to $4.1 million for
the year ended December 31, 2002 from $4.8 million for
2001. The decrease is primarily due to lower sales volumes in
2002 versus 2001. Our average DD&A rate for 2001 was
$3.73 per Bbl compared to $2.74 per Bbl in 2001.

Equity in earnings of Plains All American Pipeline, L.P.Our equity in earnings of PAA increased slightly to
$18.8 million for the year ended December 31, 2002
from $18.5 million for the 2001. Although PAAs net
income increased from $44.2 million in 2001 to
$65.3 million in 2002, our overall effective ownership was
reduced to approximately 25% as of December 31, 2002 from
54% in January 2001. The reduced ownership interest is a result
of the sale of a portion of our interest in June 2001 and
PAAs subsequent equity offerings.

Gain on PAA units.In 2002 we recognized a noncash gain
of $14.5 million due to 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 resulting from
PAAs public equity offering.

The 2001 gain on PAA units of $170.2 million reflects:
(i) $129.4 million in gains related to the sale of a
portion of our investment in PAA in connection with our June
2001 strategic restructuring; (ii) $38.8 million of
gains 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 resulting from PAAs
2001 public equity offerings, in which we did not participate;
and (iii) a $2.0 million gain related to the vesting
of certain unit grants.

Loss on debt extinguishment.We incurred a
$10.3 million loss on debt extinguishment in 2002 primarily
from the early retirement of $267.5 million of outstanding
10.25% senior subordinated notes. The loss consisted of a call
premium of 3.4167% on the outstanding principal amount of the
10.25% notes, or $9.1 million, and $3.1 million of
unamortized issue costs on the 10.25% notes and our revolving
credit facility, net of $1.9 million of unamortized issue
premium on the 10.25% notes.

Interest expense.Our interest expense decreased
$3.1 million, to $5.9 million for the year ended
December 31, 2002 from $9.0 million for 2001. The
decrease is primarily due to the redemption of the 10.25% notes
and the repayment of amounts outstanding under our revolving
credit facility on July 3, 2002. From this date through
early December 2002, when we borrowed $45 million under our
term loan facility, we had no outstanding debt. Outstanding debt
during this period was debt of PXP and accordingly, interest
expense for this period is reflected in discontinued operations.

Income tax expense.Our income tax expense decreased
$61.0 million to $6.1 million for the year ended
December 31, 2002. The decrease was primarily due to lower
pre-tax income from

40



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##### Table of Contents





Income from discontinued operations. Income from
discontinued operations decreased from $54.7 million in
2001 to $27.8 million in 2002, primarily reflecting lower
revenues due to lower realized prices partially offset by higher
sales volumes, higher costs and expenses, and expenses related
to a terminated public equity offering.

Comparison of Year Ended December 31, 2001 to Year Ended
December 31, 2000

We reported net income of $155.3 million for the year ended
December 31, 2001, compared to net income of
$40.8 million for 2000. Income from continuing operations
was $100.6 million in 2001 compared to $12.2 million
for 2000. Results for 2001 were affected by special items
including $170.2 million of pre-tax gains related to the sale of
a portion of our investment in PAA in connection with our June
2001 strategic restructuring and PAAs equity offerings.

Oil revenues. Our revenues from oil sales increased by
$7.0 million, from $9.0 million in 2000 to
$16.0 million in 2001. The increase primarily reflects
higher sales volumes that increased revenues by
$5.4 million in 2001 versus 2000. Higher prices increased
revenues by $1.6 million in 2001. Our oil sales volumes
increased 51%, from 701 MBbls in 2000 to 1,060 MBbls in 2001. On
an as produced basis, our oil volumes increased 13%
from 842 MBbls in 2000 to 954 MBbls in 2001.

Our average realized price for oil excluding transportation
costs decreased slightly, from $15.18 per Bbl. in 2000 to $15.13
per Bbl. in 2001. Hedges that we put into place in the latter
part of 1999, when oil prices were considerably lower, reduced
the 2000 realized price by $9.37 per Bbl.

Production expenses.Our production costs increased by
$1.5 million, from $5.9 million for the year ended
December 31, 2000 to $7.4 million for 2001. The 2001
increase was primarily attributable to increased volumes. Unit
production expenses for 2001 were $6.98 per Bbl compared to
$8.43 per Bbl in 2000. The decrease in unit costs was primarily
attributable to lower repair and maintenance expense.

Oil Transportation Costs.Our oil transportation costs
increased 16% to $4.4 million in 2001 from $3.8 million in
2000 primarily reflecting higher sales volumes, partially offset
by lower costs.

General and administrative expense.Our G&A expense
increased $6.5 million, from $4.6 million for the year
ended December 31, 2000 to $11.1 million for 2001. Our
2001 G&A expense includes nonrecurring costs associated with
our June 2001 strategic restructuring including noncash
compensation cost primarily associated with the vesting of
performance-based stock options in connection with our
restructuring. G&A Expense for 2000 includes
$1.1 million related to PAAs unauthorized trading
loss.

Depreciation, depletion and amortization. Our DD&A
expense increased $1.0 million, from $3.8 million for the
year ended December 31, 2000 to $4.8 million for 2001.
The increase reflects higher sales volumes and an increase in
the per unit DD&A rate. Our average DD&A rate for 2000
was $1.56 per Bbl compared to $2.74 per Bbl in 2001.

Equity in earnings of PAA.Our equity in the earnings of
PAA was $18.5 million for the year ended December 31,
2001 as compared to $41.9 million in 2000. The decrease was
primarily attributable to the decrease in our ownership interest
in 2001 as well as nonrecurring gains included in PAAs
2000 earnings. At December 31, 2000 our ownership interest
in PAA was approximately 54%. Primarily as a result of
PAAs two public unit offerings during 2001, and our June
2001 strategic restructuring, our ownership interest decreased
to approximately 29% at December 31, 2001.

Gain on PAA units.The gain on PAA units reflects: (i)
$129.4 million in gains related to the sale of a portion of
our investment in PAA in connection with our June 2001 strategic
restructuring; (ii) $38.8 million of gains 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 resulting from PAAs

41



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##### Table of Contents





Interest expense.Our interest expense decreased by
$5.5 million, from $14.5 million to $9.0 million for
the year ended December 31, 2001 compared to 2000,
reflecting lower bank debt and lower interest rates on
borrowings under our revolving credit facility.

Income tax expense.Our income tax expense increased to
$67.1 million for the year ended December 31, 2001 as
compared to $5.6 million for 2000. The increase was
primarily attributable to the gains on PAA units discussed above.

Income from discontinued operations. Income from
discontinued operations increased from $28.7 million in
2000 to $54.7 million in 2001, primarily due to higher
revenues, reflecting higher prices and sales volumes, partially
offset by higher costs and expenses.

Cumulative effect of accounting change.The cumulative
effect of accounting change recognized for the year ended
December 31, 2001 is for the adoption of Statement of
Financial Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended.
The amount in 2000 is for the adoption of SEC Staff Accounting
Bulletin 101 Revenue Recognition in Financial
Statements.

Liquidity and Capital Resources

General

At December 31, 2002 we had negative working capital of
$12.0 million. 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 (for a
description of the value assurance agreements, see
 Contingencies  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.

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 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

42



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##### Table of Contents





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 current annual distribution rate of $2.15
per unit, we would receive for 2003 an annual distribution from
PAA of approximately $30.1 million, including $2.8 million
for our general partner distribution (including
$1.8 million for the general partner incentive
distribution).

Cash distributions 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 for
2002, 2001 and 2000 were as follows:

|               |  |              |        |          |  |              |        |          |  |              |        |          |  |   |        |  |  |   |        |     |  |   |        | 
|-------------- |  | ------------ | ------ | -------- |  | ------------ | ------ | -------- |  | ------------ | ------ | -------- |  | - | ------ |  |  | - | ------ | --- |  | - | ------ | 
|               |  |             
|               |  | Year        
|               |  |             
|               |  |              |        |          |  |             
|               |  | 2002         |        | 2001     |  | 2000        
|               |  |              |        |          |  |             
|               |  |              |        | Excess   |  |              |        | Excess   |  |              |        | Excess  
|               |  | Distribution |        | over MQD |  | Distribution |        | over MQD |  | Distribution |        | over MQD
|               |  |              |        |          |  |              |        |          |  |              |        |         
|First Quarter  |  | $            | 0.5250 |          |  | $            | 0.0750 |          |  | $            | 0.4750 |          |  | $ | 0.0250 |  |  | $ | 0.4500 | (1) |  | $ |       | 
|              
|              
|              
|              
|Second Quarter |  |              | 0.5375 |          |  |              | 0.0875 |          |  |              | 0.5000 |          |  |   | 0.0500 |  |  |   | 0.4625 |     |  |   | 0.0125 | 
|              
|              
|              
|              
|Third Quarter  |  |              | 0.5375 |          |  |              | 0.0875 |          |  |              | 0.5125 |          |  |   | 0.0625 |  |  |   | 0.4625 |     |  |   | 0.0125 | 
|              
|              
|              
|              
|Fourth Quarter |  |              | 0.5375 |          |  |              | 0.0875 |          |  |              | 0.5125 |          |  |   | 0.0625 |  |  |   | 0.4625 |     |  |   | 0.0125 | 



---



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects distributions to common and Class B common
    unitholders only. No distribution was declared or paid on the
    subordinated units owned by us in this period.

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.
The term loan is repayable in 10 quarterly installments of
$4.5 million each commencing on February 28, 2003 with
a final maturity of May 31, 2005. 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.

To secure the term loan, we pledged 100% of the shares of stock
of our subsidiaries and pledged 4,950,000 of our PAA common
units. To the extent that the outstanding principal under the
term loan exceeds the balance in the debt reserve account (as
defined in the agreement) 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 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

43



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##### Table of Contents





On July 3, 2002 PXP issued $200 million of 8.75%
Senior Subordinated Notes due 2012, or the 8.75% Notes, and
entered into a $300 million revolving credit facility. PXP
distributed the net proceeds of $195.3 million from the
8.75% notes and $116.7 million of initial borrowings under
its credit facility to us. Of such distribution, we used:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | $287.0 million to redeem our 10.25% senior subordinated
    notes; and
|
| |  | $25 million to repay and terminate our revolving credit
    facility. 

The $287.0 million used to redeem the 10.25% notes
consisted of:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | $267.5 million principal amount outstanding;                                                    
|
| |  | a $9.1 million call premium due as a result of the early
    redemption of the 10.25% notes; and
|
| |  | $10.4 million in interest accrued and payable on the
    redemption date.                       

All of the outstanding 10.25% notes were redeemed and all
guarantees with respect to the 10.25% notes were terminated. In
connection with the redemption of the 10.25% notes and the
termination of our credit facility, in the third quarter of 2002
we recognized a $10.3 million loss for debt extinguishment.

Cash Flows from Continuing
Operations

|                            |                      |                         |   |        |   |      |   |       |   |  |   |        |  
|--------------------------- | -------------------- | ----------------------- | - | ------ | - | ---- | - | ----- | - |  | - | ------ | -
|                            |                      |                        
|                            |                      | Year Ended December 31,
|                            |                      |                        
|                            |                      | 2002                    |   | 2001   |   | 2000
|                            |                      |                         |   |        |   |     
|                            |                      |                        
|                            |                      | (in millions)          
|                           
|                           
|                           
|                           
|Cash provided by (used in): |                      |                         |   |        |   |      |   |       |   |  |   |       
|                           
|                           
|                           
|                           
|                            | Operating activities |                         | $ | 7.6    |   |      | $ | 3.3   |   |  | $ | (43.6  | )
|                           
|                           
|                           
|                           
|                            | Investing activities |                         |   | (7.3   | ) |      |   | 96.5  |   |  |   | 201.1  |  
|                           
|                           
|                           
|                           
|                            | Financing activities |                         |   | (235.4 | ) |      |   | (90.7 | ) |  |   | (228.7 | )

Operating Activities. Net cash provided by operating
activities in 2002 totaled $7.6 million compared to
$3.3 million in 2001. The net increase is primarily
attributable to higher realized oil prices and increased sales
volumes. Net cash provided by operating activities in 2001
totaled $3.3 million compared to net cash used in operating
activities of $43.6 million in 2000. Net cash used in
operating activities in 2000 is attributable to PAAs
unauthorized trading losses.

Investing Activities. In 2002 net cash used in investing
activities totaled $7.3 million. Additions to oil and gas
properties and equipment used $5.9 million in cash, and we made
capital contributions to PAA of $1.3 million to maintain
our proportionate general partner share interest as a result of
equity offerings by PAA. To maintain its 2% general partner
interest, the general partner of PAA is required to make a
capital contribution each time PAA has a new equity offering. In
2001 net cash provided by investing activities was
$96.5 million. Additions to oil and gas properties and
equipment used $6.0 million in cash, and we made capital
contributions to PAA of $4.0 million to maintain our
proportionate general partner share of equity offerings by PAA.
These uses of cash were offset by $106.9 million in cash
proceeds received as a result of our June 2001 strategic
restructuring. During 2000 investing activities provided cash of
$201.1 million. Proceeds from PAA asset sales of
$224.3 million were offset primarily by expenditures of
$12.2 million for oil pipeline, gathering and terminal
costs and $8.2 million for upstream acquisition,
exploration and development costs.

Financing activities. Cash used in financing activities
in 2002 included a net reduction in long-term debt of
$234.0 million, $5.2 million in proceeds from
issuances of our common stock, and $1.4 million in
preferred stock dividends. Cash used in financing activities in
2001 included a net

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Capital Expenditures

We have made and will continue to make capital expenditures with
respect to our oil properties. We intend to make aggregate
capital expenditures of approximately $3.7 million in 2003
for exploitation of our existing properties.

When PAA issues equity, the general partner is required to
contribute cash to maintain its 2% general partner interest. In
March 2003, PAA issued 2.6 million shares in a public
equity offering. We were required to make a cash capital
contribution to the general partner of PAA in the amount of
$0.6 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 March 15, 2003 we have
repurchased an additional 142,700 shares at a total cost of
$1.6 million. We intend to make additional repurchases in
2003 and expect to fund the purchases from cash flows.

Contractual
Obligations

At December 31, 2002, 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   |  | $    | 18,000 |      |  | $    | 18,000 |      |  | $    | 9,000 |            |  | $ |  |  |  | $ |  |  |  | $ |  | 
|                
|                
|                
|                
|Operating leases |  |      | 22     |      |  |      | 23     |      |  |      | 23    |            |  |   | 6 |  |  |   |  |  |  |   |  | 
|                 |  |      |        |      |  |      |        |      |  |      |       |            |  |   |   |  |  |   |   |  |  |   |   | 
|                 |  | $    | 18,022 |      |  | $    | 18,023 |      |  | $    | 9,023 |            |  | $ | 6 |  |  | $ |  |  |  | $ |  | 
|                 |  |      |        |      |  |      |        |      |  |      |       |            |  |   |   |  |  |   |   |  |  |   |   | 

Contingencies

In connection with our June 2001 strategic restructuring, we
entered into value assurance agreements with the purchasers of
the subordinated units, 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 first quarter of 2002 PAA
paid a quarterly distribution of $0.5125 per unit
($2.05 annualized).

Also in connection with the June 2001 sale of a portion of our
interest in PAA, 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.

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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. See  Items 1
and 2. Business and Properties  Spin-off
Agreements.

Environmental Matters. As discussed in Items 1 and
2. Business & Properties 
Regulation  Environmental. as an owner or
lessee and operator of oil and gas properties, we are subject to
various federal, state, and local laws and regulations relating
to discharge of materials into, and protection of, the
environment. Typically when producing oil and gas assets are
purchased, one assumes the obligation to plug and abandon wells
that are part of such assets. We have established policies for
continuing compliance with environmental laws and regulations.
Also, we maintain insurance coverage for environmental matters,
which we believe is customary in the industry, but we are not
fully insured against all environmental risks. There can be no
assurance that current or future local, state or federal rules
and regulations will not require us to spend material amounts to
comply with such rules and regulations.

Plugging, Abandonment and Remediation Obligations.Consistent with normal industry practices, our oil and gas
leases require that, upon termination of economic production,
the working interest owners plug and abandon non-producing
wellbores, remove tanks, production equipment and flow lines and
restore the wellsite. Typically when producing oil and gas
assets are purchased, one assumes the obligation to plug and
abandon wells that are part of such assets.

We have estimated that at December 31, 2002 the costs to
perform these tasks will be approximately $9.0 million, net
of salvage value. Effective January 1, 2003, upon adoption
of SFAS No. 143, Accounting for Asset Retirement
Obligations, we will record the fair value of the
liabilities associated with our asset retirement obligations,
See Recent Accounting Pronouncements.

Other commitments and contingencies. As is common within
the industry, we have entered into various commitments and
operating agreements related to the exploration and development
of and production from proved oil and gas properties and the
marketing, transportation, terminalling and storage of oil. It
is managements belief that such commitments will be met
without a material adverse effect on our financial position,
results of operations or cash flows.

As discussed in Item 3. Legal Proceedings, 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. We intend to defend our rights vigorously in this
matter. Under the spin-off agreements, PXP will indemnify us
against this lawsuit. 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.

Operating risks and insurance coverage. Our operations
are subject to all of the risks normally incident to the
exploration for and the production of oil and gas, including
well blowouts, cratering, explosions, spills of oil, gas or well
fluids, fires, pollution and releases of toxic gas, each of
which could result in damage to or destruction of oil and gas
wells, production facilities or other property, or injury to
persons. Although we maintain insurance coverage considered to
be customary in the industry, we are not fully insured against
all risks, either because insurance is not available or because
of high premium costs. The occurrence of a significant event
that is not fully insured against could have a material adverse
effect on our financial position. Our insurance does not cover
every potential risk associated with operating our pipelines,
including the potential loss of significant revenues. Consistent
with insurance coverage generally available to the industry, our
insurance

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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 other applicable
SEC filings by PAA.

Material Related Party Transactions

Governance of PAA

We, along with Sable Investments, L.P. (which is owned by
Mr. Flores, our Executive Chairman, and Mr. Raymond,
our Chief Executive Officer), Kafu Holdings, L.P. (which is
controlled by Kayne Anderson Capital Advisors, L.P. and Kayne
Anderson Investment Management, Inc., of which Mr. Sinnott
is Senior Vice President), and E-Holdings III, L.P. (which
is controlled by EnCap Investments L.L.C. and of which
Mr. Phillips 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 of PAA.

In addition, 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 a value assurance agreement with each of Sable
Investments, Kafu Holdings and E-Holdings with respect to the
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.

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 2002, PAA paid us $22.7 million
    for such equity production and we paid PAA $0.2 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

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| |  |                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | June 8, 2001, and (2) PAA agreed to indemnify us and
    our subsidiaries against any claims related to the midstream
    business, whenever arising.

We are currently negotiating a new marketing agreement with PAA
to, among other things, add a definitive term to the agreement
and provide that PAA will use its reasonable best efforts to
obtain the best price for our oil production. There can be no
assurance, however, that we will enter into a new marketing
agreement with PAA.

Spin-off Agreements

In connection with the spin-off of PXP, we entered into various
agreements with PXP. For a discussion of these agreements, see
Items 1 and 2. Business and Properties 
Spin-off Agreements.

Industry Concentration

Financial instruments which potentially subject us to
concentrations of credit risk consist principally of accounts
receivable with respect to our oil operations and derivative
instruments related to our hedging activities. PAA is the
exclusive marketer/ purchaser for all of our equity oil
production. This concentration has the potential to impact our
overall exposure to credit risk, either positively or
negatively, in that PAA may be affected by changes in economic,
industry or other conditions. We do not believe the loss of PAA
as the exclusive purchaser of our equity production would have a
material adverse affect on our results of operations. We believe
PAA could be replaced by other purchasers under contracts with
similar terms and conditions.

There are a limited number of alternative methods of
transportation for our production. Substantially all of our oil
production is transported by pipelines, trucks and barges owned
by third parties. The inability or unwillingness of these
parties to provide transportation services to us for a
reasonable fee could result in our having to find transportation
alternatives, increased transportation costs or involuntary
curtailment of a significant portion of our oil production which
could have a negative impact on future results of operations or
cash flows.

The contract counterparties for our derivative commodity
contracts are all major financial institutions with Standard
& Poors ratings of A or better.

Critical Accounting Policies and Factors That May Affect
Future Results

Based on the accounting policies which we have in place, certain
factors may impact our future financial results. The most
significant of these factors and their effect on certain of our
accounting policies are discussed below.

Commodity pricing and risk management activities. Prices
for oil have historically been volatile. Decreases in oil prices
from current levels will adversely affect our revenues, results
of operations, cash flows and proved reserves. If the industry
experiences significant prolonged future price decreases, this
could be materially adverse to our operations and our ability to
fund planned capital expenditures.

Periodically, we enter into hedging arrangements relating to a
portion of our oil production to achieve a more predictable cash
flow, as well as to reduce our exposure to adverse price
fluctuations. Hedging instruments used are typically fixed price
swaps and collars and purchased puts and calls. While the use of
these types of hedging instruments limits our downside risk to
adverse price movements, we are subject to a number of risks,
including instances in which the benefit to revenues is limited
when commodity prices increase. For a further discussion
concerning our risks related to oil prices and our hedging
programs, see  Quantitative and Qualitative
Disclosures about Market Risks.

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Write-downs under full cost ceiling test rules.Under the
SECs full cost accounting rules we review the carrying
value of our proved oil and gas properties each quarter. Under
these rules, capitalized costs of proved oil and gas properties
(net of accumulated depreciation, depletion and amortization,
and deferred income taxes) may not exceed a ceiling
equal to:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | the standardized measure (including, for this test only, the
    effect of any related hedging activities); plus                      
|
| |  | the lower of cost or fair value of unproved properties not
    included in the costs being amortized (net of related tax
    effects).

These rules generally require that we price our future oil
production at the prices in effect at the end of each fiscal
quarter and require a write-down if our capitalized costs exceed
this ceiling, even if prices declined for only a
short period of time. 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 reserves will change in the near term.
If oil prices decline in the future, even if only for a short
period of time, 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.

Based on the book value of our proved oil and gas properties
(including related deferred income taxes) and our proved reserve
reports as of December 31, 2002, 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
$17.50 per barrel. Based on an estimated oil differential for
2003 of $9.00  $9.50 per barrel, we would have a
write-down at a NYMEX oil index price of $26.50 
$27.00 per barrel.

Oil and gas reserves. The proved reserve information
included herein were based on estimates prepared by outside
engineering firms. Estimates prepared by others may be higher or
lower than these estimates.

Estimates of proved reserves may be different from the actual
quantities of oil and gas recovered because such estimates
depend on many assumptions and are based on operating conditions
and results at the time the estimate is made. The actual results
of drilling and testing, as well as changes in production rates
and recovery factors, can vary significantly from those assumed
in the preparation of reserve estimates. As a result, such
factors have historically, and can in the future, cause
significant upward and downward revisions to proved reserve
estimates.

You should not assume that the present value of future net cash
flows is the current market value of our estimated proved oil
and gas reserves. In accordance with SEC requirements, we base
the estimated discounted future net revenues from proved
reserves on prices and costs on the date of the estimate. Actual
future prices and costs may be materially higher or lower than
the prices and costs as of the date of the estimate.

All of our reserve base is comprised of oil properties that are
sensitive to oil price volatility. Historically, we have
experienced significant upward and downward revisions to our
reserves volumes and values as a result of changes in year-end
oil and gas prices and the corresponding adjustment to the
projected economic life of such properties. Prices for oil and
gas are likely to continue to be volatile, resulting in future
downward and upward revisions to our reserve base.

Our rate of recording DD&A is dependent upon our estimate of
proved reserves including future development and abandonment
costs as well as our level of capital spending. If the estimates
of proved reserves decline, the rate at which we record DD&A
expense increases, reducing our net income. This decline may
result from lower market prices, which may make it uneconomic to
drill for and produce higher cost fields. The decline in proved
reserve estimates may impact the outcome of the
ceiling test discussed above. In addition, increases
in costs required to develop our reserves would increase the
rate at which we record DD&A expense. We are unable to
predict changes in

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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 other applicable SEC filings
by PAA.

Recent Accounting Pronouncements

Statement of Accounting Standards, or SFAS, No. 143,
Accounting for Asset Retirement Obligations becomes
effective January 1, 2003. SFAS No. 143 requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and
a corresponding increase in the carrying amount 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. For all historical periods presented, we
have included estimated future costs of abandonment and
dismantlement in our full cost amortization base and these costs
have been amortized as a component of our depletion expense.

We have completed our assessment of SFAS No. 143 and we
estimate that at January 1, 2003 the present value of our
future Asset Retirement Obligation (ARO) for oil and
gas properties and equipment is approximately $2.6 million.
We estimate that the cumulative effect of our adoption of SFAS
No. 143 and the change in accounting principle will result
in an increase in net income during the first quarter of 2003 of
$1.5 million (reflecting a $2.9 million decrease in
accumulated DD&A, partially offset by $1.3 million in
accretion expense), $0.9 million net of taxes. We estimate
that we will record a liability of $2.6 million and an
asset of $1.2 million in connection with the adoption of
SFAS 143. There will be no impact on our cash flows as a
result of adopting SFAS No. 143.

In April 2002, SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, was issued.
SFAS 145 rescinds SFAS 4 and SFAS 64 related to
classification of gains and losses on debt extinguishment such
that most debt extinguishment gains and losses will no longer be
classified as extraordinary. SFAS 145 also amends
SFAS 13 with respect to sales-leaseback transactions. The
provisions of SFAS 145 with respect to sales-leaseback
transactions have no effect on our financial statements. As a
result of the provisions of SFAS 145 with respect to debt
extinguishments, the $15.1 million of debt extinguishment
costs related to the refinancing of certain of PAAs debt
instruments in 2000 are not classified as an extraordinary item
in our statement of income.

In July 2002 SFAS No. 146, Accounting For Costs
Associated with Exit or Disposal Activities was issued.
SFAS 146 is effective for exit or disposal activities
initiated after December 31, 2002 and does not require
previously issued financial statements to be restated. We will
account for exit or disposal activities initiated after
December 31, 2002 in accordance with the provisions of
SFAS 146.

In December 2002, SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123 was issued. SFAS 148 amends
SFAS 123, Accounting for Stock-Based
Compensation,to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS 148
are effective for financial statements for fiscal years ending
after December 15, 2002. SFAS 148 does not change the
provisions of SFAS 123 that permit entities to continue to
apply the intrinsic value method of Accounting Principles
Bulletin No. 25, Accounting for Stock Issued to
Employees. We will continue to account for stock-based
compensation on accordance with the provisions of APB
No. 25. We will provide the disclosures required by
SFAS 148 in our financial statements.

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In November 2002 FASB interpretation 45, or FIN 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantee of Indebtedness of
Others was issued. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under that guarantee.
FIN 45s provisions for initial recognition and
measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The
guarantors previous accounting for guarantees that were
issued before the date of FIN 45s initial application
may not be revised or restated to reflect the effect of the
recognition and measurement provisions of FIN 45. The
disclosure requirements are effective for financial statements
of both interim and annual periods that end after
December 15, 2002. The disclosures required by FIN 45
are included in this Form 10-K.

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.

Item 7A.     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.

Derivative instruments are accounted for in accordance with SFAS
No. 133 Accounting for Derivative Instruments and
Hedging Activities as amended by SFAS 137 and
SFAS 138, 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.

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 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. No amounts were excluded from the computation of
hedge effectiveness. At December 31, 2002, all open
positions qualified for hedge accounting.

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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.

At December 31, 2002 OCI consisted of unrealized losses of:
(i) $0.4 million ($0.3 million, net of tax) on
our oil hedging instruments, (ii) $3.7 million
($2.3 million, net of tax) related to our equity in the OCI
loss of PAA, and (iii) $0.5 million
($0.3 million, net of tax) related to pension liabilities.
At December 31, 2002, the liability related to our open oil
hedging instruments was included in current liabilities
($0.4 million), and deferred income taxes (a tax benefit of
$0.2 million)

During 2002 oil sales revenues were reduced by $0.6 million
for non-cash expense related to the amortization of option
premiums. As of December 31, 2002, $0.4 million
($0.2 million, net of tax) of deferred net losses on our
oil hedging instruments recorded in OCI are expected to be
reclassified to earnings during 2003.

Commodity Price Risk. At March 1, 2003, we had the
following open oil hedge positions:

|      |                          |                 |  |       |  |  |  |       | 
|----- | ------------------------ | --------------- |  | ----- |  |  |  | ----- | 
|      |                          |                
|      |                          | Barrels Per Day
|      |                          |                
|      |                          | 2003            |  | 2004 
|      |                          |                 |  |      
|Swaps |                          |                 |  |       |  |  |  |      
|     
|     
|     
|     
|      | Average price $26.10/bbl |                 |  | 1,500 |  |  |  |      | 
|     
|     
|     
|     
|      | Average price $24.07/bbl |                 |  |      |  |  |  | 1,000 | 

Assuming our fourth quarter 2002 sales volumes are held constant
in subsequent periods, these positions result in our hedging
approximately 61% and 41% of oil sales in 2003 and 2004,
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 price per barrel.

The agreements provide for monthly cash settlement based on the
differential between the agreement price and the actual NYMEX
price. Gains or losses are recognized in the month of related
production and are included in oil sales revenues. Such
contracts resulted in a reduction of revenues of
$0.6 million, $1.2 million and $6.6 million for
the years ended December 31, 2002, 2001 and 2000,
respectively.

The fair value of outstanding oil derivative commodity
instruments and the change in fair value that would be expected
from a 10 percent price decrease are shown in the table
below (in millions):

|                            |  |              |       |           |  |       |     |           |  |   |     |  |  |   |     | 
|--------------------------- |  | ------------ | ----- | --------- |  | ----- | --- | --------- |  | - | --- |  |  | - | --- | 
|                            |  |             
|                            |  | December 31,
|                            |  |             
|                            |  |              |       |          
|                            |  | 2002         |       | 2001     
|                            |  |              |       |          
|                            |  |              |       | Effect of |  |       |     | Effect of
|                            |  |              |       | 10%       |  |       |     | 10%      
|                            |  | Fair         |       | Price     |  | Fair  |     | Price    
|                            |  | Value        |       | Decrease  |  | Value |     | Decrease 
|                            |  |              |       |           |  |       |     |          
|                           
|                           
|                           
|                           
|Swaps and options contracts |  | $            | (0.4) |           |  | $     | 1.9 |           |  | $ | 1.5 |  |  | $ | 0.7 | 

The fair value of the swaps and option contracts are estimated
based on quoted prices from independent reporting services
compared to the contract price of the swap and approximate the
gain or loss that would have been realized if the contracts had
been closed out at year end. All hedge positions offset physical
positions exposed to the cash market. None of these offsetting
physical positions are included in the above table. Price-risk
sensitivities were calculated by assuming an across-the-board
10 percent decrease in price regardless of term or
historical relationships between the contractual price of the
instruments and the underlying commodity price. In the event of
an actual 10 percent change in prompt month oil prices, the
fair value of our derivative portfolio would typically change
less than that shown in the table due to lower volatility in
out-month prices.

In the fourth quarter of 2001 we terminated our open oil put
options with Enron Risk Management Corp. and charged earnings
for $0.9 million, representing unamortized premiums for

52



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Our management intends to continue to maintain hedging
arrangements for a significant portion of our production. These
contracts may expose us to the risk of financial loss in certain
circumstances. Our hedging arrangements provide us protection on
the hedged volumes if oil prices decline below the prices at
which these hedges are set, but ceiling prices in our hedges may
cause us to receive less revenue on the hedged volumes than we
would receive in the absence of hedges.

Interest Rate Risk.Our debt instruments are sensitive to
market fluctuations in interest rates. At December 31, 2002
we had $45.0 million outstanding under our credit facility,
repayable $18.0 million in 2003, $18.0 million in 2004
and $9.0 million in 2005. Our credit facility bears
interest at a base rate (as defined) or LIBOR plus the
applicable margin (4.4% at December 31, 2002). The carrying
value of our credit facility debt approximates fair value
because interest rates are variable, based on prevailing market
rates.

Item 8.     Financial
Statements and Supplementary Data

The information required here is included in this report as set
forth in the Index to Financial Statements on page
F-1.

The financial statements, including the notes thereto, of PAA
are incorporated herein by reference to pages F-1 through F-37
of PAAs Annual Report on Form 10-K for the year ended
December 31, 2002 (as may be amended from time to time).
The PAA financial statements were prepared by PAA.



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure

None.






PART III


Item 10.     Directors and
Executive Officers of the Registrant

Information regarding our directors and executive officers will
be included in the proxy statement for the 2003 annual meeting
of stockholders to be filed within 120 days after
December 31, 2002, and is incorporated by reference to this
report.

We have provided summary information with respect to our
directors and executive officers following Item 4 in Part I
of this report.

Item 11.     Executive
Compensation

Information regarding executive compensation will be included in
the proxy statement and is incorporated by reference to this
report.



|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters

Information regarding beneficial ownership and related
stockholder matters will be included in the proxy statement and
is incorporated by reference to this report.

Item 13.     Certain
Relationships and Related Transactions

Information regarding certain relationships and related
transactions will be included in the proxy statement and is
incorporated by reference to this report.

53



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Item 14.     Controls and
Procedures

Within 90 days before the date of this report on
Form 10-K, 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 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.

54



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PART IV


Item 15.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

(a) (1) and (2) Financial Statements and Financial
Statement Schedules

See Index to Consolidated Financial Statements set
forth on Page F-1.

The financial statements, including the notes thereto, of PAA
are incorporated herein by reference to pages F-1 through
F-37 of PAAs Annual Report on Form 10-K for the year
ended December 31, 2002 (as may be amended from time to
time). The PAA financial statements were prepared by PAA.

(a) (3) Exhibits

| |      |  |  |                                                                                                                                                                                                                                                                                              
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1  |  |  | Stock Purchase Agreement dated as of
    March 15, 1998, among Plains Resources Inc., Plains All
    American Inc. and Wingfoot Ventures Seven Inc. (incorporated by
    reference to Exhibit 2(b) to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    1997).
| | 3.1  |  |  | Second Restated Certificate of Incorporation of
    the Company (incorporated by reference to Exhibit 3(a) to
    the Companys Annual Report on Form 10-K for the year
    ended December 31, 1995).                                                                                        
| | 3.2  |  |  | Bylaws of the Company                                                                                                                                                                                                                                                                        
| | 3.3  |  |  | Certificate of Designation, Preference and Rights
    of Series D Cumulative Convertible Preferred Stock
    (incorporated by reference to Exhibit 3(c) to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 1997).                                    
| | 3.4  |  |  | First Amendment to the Plains Resources Inc.
    Bylaws (incorporated by reference to Exhibit 3.1 to the
    Companys Quarterly Report on Form 10-Q for the three
    months ended June 30, 2001).                                                                                          
| | 4.1  |  |  | Specimen Common Stock Certificate (incorporated
    by reference to Exhibit 4 to the Companys
    Form S-1 Registration Statement (Reg. No. 33-33986)).                                                                                                                                     
| | 10.1 |  |  | The Companys 1992 Stock Incentive Plan
    (incorporated by reference to Exhibit 4.3 to the
    Companys Form S-8 Registration Statement (Reg.
    No. 33-48610)).                                                                                                                         
| | 10.2 |  |  | First Amendment to the Companys 1992 Stock
    Incentive Plan (incorporated by reference to Exhibit 10(n)
    to the Companys Annual Report on Form 10-K for the
    year ended December 31, 1996).                                                                                        
| | 10.3 |  |  | Second Amendment to the Companys 1992 Stock
    Incentive Plan (incorporated by reference to Exhibit 10(b)
    to the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended June 30, 1997).                                                                            
| | 10.4 |  |  | Third Amendment to Plains Resources Inc. 1992
    Stock Incentive Plan dated May 21, 1998 (incorporated by
    reference to Exhibit 10(aa) to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    September 30, 1998).                                        
| | 10.5 |  |  | The Companys 1996 Stock Incentive Plan
    (incorporated by reference to Exhibit 4 to the
    Companys Form S-8 Registration Statement (Reg.
    No. 333-06191)).                                                                                                                          
| | 10.6 |  |  | First Amendment to Plains Resources Inc. 1996
    Stock Incentive Plan dated May 21, 1998 (incorporated by
    reference to Exhibit 10(z) to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    September 30, 1998)                                          
| | 10.7 |  |  | Second Amendment to Plains Resources 1996 Stock
    Incentive Plan dated May 20, 1999 (incorporated by
    reference to Exhibit 10(q) to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    June 30, 1999).                                                  
| | 10.8 |  |  | Third Amendment to Plains Resources 1996 Stock
    Incentive Plan dated June 7, 2000(incorporated by reference
    to Exhibit 10.23 to the Companys Annual Report on
    Form 10-K for the Year Ended December 31, 2000).                                                                   
| | 10.9 |  |  | Forms of Officer Stock Option Agreement
    (incorporated by reference to Exhibits 4.1 and 4.2 to the
    Companys Form S-8 Registration Statement
    (Registration No. 333-45562).                                                                                                        

55



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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.10 |  |  | Contribution, Conveyance and Assumption Agreement
    among Plains All American Pipeline, L.P. and certain other
    parties dated as of November 23, 1998 (incorporated by
    reference to Exhibit 10.03 to Annual Report on
    Form 10-K for the Year Ended December 31, 1998 for
    Plains All American Pipeline, L.P.).                                                                                                                                                                
| | 10.11 |  |  | Crude Oil Marketing Agreement among Plains
    Resources Inc., Plains Illinois Inc., Stocker Resources, L.P.,
    Calumet Florida, Inc. and Plains Marketing, L.P. dated as of
    November 23, 1998 (incorporated by reference to
    Exhibit 10.07 to Annual Report on Form 10-K for the
    Year Ended December 31, 1998 for Plains All American
    Pipeline, L.P.).                                                                                                                      
| | 10.12 |  |  | First Amendment to Contribution, Conveyance and
    Assumption Agreement dated as of December 15, 1998
    (incorporated by reference to Exhibit 10.13 to Annual
    Report on Form 10-K for the Year Ended December 31,
    1998 for Plains All American Pipeline, L.P.).                                                                                                                                                                                                                    
| | 10.13 |  |  | Performance Stock Option Agreement dated as of
    May 8, 2001 between Plains Resources Inc. and James C.
    Flores (incorporated by reference to Exhibit 10.2 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                                                                             
| | 10.14 |  |  | Separation Agreement dated as of June 8,
    2001 by and among Plains Resources Inc., Plains Holdings Inc.
    (formerly known as Plains All American Inc.), Plains All
    American GP LLC, Plains AAP, LP and Plains All American
    Pipeline, L.P. (incorporated by reference to Exhibit 10.3
    to the Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                           
| | 10.15 |  |  | Pension and Employee Benefits Assumption and
    Transition Agreement, dated as of June 8, 2001, by and
    between Plains Resources Inc., Plains Holdings Inc. (formerly
    known as Plains All American Inc.) and Plains All American GP
    LLC (incorporated by reference to Exhibit 10.4 to the
    Companys Quarterly Report on Form 10-Q for the three
    months ended June 30, 2001).                                                                                              
| | 10.16 |  |  | Value Assurance Agreement dated as of
    June 8, 2001 by and among Plains Resources Inc. and Sable
    Holdings L.P. and schedule of other Value Assurance Agreements
    substantially identical thereto (incorporated by reference to
    Exhibit 10.5 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30, 2001).                                                                                                                                       
| | 10.17 |  |  | Contribution, Assignment and Amendment Agreement
    dated as of June 8, 2001, between Plains Holdings Inc.
    (formerly known as Plains All American Inc.), Plains AAP, LP and
    Plains All American GP LLC. (incorporated by reference to
    Exhibit 10.6 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30, 2001).                                                                                                                                 
| | 10.18 |  |  | Registration Rights Agreement dated as of
    May 8, 2001, among Plains Resources Inc. and James C.
    Flores. (incorporated by reference to Exhibit 10.7 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                                                                                  
| | 10.19 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains Resources Inc., Strome Hedgecap
    Fund L.P., Strome Series Fund 1, Strome Series Fund 2
    and Mark E. Strome. (incorporated by reference to
    Exhibit 10.8 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30,
    2001).                                                                                                                                                   
| | 10.20 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains All American Pipeline, L.P.,
    Sable Holdings, L.P., E-Holdings III, L.P., KAFU Holdings,
    LP, PAA Management, L.P., Mark E. Strome, Strome Hedgecap
    Fund, L.P., John T. Raymond, and Plains Holdings Inc.
    (formerly known as Plains All American Inc.) (incorporated by
    reference to Exhibit 10.9 to the Companys Quarterly
    Report on Form 10-Q for the three months ended
    June 30, 2001).
| | 10.21 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains Resources Inc. and EnCap Energy
    Capital Fund III, L.P., EnCap Energy Capital Fund III-B,
    L.P., BOCP Energy Partners, L.P. and Energy Capital Investment
    Company PLC. (incorporated by reference to Exhibit 10.10 to
    the Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                       
| | 10.22 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains Resources Inc. and Kayne
    Anderson Capital Advisors, L.P. (incorporated by reference to
    Exhibit 10.11 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30, 2001).                                                                                                                                                                                                           

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| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.23  |  |  | Amended and Restated Limited Liability Company
    Agreement of Plains All American GP LLC, dated as of
    June 8, 2001. (incorporated by reference to
    Exhibit 10.12 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30,
    2001).                                                                                                                                       
| | 10.24  |  |  | Amended and Restated Limited Partnership
    Agreement of Plains AAP, L.P, dated June 8, 2001.
    (incorporated by reference to Exhibit 10.13 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                  
| | 10.25  |  |  | Plains Resources Inc. 2001 Stock Incentive Plan.
    (incorporated by reference to Exhibit 10.15 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                                                                
| | 10.26  |  |  | Value Assurance Agreement, dated as of
    August 17, 2001, by and among Plains Resources Inc. and
    First Union Investors, Inc. (incorporated by reference to
    Exhibit 10.34 of the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001).                                                                                                                                         
| | 10.27  |  |  | Combination Incentive Stock Option and
    Nonqualified Stock Option Agreement, dated as of June 7,
    2001, between John T. Raymond and Plains Resources Inc.
    (incorporated by reference to Exhibit 10.36 of the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2001).                                                                                                        
| | 10.28  |  |  | Performance Stock Option Agreement, dated as of
    June 7, 2001, between John T. Raymond and Plains
    Resources Inc. (incorporated by reference to Exhibit 10.37
    of the Companys Annual Report on Form 10-K for the
    year ended December 31, 2001).                                                                                                                                                    
| | 10.29  |  |  | Secured Term Loan Agreement dated as of
    December 6, 2002, by and among the Company, Bank of
    Montreal as Administrative Agent, Bank One, NA, as Syndication
    Agent, Wells Fargo Bank Texas, NA, as Collateral Agent and
    Documentation Agent, and the Lenders named therein (incorporated
    by reference to Exhibit 10.1 of the Companys Current
    Report on Form 8-K filed on January 2, 2003).
| | 10.30  |  |  | Amended and Restated Employment Agreement, dated
    as of September 19, 2002, by and between James C.
    Flores and the Company (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the three months ended September 30,
    2002).                                                                                                                           
| | 10.31  |  |  | Amended and Restated Employment Agreement, dated
    as of September 19, 2002, by and between John T.
    Raymond and the Company (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the three months ended September 30,
    2002).                                                                                                                           
| | 10.32* |  |  | Form of Officer Restricted Stock Award Agreement.                                                                                                                                                                                                                                                                                                                                                                 
| | 10.33* |  |  | Form of Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                                                                                                                          
| | 10.34* |  |  | Form of Incentive Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                         
| | 10.35* |  |  | Form of Non-Qualified Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                     
| | 10.36  |  |  | Master Separation Agreement dated July 3,
    2002 between PXP and the Company (incorporated by reference to
    Exhibit 10.1 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                                                                                                                                                                                                 
| | 10.37  |  |  | Plains Exploration & Production Company
    Transition Services Agreement dated July 3, 2002 between
    PXP and the Company (incorporated by reference to
    Exhibit 10.2 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                                                                                                                                                   
| | 10.38  |  |  | Extension of Term of Plains Exploration &
    Production Company Transition Services Agreement, dated as of
    December 18, 2002, between PXP and the Company
    (incorporated by reference to Exhibit 10.3 to PXPs
    Registration Statement on Form S-4 filed on
    February 12, 2003).                                                                                                                    
| | 10.39  |  |  | Plains Resources Inc. Transition Services
    Agreement dated July 3, 2002 between the Company and PXP
    (incorporated by reference to Exhibit 10.3 to PXPs
    Amendment No. 1 to Form S-1 filed on August 28,
    2002).                                                                                                                                                                                     
| | 10.40  |  |  | Second Amended and Restated Tax Allocation
    Agreement dated November 20, 2002 between PXP and the
    Company (incorporated by reference to Exhibit 10.4 to
    PXPs Amendment No. 1 to Form 10 filed on
    November 21, 2002).                                                                                                                                                                              

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| |        |  |  |                                                                                                                                                                                                                                              
| | ------ |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.41  |  |  | Technical Services Agreement dated July 3,
    2002 between PXP and the Company (incorporated by reference to
    Exhibit 10.5 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                           
| | 10.42  |  |  | Intellectual Property Agreement dated
    July 3, 2002 between PXP and the Company (incorporated by
    reference to Exhibit 10.6 to PXPs Amendment
    No. 1 to Form S-1 filed on August 28, 2002).                                        
| | 10.43  |  |  | Employee Matters Agreement dated July 3,
    2002 between PXP and the Company (incorporated by reference to
    Exhibit 10.7 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                             
| | 10.44  |  |  | Amendment No. 1 to Employee Matters
    Agreement, dated as of September 18, 2002, between the
    Company and PXP (incorporated by reference to Exhibit 10.22
    to PXPs Amendment No. 2 to Form S-1 filed on
    October 4, 2002).       
| | 10.45  |  |  | Amendment No. 1 to Master Separation
    Agreement, dated as of November 20, 2002, between the
    Company and PXP (incorporated by reference to Exhibit 10.24
    to PXPs Amendment No. 1 to Form 10 filed on
    November 21, 2002).      
| | 10.46  |  |  | Amendment No. 2 to Employee Matters
    Agreement, dated as of November 20, 2002, between the
    Company and PXP (incorporated by reference to Exhibit 10.25
    to PXPs Amendment No. 1 to Form 10 filed on
    November 21, 2002).       
| | 10.47  |  |  | Amendment No. 3 to Employee Matters
    Agreement, dated as of December 2, 2002, between PXP and
    the Company (incorporated by reference to Exhibit 10.23 to
    PXPs Registration Statement on Form S-4 filed on
    February 12, 2003).
| | 10.48  |  |  | First Amendment to Plains Resources Inc. 2001
    Stock Incentive Plan (incorporated by reference to
    Exhibit 10.6 to the Companys Quarterly Report on
    Form 10-Q for the three months ended September 30,
    2002).                 
| | 10.49* |  |  | Second Amendment to Plains Resources Inc. 2001
    Stock Incentive Plan.                                                                                                                                                                     
| | 21.1*  |  |  | Subsidiaries of the Company                                                                                                                                                                                                                  
| | 23.1*  |  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                       
| | 23.2*  |  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                       
| | 23.3*  |  |  | Consent of Netherland, Sewell and Associates, Inc.                                                                                                                                                                                           
| | 99.1   |  |  | The financial statements of Plains All American
    Pipeline, L.P. included on pages F-1 through F-37 of
    PAAs Annual Report on Form 10-K for the year ended
    December 31, 2002.                                                      
| | 99.2*  |  |  | 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.                                                                                      
| | 99.3*  |  |  | 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.                                                                                      



---



|  |               
|- | --------------
|* | Filed herewith

(b) Reports on Form 8-K

A Current Report on Form 8-K was filed on February 27,
2003 with respect to the Companys press release reporting
2002 earnings and December 31, 2002 oil and gas reserve
information.

A Current Report on Form 8-K was filed on February 27,
2003 with respect to current estimates of certain results for
2003.

A Current Report on Form 8-K was filed on January 2,
2003 with respect to the completion of the spin off and the
Companys new term loan facility.

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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |                      
| | ---------------------
| | PLAINS RESOURCES INC.



| |     |                          
| | --- | -------------------------
| | By: | /s/ STEPHEN A. THORINGTON

| |                                                                                     
| | ------------------------------------------------------------------------------------
| |                                                                                     
| | Stephen A. Thorington                                                               
| | Executive Vice President and Chief                                                  
| | Financial Officer (Principal Financial Officer and Principal
    Accounting Officer)

Date: March 28, 2003

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.

|          |  |                                                |  |                                                                                                                                 |  |               
|--------- |  | ---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|          |  |                                                |  |                                                                                                                                
|Signature |  | Title                                          |  | Date                                                                                                                           
|          |  |                                                |  |                                                                                                                                
|         
|         
|         
|         
|         
|By:       |  | /s/ JOHN T. RAYMONDJohn T. Raymond             |  | Chief Executive Officer and President
    (Principal Executive Officer)                                                         |  | March 28, 2003
|         
|         
|         
|         
|         
|By:       |  | /s/ JAMES C. FLORESJames C. Flores             |  | Executive Chairman of the Board                                                                                                 |  | March 28, 2003
|         
|         
|         
|         
|         
|By:       |  | /s/ WILLIAM M. HITCHCOCKWilliam M. Hitchcock   |  | Director                                                                                                                        |  | March 28, 2003
|         
|         
|         
|         
|         
|By:       |  | /s/ D. MARTIN PHILLIPSD. Martin Phillips       |  | Director                                                                                                                        |  | March 28, 2003
|         
|         
|         
|         
|         
|By:       |  | Robert V. Sinnott                              |  | Director                                                                                                                        |  |               
|         
|         
|         
|         
|         
|By:       |  | /s/ J. TAFT SYMONDSJ. Taft Symonds             |  | Director                                                                                                                        |  | March 28, 2003
|         
|         
|         
|         
|         
|By:       |  | /s/ STEPHEN A. THORINGTONStephen A. Thorington |  | Executive Vice President and
    Chief Financial Officer
    (Principal Financial Officer and
    Principal Accounting Officer) |  | March 28, 2003

59



---



##### Table of Contents








CERTIFICATION


I, John T. Raymond, Chief Executive Officer of Plains
Resources Inc., certify that:

1. I have reviewed this annual report on Form 10-K of
Plains Resources Inc.;

2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;

4. The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and procedures to
    ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the registrants
    disclosure controls and procedures as of a date within
    90 days prior to the filing date of this annual report (the
    Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our conclusions about
    the effectiveness of the disclosure controls and procedures
    based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the design or operation
    of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying officers and I
have indicated in this annual report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.



| |                                             
| | --------------------------------------------
| | /s/ John T. Raymond                         
| |                                             
| | Name: John T. Raymond                       
| | Title: Chief Executive Officer and President

Date: March 28, 2003

60



---



##### Table of Contents








CERTIFICATION


I, Stephen A. Thorington, Chief Financial Officer of Plains
Resources Inc., certify that:

1. I have reviewed this annual report on Form 10-K of
Plains Resources Inc.;

2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;

4. The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and procedures to
    ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the registrants
    disclosure controls and procedures as of a date within
    90 days prior to the filing date of this annual report (the
    Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our conclusions about
    the effectiveness of the disclosure controls and procedures
    based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the design or operation
    of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying officers and I
have indicated in this annual report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.



| |                            
| | ---------------------------
| | /s/ Stephen A. Thorington  
| |                            
| | Name: Stephen A. Thorington

| |        |                                                     
| | ------ | ----------------------------------------------------
| | Title: | Executive Vice President and Chief Financial Officer

Date: March 28, 2003

61



---



##### Table of Contents



PLAINS RESOURCES INC.






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                     |                                                                                                                          |      |  |     | 
|-------------------- | ------------------------------------------------------------------------------------------------------------------------ | ---- |  | --- | 
|                     |                                                                                                                          | Page
|                     |                                                                                                                          |     
|Financial Statements |                                                                                                                          |      |  |    
|                    
|                    
|                    
|                    
|                     | Report of Independent Accountants                                                                                        |      |  | F-2 | 
|                    
|                    
|                    
|                    
|                     | Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                         |      |  | F-3 | 
|                    
|                    
|                    
|                    
|                     | Consolidated Statements of Income for the years
    ended
    December 31, 2002, 2001 and 2000                           |      |  | F-4 | 
|                    
|                    
|                    
|                    
|                     | Consolidated Statements of Cash Flows for the
    years ended
    December 31, 2002, 2001 and 2000                       |      |  | F-5 | 
|                    
|                    
|                    
|                    
|                     | Consolidated Statements of Comprehensive Income
    for the years ended
    December 31, 2002, 2001, and 2000            |      |  | F-6 | 
|                    
|                    
|                    
|                    
|                     | Consolidated Statements of Changes in
    Stockholders Equity for the years ended
    December 31, 2002, 2001, and 2000 |      |  | F-7 | 
|                    
|                    
|                    
|                    
|                     | Notes to Consolidated Financial Statements                                                                               |      |  | F-8 | 

Financial statements of our equity investment, Plains All
American Pipeline, L.P., are included in this report as
Exhibit 99.1.

All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.

F-1



---



##### Table of Contents








REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and



In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Plains Resources Inc. and its
subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United
States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 4 to the consolidated financial statements,
the Company changed its method of accounting for derivative
instruments and hedging activities in connection with its
adoption of Statement of Financial Accounting Standards
No. 133 Accounting for Derivative Instruments and
Hedging Activities, as amended effective January 1,
2001.

PricewaterhouseCoopers LLP

Houston, Texas



F-2



---



##### Table of Contents



PLAINS RESOURCES INC.






CONSOLIDATED BALANCE SHEETS


|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |          |         | 
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------- | 
|                                                     |                                                                                                                                                          |                            
|                                                     |                                                                                                                                                          | December 31,               
|                                                     |                                                                                                                                                          |                            
|                                                     |                                                                                                                                                          | 2002                        |         | 2001    
|                                                     |                                                                                                                                                          |                             |         |         
|                                                     |                                                                                                                                                          |                            
|                                                     |                                                                                                                                                          | (in thousands)             
|                                                    
|                                                    
|                                                    
|                                                    
|ASSETS                                              
|                                                    
|                                                    
|                                                    
|                                                    
|Current Assets                                       |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash and cash equivalents                                                                                                                                |                             | $       | 8,807    |         |   | $       | 1,179    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts receivable  Plains All
    American Pipeline, L.P.                                                                                             |                             |         |         |         |   |         | 13,726   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other accounts receivable                                                                                                                                |                             |         | 1,589    |         |   |         | 6,313    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Commodity hedging contracts and other derivatives                                                                                                        |                             |         |         |         |   |         | 23,257   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Inventory                                                                                                                                                |                             |         | 2,305    |         |   |         | 6,721    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other current assets                                                                                                                                     |                             |         | 1,515    |         |   |         | 1,527    |        
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          |                             | 14,216  |          |         |   | 52,723  |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|Property and Equipment, at cost                      |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     | Oil and gas properties  full cost
    method                                                                                                            |                             |         |          |         |   |         |          |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                          | Subject to amortization     |         |          | 349,517 |   |         |          | 900,898 | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                          | Not subject to amortization |         |          |        |   |         |          | 40,506  | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other property and equipment                                                                                                                             |                             |         | 27       |         |   |         | 4,003    |        
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          |                             | 349,544 |          |         |   | 945,407 |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Less allowance for depreciation, depletion and
    amortization                                                                                          |                             |         | (299,214 | )       |   |         | (437,982 | )      
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          |                             | 50,330  |          |         |   | 507,425 |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|Investment in Plains All American Pipeline,
    L.P. |                                                                                                                                                          |                             | 70,042  |          |         |   | 64,626  |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|Other Assets                                         |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Deferred income taxes                                                                                                                                    |                             |         | 16,957   |         |   |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other                                                                                                                                                    |                             |         | 9,867    |         |   |         | 24,014   |        
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          |                             | 26,824  |          |         |   | 24,014  |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          | $                           | 161,412 |          |         | $ | 648,788 |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|LIABILITIES AND STOCKHOLDERS
    EQUITY            
|                                                    
|                                                    
|                                                    
|                                                    
|Current Liabilities                                  |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts payable and other current liabilities                                                                                                           |                             | $       | 1,361    |         |   | $       | 30,136   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Taxes payable                                                                                                                                            |                             |         | 1,878    |         |   |         | 4,196    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Royalties payable                                                                                                                                        |                             |         | 348      |         |   |         | 9,042    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest payable                                                                                                                                         |                             |         | 78       |         |   |         | 8,286    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Current maturities of long-term debt                                                                                                                     |                             |         | 18,000   |         |   |         | 511      |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other current liabilities                                                                                                                                |                             |         | 4,522    |         |   |         | 10,521   |        
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          |                             | 26,187  |          |         |   | 62,692  |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|Long-Term Debt                                       |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Bank debt                                                                                                                                                |                             |         | 27,000   |         |   |         | 11,500   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Subordinated debt                                                                                                                                        |                             |         |         |         |   |         | 269,539  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other                                                                                                                                                    |                             |         |         |         |   |         | 1,022    |        
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          |                             | 27,000  |          |         |   | 282,061 |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|Other Long-Term Liabilities                          |                                                                                                                                                          |                             | 2,716   |          |         |   | 4,889   |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|Deferred Income Taxes                                |                                                                                                                                                          |                             |        |          |         |   | 44,294  |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|Commitments and Contingencies (Notes 16 and
    17)  |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|Stockholders Equity                                 |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Series D Cumulative Convertible Preferred
    Stock, $1.00 par value, 46,600 shares authorized, issued and
    outstanding, at stated value              |                             |         | 23,300   |         |   |         | 23,300   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Common Stock, $0.10 par value, 50,000,000 shares
    authorized; 28,048,378 and 27,677,411 shares issued at
    December 31, 2002 and 2001, respectively |                             |         | 2,806    |         |   |         | 2,768    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Additional paid-in capital                                                                                                                               |                             |         | 273,162  |         |   |         | 268,520  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Retained earnings (deficit)                                                                                                                              |                             |         | (103,882 | )       |   |         | 37,676   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accumulated other comprehensive income                                                                                                                   |                             |         | (2,862   | )       |   |         | 13,930   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Treasury stock, at cost                                                                                                                                  |                             |         | (87,015  | )       |   |         | (91,342  | )      
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          |                             | 105,509 |          |         |   | 254,852 |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         
|                                                     |                                                                                                                                                          | $                           | 161,412 |          |         | $ | 648,788 |         
|                                                     |                                                                                                                                                          |                             |         |          |         |   |         |         

See notes to consolidated financial statements.

F-3



---



##### Table of Contents



PLAINS RESOURCES INC.






CONSOLIDATED STATEMENTS OF INCOME


|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |           |  
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------- | - | ---- | ------- | ------- | - | - | --------- | --------- | -
|                                                                                |                                                                                        |                                      
|                                                                                |                                                                                        | Year Ended December 31,              
|                                                                                |                                                                                        |                                      
|                                                                                |                                                                                        | 2002                                  |        | 2001    |   | 2000
|                                                                                |                                                                                        |                                       |        |         |   |     
|                                                                                |                                                                                        |                                      
|                                                                                |                                                                                        | (in thousands, except per share data)
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Revenues                                                                        |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Oil sales to Plains All American Pipeline, L.P.                                        |                                       | $      | 18,662  |   |      | $       | 16,030  |   |   | $         | 10,643    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Marketing, transportation, storage and
    terminalling                                |                                       |        |        |   |      |         |        |   |   |           | 6,425,644 |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Gain on sale of assets                                                                 |                                       |        |        |   |      |         |        |   |   |           | 48,188    |  
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                                |                                                                                        |                                       | 18,662 |         |   |      | 16,030  |         |   |   | 6,484,475 |          
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Costs and Expenses                                                              |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Production expenses                                                                    |                                       |        | 6,536   |   |      |         | 7,397   |   |   |           | 5,912     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Oil transportation expenses                                                            |                                       |        | 3,775   |   |      |         | 4,449   |   |   |           | 3,752     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | General and administrative                                                             |                                       |        | 5,747   |   |      |         | 11,083  |   |   |           | 44,468    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Marketing, transportation, storage and
    terminalling                                |                                       |        |        |   |      |         |        |   |   |           | 6,292,615 |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Unauthorized trading losses and related expenses                                       |                                       |        |        |   |      |         |        |   |   |           | 7,963     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Depreciation, depletion and amortization                                               |                                       |        | 4,139   |   |      |         | 4,816   |   |   |           | 28,362    |  
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                                |                                                                                        |                                       | 20,197 |         |   |      | 27,745  |         |   |   | 6,383,072 |          
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Other Income (Expense)                                                          |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Equity in earnings of Plains All American
    Pipeline, L.P.                           |                                       |        | 18,807  |   |      |         | 18,540  |   |   |           |          |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Gains on Plains All American Pipeline, L.P. unit
    transactions and public offerings |                                       |        | 14,512  |   |      |         | 170,157 |   |   |           |          |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Loss on debt extinguishment                                                            |                                       |        | (10,319 | ) |      |         |        |   |   |           | (15,148   | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest expense                                                                       |                                       |        | (5,866  | ) |      |         | (8,974  | ) |   |           | (39,943   | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest and other income (expense)                                                    |                                       |        | 239     |   |      |         | (312    | ) |   |           | 7,068     |  
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                                |                                                                                        |                                       | 17,373 |         |   |      | 179,411 |         |   |   | (48,023   | )        
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Income From Continuing Operations Before
    Income Taxes and Minority Interest |                                                                                        |                                       | 15,838 |         |   |      | 167,696 |         |   |   | 53,380    |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Minority interest in Plains All American
    Pipeline, L.P.                            |                                       |        |        |   |      |         |        |   |   |           | (35,565   | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Income tax expense                                                                     |                                       |        | (6,106  | ) |      |         | (67,072 | ) |   |           | (5,628    | )
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Income From Continuing Operations                                               |                                                                                        |                                       | 9,732  |         |   |      | 100,624 |         |   |   | 12,187    |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Income from discontinued operations, net of tax                                        |                                       |        | 27,800  |   |      |         | 54,693  |   |   |           | 28,749    |  
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Income Before Cumulative Effect of Accounting
    Changes                       |                                                                                        |                                       | 37,532 |         |   |      | 155,317 |         |   |   | 40,936    |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Cumulative effect of accounting changes, net of
    tax benefit                        |                                       |        |        |   |      |         | (1,986  | ) |   |           | (121      | )
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Net Income                                                                      |                                                                                        |                                       | 37,532 |         |   |      | 153,331 |         |   |   | 40,815    |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Cumulative preferred dividends                                                         |                                       |        | (1,400  | ) |      |         | (27,245 | ) |   |           | (14,725   | )
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Net Income Available to Common
    Stockholders                                 |                                                                                        | $                                     | 36,132 |         |   | $    | 126,086 |         |   | $ | 26,090    |          
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Basic Earnings Per Share                                                        |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Continuing operations                                                                  |                                       | $      | 0.35    |   |      | $       | 3.48    |   |   | $         | (0.14     | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Discontinued operations                                                                |                                       |        | 1.16    |   |      |         | 2.59    |   |   | $         | 1.61      |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Change in accounting policy                                                            |                                       |        |        |   |      |         | (0.09   | ) |   | $         | (0.01     | )
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                                |                                                                                        | $                                     | 1.51   |         |   | $    | 5.98    |         |   | $ | 1.46      |          
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|Diluted Earnings Per Share                                                      |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Continuing operations                                                                  |                                       | $      | 0.34    |   |      | $       | 2.81    |   |   | $         | (0.14     | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Discontinued operations                                                                |                                       |        | 1.14    |   |      |         | 2.01    |   |   |           | 1.54      |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Change in accounting policy                                                            |                                       |        |        |   |      |         | (0.07   | ) |   |           | (0.01     | )
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          
|                                                                                |                                                                                        | $                                     | 1.48   |         |   | $    | 4.75    |         |   | $ | 1.39      |          
|                                                                                |                                                                                        |                                       |        |         |   |      |         |         |   |   |           |          

See notes to consolidated financial statements.

F-4



---



##### Table of Contents



PLAINS RESOURCES INC.






CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |          |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ----------------------- | -------- | ------- | - | ---- | -------- | -------- | - | - | ---------- | -------- | -
|                                                                                  |                                                                    |                        
|                                                                                  |                                                                    | Year Ended December 31,
|                                                                                  |                                                                    |                        
|                                                                                  |                                                                    | 2002                    |          | 2001    |   | 2000
|                                                                                  |                                                                    |                         |          |         |   |     
|                                                                                  |                                                                    |                        
|                                                                                  |                                                                    | (in thousands)         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash Flows from Operating Activities                                              |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                    | $                       | 37,532   |         |   | $    | 153,331  |          |   | $ | 40,815     |         
|Items not affecting cash flows from continuing
    operating activities           |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Earnings from discontinued operations, net of
    taxes            |                         |          | (27,800 | ) |      |          | (54,693  | ) |   |            | (28,749  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation, depletion and amortization                           |                         |          | 4,139   |   |      |          | 4,816    |   |   |            | 28,362   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Equity in earnings of Plains All American
    Pipeline, L.P.       |                         |          | (18,807 | ) |      |          | (18,540  | ) |   |            |         |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Distributions received from Plains All American
    Pipeline, L.P. |                         |          | 29,063  |   |      |          | 31,553   |   |   |            |         |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Noncash gains                                                      |                         |          | (14,512 | ) |      |          | (170,157 | ) |   |            | (48,188  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Minority interest in Plains All American
    Pipeline, L.P.        |                         |          |        |   |      |          |         |   |   |            | 35,566   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Deferred income taxes                                              |                         |          | 7,069   |   |      |          | 63,139   |   |   |            | 6,963    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Cumulative effect of adoption of SFAS 133                          |                         |          |        |   |      |          | 1,986    |   |   |            |         |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Change in derivative fair value                                    |                         |          |        |   |      |          | 172      |   |   |            |         |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Noncash compensation expense                                       |                         |          | 1,778   |   |      |          | 4,514    |   |   |            | 2,682    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Allowance for doubtful accounts                                    |                         |          |        |   |      |          |         |   |   |            | 5,000    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other noncash items                                                |                         |          | 1,585   |   |      |          | 630      |   |   |            | 10,925   |  
|Change in assets and liabilities from operating
    activities                    |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accounts receivable and other                                      |                         |          | 2,338   |   |      |          | 11,826   |   |   |            | 95,054   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Inventory                                                          |                         |          | 240     |   |      |          | 1,724    |   |   |            | (13,782  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accounts payable and other                                         |                         |          | (14,987 | ) |      |          | (26,981  | ) |   |            | (161,573 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Pipeline linefill                                                  |                         |          |        |   |      |          |         |   |   |            | (16,679  | )
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Net cash provided by (used in) continuing
    activities                          |                                                                    |                         | 7,638    |         |   |      | 3,320    |          |   |   | (43,604    | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net cash provided by (used in) discontinued
    activities                        |                                                                    |                         | 82,097   |         |   |      | 116,808  |          |   |   | 79,464     |         
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Net cash provided by (used in) operating
    activities                           |                                                                    |                         | 89,735   |         |   |      | 120,128  |          |   |   | 35,860     |         
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Cash Flows from Investing Activities                                              |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition, exploration and developments costs                                   |                                                                    |                         | (5,860   | )       |   |      | (6,032   | )        |   |   | (8,221     | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Additions to other property and assets                                            |                                                                    |                         | (64      | )       |   |      | (434     | )        |   |   | (2,767     | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Plains All American Pipeline, L.P. acquisitions
    and assets                    |                                                                    |                         |         |         |   |      |         |          |   |   | (12,219    | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from the sale of Plains All American
    Pipeline, L.P. units            |                                                                    |                         |         |         |   |      | 106,941  |          |   |   |           |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Investment in Plains All American Pipeline, L.P.                                  |                                                                    |                         | (1,334   | )       |   |      | (3,978   | )        |   |   |           |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from asset sales                                                         |                                                                    |                         |         |         |   |      |         |          |   |   | 224,261    |         
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Net cash provided by (used in) continuing
    activities                          |                                                                    |                         | (7,258   | )       |   |      | 96,497   |          |   |   | 201,054    |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net cash provided by (used in) discontinued
    activities                        |                                                                    |                         | (64,158  | )       |   |      | (125,880 | )        |   |   | (70,871    | )       
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Net cash provided by (used in) investing
    activities                           |                                                                    |                         | (71,416  | )       |   |      | (29,383  | )        |   |   | 130,183    |         
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Cash Flows from Financing Activities                                              |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from long-term debt                                                      |                                                                    |                         | 45,000   |         |   |      | 204,900  |          |   |   | 1,698,575  |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from short-term debt                                                     |                                                                    |                         |         |         |   |      |         |          |   |   | 51,300     |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from sale of common stock                                                |                                                                    |                         | 5,210    |         |   |      | 9,169    |          |   |   | 2,301      |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of senior subordinated notes                                             |                                                                    |                         |         |         |   |      | (7,550   | )        |   |   |           |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments of long-term debt                                              |                                                                    |                         | (278,950 | )       |   |      | (220,700 | )        |   |   | (1,798,675 | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments of short-term debt                                             |                                                                    |                         |         |         |   |      |         |          |   |   | (108,719   | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of common stock                                                          |                                                                    |                         |         |         |   |      | (67,729  | )        |   |   | (23,613    | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Costs incurred in connection with financing
    arrangements                      |                                                                    |                         | (632     | )       |   |      |         |          |   |   | (6,748     | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Increase in restricted cash                                                       |                                                                    |                         | (5,000   | )       |   |      |         |          |   |   |           |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Preferred stock dividends                                                         |                                                                    |                         | (1,400   | )       |   |      | (8,698   | )        |   |   | (13,409    | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions to Plains All American Pipeline,
    L.P. unitholders               |                                                                    |                         |         |         |   |      |         |          |   |   | (29,432    | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Other                                                                             |                                                                    |                         | 363      |         |   |      | (102     | )        |   |   | (260       | )       
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Net cash provided by (used in) continuing
    activities                          |                                                                    |                         | (235,409 | )       |   |      | (90,710  | )        |   |   | (228,680   | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net cash provided by (used in) discontinued
    activities                        |                                                                    |                         | 225,748  |         |   |      | (511     | )        |   |   | (511       | )       
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Net cash provided by (used in) financing
    activities                           |                                                                    |                         | (9,661   | )       |   |      | (91,221  | )        |   |   | (229,191   | )       
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Net increase (decrease) in cash and cash
    equivalents                          |                                                                    |                         | 8,658    |         |   |      | (476     | )        |   |   | (63,148    | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Decrease in cash due to deconsolidation of Plains
    All American Pipeline, L.P. |                                                                    |                         |         |         |   |      | (3,425   | )        |   |   |           |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Decrease in cash due to spin-off of Plains
    Exploration & Production Company   |                                                                    |                         | (1,028   | )       |   |      |         |          |   |   |           |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents, beginning of year                                      |                                                                    |                         | 1,179    |         |   |      | 5,080    |          |   |   | 68,228     |         
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         
|Cash and cash equivalents, end of year                                            |                                                                    | $                       | 8,809    |         |   | $    | 1,179    |          |   | $ | 5,080      |         
|                                                                                  |                                                                    |                         |          |         |   |      |          |          |   |   |            |         

See notes to consolidated financial statements

F-5



---



##### Table of Contents



PLAINS RESOURCES INC.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        |  |   |   | 
|---------------------------------- | ----------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---- | ------- | ------- | ------- | - | ------ | ------ | ------ |  | - | - | 
|                                   |                               |                                                                                                                             
|                                   |                               | Year Ended December 31,                                                                                                     
|                                   |                               |                                                                                                                             
|                                   |                               | 2002                                                                                                                         |                                                                                           | 2001 |         | 2000   
|                                   |                               |                                                                                                                              |                                                                                           |      |         |        
|                                   |                               |                                                                                                                             
|                                   |                               | (in thousands)                                                                                                              
|                                  
|                                  
|                                  
|                                  
|Net Income                         |                               | $                                                                                                                            | 37,532                                                                                    |      |         | $       | 153,331 |   |        | $      | 40,815 | 
|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 
|Other Comprehensive Income (Loss): |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 
|                                  
|                                  
|                                  
|                                  
|                                   | From continuing operations:   |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        |  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Cumulative effect of accounting change, net of
    tax benefit of $71                                                        |                                                                                           |      |        |         |         |   | (111   | )      |        |  |  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Commodity hedging contracts:                                                                                                 |                                                                                           |      |         |         |         |   |        |        |        |  |   |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               |                                                                                                                              | Change in fair value, net of taxes of $(223) and
    $75                                  |      |         | (1,003  | )       |   |        | 766    |        |  |   |  | 
|                                  
|                                  
|                                  
|                                  
|                                   |                               |                                                                                                                              | Reclassification adjustment for settled contracts
    net of tax benefit of $7            |      |         | (10     | )       |   |        |       |        |  |   |  | 
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Interest rate swap, net of taxes of $(13) and $84                                                                            |                                                                                           |      | (20     | )       |         |   | 131    |        |        |  |  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Minimum pension liability adjustment, net of
    taxes of $66 and $(272)                                                     |                                                                                           |      | 106     |         |         |   | (421   | )      |        |  |  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Equity in other comprehensive income changes of
    Plains All American Pipeline, L.P., net of taxes of $56 and
    $(1,500) |                                                                                           |      | 19      |         |         |   | (2,319 | )      |        |  |  |  
|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 
|                                   |                               |                                                                                                                              | (908                                                                                      | )    |         |         | (1,954  | ) |        |        |       | 
|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 
|                                   | From discontinued operations: |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        |  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Commodity hedging contracts:                                                                                                 |                                                                                           |      |         |         |         |   |        |        |        |  |   |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               |                                                                                                                              | Cumulative effect of accounting change, net of
    tax benefit of $4,454                  |      |         |        |         |   |        | 6,967  |        |  |   |  | 
|                                  
|                                  
|                                  
|                                  
|                                   |                               |                                                                                                                              | Change in fair value, net of taxes of $(24,970)
    and $7,634                            |      |         | (37,298 | )       |   |        | 10,978 |        |  |   |  | 
|                                  
|                                  
|                                  
|                                  
|                                   |                               |                                                                                                                              | Reclassification adjustment for settled contracts
    net of taxes of $(5,897) and $1,388 |      |         | 8,850   |         |   |        | (2,061 | )      |  |   |  | 
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Interest rate swap, net of tax benefit of $119                                                                               |                                                                                           |      | (178    | )       |         |   |       |        |        |  |  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                               | Minimum pension liability adjustment, net of tax
    benefit of $77                                                          |                                                                                           |      | (116    | )       |         |   |       |        |        |  |  |  
|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 
|                                   |                               |                                                                                                                              | (28,742                                                                                   | )    |         |         | 15,884  |   |        |        |       | 
|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 
|                                   |                               | Other comprehensive income (loss)                                                                                            |                                                                                           |      | (29,650 | )       |         |   | 13,930 |        |        |  |  |  
|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 
|Comprehensive Income               |                               | $                                                                                                                            | 7,882                                                                                     |      |         | $       | 167,261 |   |        | $      | 40,815 | 
|                                   |                               |                                                                                                                              |                                                                                           |      |         |         |         |   |        |        |        | 

See notes to consolidated financial statements.

F-6



---



##### Table of Contents



PLAINS RESOURCES INC.






CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY


|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |          |   | 
|--------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------------ |  | ------ | - | ------ | ------- | -------- | -------- | ------ |  | ------ | - | - | ------- | ------- | - |  |  | ------ | - | - | ------- | -------- | - | 
|                                                    |                                                                      |                                                        |  |        |   |       
|                                                    |                                                                      | 2002                                                   |  | 2001   |   | 2000  
|                                                    |                                                                      |                                                        |  |        |   |       
|                                                    |                                                                      | Shares                                                 |  | Amount |   | Shares |         | Amount   |          | Shares |  | Amount
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |       
|                                                    |                                                                      |                                                       
|                                                    |                                                                      | (in thousands)                                        
|                                                   
|                                                   
|                                                   
|                                                   
|Series D Cumulative Convertible Preferred
    Stock |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Balance, beginning of year                                           |                                                        |  | 47     |   |        | $       | 23,300   |          |        |  | 47     |   |   | $       | 23,300  |   |  |  | 47     |   |   | $       | 23,300   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Preferred stock dividends                                            |                                                        |  |        |   |        |         |          |          |        |  |       |   |   |         |        |   |  |  |       |   |   |         |         |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                    | Balance, end of year                                                 |                                                        |  | 47     |   |        |         | 23,300   |          |        |  | 47     |   |   |         | 23,300  |   |  |  | 47     |   |   |         | 23,300   |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|Series H Cumulative Convertible Preferred
    Stock |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Balance, beginning of year                                           |                                                        |  |       |   |        |         |         |          |        |  | 170    |   |   |         | 84,785  |   |  |  |       |   |   |         |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Shares issued upon conversion of redeemable
    preferred stock      |                                                        |  |       |   |        |         |         |          |        |  |       |   |   |         |        |   |  |  | 170    |   |   |         | 84,785   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Conversion of preferred stock into common                            |                                                        |  |       |   |        |         |         |          |        |  | (170   | ) |   |         | (84,785 | ) |  |  |       |   |   |         |         |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                    | Balance, end of year                                                 |                                                        |  |       |   |        |         |         |          |        |  |       |   |   |         |        |   |  |  | 170    |   |   |         | 84,785   |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|Common Stock                                        |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Balance, beginning of year                                           |                                                        |  | 27,677 |   |        |         | 2,768    |          |        |  | 18,747 |   |   |         | 1,875   |   |  |  | 17,924 |   |   |         | 1,792    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Common stock issued upon exercise of options,
    warrants and other |                                                        |  | 371    |   |        |         | 38       |          |        |  | 1,041  |   |   |         | 103     |   |  |  | 557    |   |   |         | 56       |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Conversion of preferred stock into common                            |                                                        |  |       |   |        |         |         |          |        |  | 7,889  |   |   |         | 790     |   |  |  | 266    |   |   |         | 27       |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                    | Balance, end of year                                                 |                                                        |  | 28,048 |   |        |         | 2,806    |          |        |  | 27,677 |   |   |         | 2,768   |   |  |  | 18,747 |   |   |         | 1,875    |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|Additional Paid-in Capital                          |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Balance, beginning of year                                           |                                                        |  |        |   |        |         | 268,520  |          |        |  |        |   |   |         | 139,203 |   |  |  |        |   |   |         | 130,027  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Common stock issued upon exercise of options,
    warrants and other |                                                        |  |        |   |        |         | 4,398    |          |        |  |        |   |   |         | 18,429  |   |  |  |        |   |   |         | 5,223    |  
|                                                    | Restricted stock awards                                              |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |          |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                      | Issuance of restricted stock                           |  |        |   |        |         |          | 2,955    |        |  |        |   |   |         |         |  |  |  |        |   |   |         |          |  | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                      | Deferred compensation                                  |  |        |   |        |         |          | (2,711   | )      |  |        |   |   |         |         |  |  |  |        |   |   |         |          |  | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Conversion of preferred stock into common                            |                                                        |  |        |   |        |         |         |          |        |  |        |   |   |         | 110,888 |   |  |  |        |   |   |         | 3,958    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Redemption of preferred stock                                        |                                                        |  |        |   |        |         |         |          |        |  |        |   |   |         |        |   |  |  |        |   |   |         | (5       | )
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                    | Balance, end of year                                                 |                                                        |  |        |   |        |         | 273,162  |          |        |  |        |   |   |         | 268,520 |   |  |  |        |   |   |         | 139,203  |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|Retained Earnings (Deficit)                         |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Balance, beginning of year                                           |                                                        |  |        |   |        |         | 37,676   |          |        |  |        |   |   |         | (88,410 | ) |  |  |        |   |   |         | (114,500 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net income                                                           |                                                        |  |        |   |        |         | 37,532   |          |        |  |        |   |   |         | 153,331 |   |  |  |        |   |   |         | 40,815   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Preferred stock dividends                                            |                                                        |  |        |   |        |         | (1,400   | )        |        |  |        |   |   |         | (27,245 | ) |  |  |        |   |   |         | (14,725  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Treasury stock issued for less than cost                             |                                                        |  |        |   |        |         | (927     | )        |        |  |        |   |   |         |        |   |  |  |        |   |   |         |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                      | Spinoff of Plains Exploration & Production
    Company |  |        |   |        |         |          | (176,763 | )      |  |        |   |   |         |         |  |  |  |        |   |   |         |          |  | 
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                    | Balance, end of year                                                 |                                                        |  |        |   |        |         | (103,882 | )        |        |  |        |   |   |         | 37,676  |   |  |  |        |   |   |         | (88,410  | )
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|Accumulated Other Comprehensive
    Income          |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Balance, beginning of year                                           |                                                        |  |        |   |        |         | 13,930   |          |        |  |        |   |   |         |        |   |  |  |        |   |   |         |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other comprehensive income                                           |                                                        |  |        |   |        |         | (29,650  | )        |        |  |        |   |   |         | 13,930  |   |  |  |        |   |   |         |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Spinoff of Plains Exploration & Production
    Company               |                                                        |  |        |   |        |         | 12,858   |          |        |  |        |   |   |         |        |   |  |  |        |   |   |         |         |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                    | Balance, end of year                                                 |                                                        |  |        |   |        |         | (2,862   | )        |        |  |        |   |   |         | 13,930  |   |  |  |        |   |   |         |         |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|Treasury Stock                                      |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Balance, beginning of year                                           |                                                        |  | (4,121 | ) |        |         | (91,342  | )        |        |  | (1,291 | ) |   |         | (23,613 | ) |  |  |       |   |   |         |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of common stock                                             |                                                        |  |       |   |        |         |         |          |        |  | (2,830 | ) |   |         | (67,729 | ) |  |  | (1,291 | ) |   |         | (23,613  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Common stock issued upon exercise of options                         |                                                        |  | 267    |   |        |         | 4,327    |          |        |  |       |   |   |         |        |   |  |  |       |   |   |         |         |  
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|                                                    | Balance, end of year                                                 |                                                        |  | (3,854 | ) |        |         | (87,015  | )        |        |  | (4,121 | ) |   |         | (91,342 | ) |  |  | (1,291 | ) |   |         | (23,613  | )
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         
|Total                                               |                                                                      |                                                        |  |        |   | $      | 105,509 |          |          |        |  |        |   | $ | 254,852 |         |   |  |  |        |   | $ | 137,140 |         
|                                                    |                                                                      |                                                        |  |        |   |        |         |          |          |        |  |        |   |   |         |         |   |  |  |        |   |   |         |         

See notes to consolidated financial statements.

F-7



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##### Table of Contents



PLAINS RESOURCES INC.






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 and for periods
prior to January 1, 2001, Plains All American Pipeline,
L.P. (PAA). As discussed in Note 2, in June
2001 we reduced our interest in PAA from 54% to 33% and as a
result we no longer have the ability to exercise control over
the operations of PAA. Accordingly, effective January 1,
2001, our minority interest investment in PAA is accounted for
using the equity method of accounting. Under the equity method,
we no longer consolidate the assets, liabilities and operating
activities of PAA, but instead our ownership interest in PAA is
reflected as an investment in the balance sheet and we record
our share of PAAs results of operations. For periods prior
to January 1, 2001 the assets, liabilities and results of
operations of PAA are consolidated in our financial statements

On July 3, 2002 we contributed all of the capital stock of
our subsidiaries that owned oil and gas properties offshore
California and in Illinois to our wholly-owned subsidiary Plains
Exploration & Production Company (PXP). PXP also
directly owned our onshore California oil and gas properties. We
also contributed to PXP the intercompany payables that PXP and
its subsidiaries owed to us.

On July 3, 2002 PXP (i) issued $200.0 million of
8.75% senior subordinated notes due 2012; and (ii) entered
into a $300.0 million revolving credit facility. PXP
distributed the net proceeds of $195.3 million from the
8.75% notes and $116.7 million in initial borrowings under
the credit facility to us and we used such amounts to redeem our
10.25% senior subordinated notes on August 2, 2002
($287.0 million) and to repay amounts outstanding under our
credit facility ($25.0 million).

On December 18, 2002 we distributed 100 percent of the
common shares of PXP to the holders of record of our common
stock as of December 11, 2002 (the spin-off).
Each stockholder received one share of PXP common stock for each
share of our common stock held. Prior to the spin-off, we
borrowed $45.0 million under a new term loan facility and
used a portion of the proceeds to make a $40.0 million cash
capital contribution to PXP. In addition, prior to the spin-off
we transferred to PXP $12.2 million in cash and certain
assets and PXP assumed certain liabilities, primarily related to
land, unproved oil and gas properties, office equipment and
pension obligations.

We received a letter ruling from the IRS on May 22, 2002,
as supplemented on November 5, 2002, to the effect that the
spin-off will qualify as a tax-free distribution. A letter
ruling from the IRS, while generally binding on the IRS, may
under certain circumstances be retroactively revoked or modified
by the IRS. A letter ruling is based on the facts and
representations presented in the request for that ruling.
Generally, an IRS letter ruling will not be revoked or modified
retroactively if there has been no misstatement or omission of
material facts, the facts at the time of the transaction are not
materially different from the facts upon which the IRS letter
ruling was based, and there has been no change in the applicable
law. We are not aware of any facts or circumstances that would
cause the representations in the ruling request to be untrue or
incomplete in any material respect.

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 11.

All significant intercompany transactions have been eliminated.
Certain reclassifications have been made to the prior year
statements to conform to the current year presentation.

We are an independent energy company that is currently engaged
in the Upstream oil and gas business. The Upstream
business acquires, exploits, develops, explores for and produces
oil and gas. Our Upstream activities are all located in the
United States. Prior to the reduction in our

F-8



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interest in PAA, we also participated directly in the
Midstream oil and gas business, which consists of
the marketing, transportation and terminalling of oil. We
continue to participate indirectly in the Midstream oil and gas
business through our minority interest investment in PAA. All of
PAAs Midstream activities are conducted in the United
States and Canada.

Significant Accounting
Policies

Oil and Gas Properties.We follow the full cost method of
accounting whereby all costs associated with property
acquisition, exploration, exploitation and development
activities are capitalized. Such costs include internal general
and administrative costs such as payroll and related benefits
and costs directly attributable to employees engaged in
acquisition, exploration, exploitation and development
activities. General and administrative costs associated with
production, operations, marketing and general corporate
activities are expensed as incurred. These capitalized costs
along with our estimate of future development and abandonment
costs, net of salvage values and other considerations, are
amortized to expense by the unit-of-production method using
engineers estimates of proved oil and gas reserves. The
costs of unproved properties are excluded from amortization
until the properties are evaluated. Interest is capitalized on
oil and gas properties not subject to amortization and in the
process of development. Proceeds from the sale of oil and gas
properties are accounted for as reductions to capitalized costs
unless such sales involve a significant change in the
relationship between costs and the estimated value of proved
reserves, in which case a gain or loss is recognized.
Unamortized costs of proved properties are subject to a ceiling
which limits such costs to the present value of estimated future
cash flows from proved oil and gas reserves of such properties
(including the effect of any related hedging activities) reduced
by future operating expenses, development expenditures and
abandonment costs (net of salvage values), and estimated future
income taxes thereon.

Other Property and Equipment.Other property and
equipment at December 31, 2002 is recorded at cost and
consists of computer hardware and software and is fully
depreciated. Net gains or losses on property and equipment
disposed of are included in interest and other income in the
period in which the transaction occurs.

Use of Estimates.The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates
made by management include (1) oil and gas reserves,
(2) depreciation, depletion and amortization, including
future abandonment costs, (3) income taxes and related
valuation allowance, and (4) accrued liabilities. Although
management believes these estimates are reasonable, actual
results could differ from these estimates.

Cash and Cash Equivalents.Cash and cash equivalents
consist of all demand deposits and funds invested in highly
liquid instruments with original maturities of three months or
less. At December 31, 2002 and 2001, the majority of cash
and cash equivalents is concentrated in two institutions and at
times may exceed federally insured limits. We periodically
assess the financial condition of the institutions and believe
that our credit risk is minimal.

Inventory. Our oil inventories are carried at cost.
Materials and supplies inventory is stated at the lower of cost
to produce or market with cost determined on an average cost
method.

F-9



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventory consists of the following (in thousands):

|                        |                        |              |       |       |  |   |       |       | 
|----------------------- | ---------------------- | ------------ | ----- | ----- |  | - | ----- | ----- | 
|                        |                        |             
|                        |                        | December 31,
|                        |                        |             
|                        |                        | 2002         |       | 2001 
|                        |                        |              |       |      
|Continuing operations   |                        |              |       |       |  |   |       |      
|                       
|                       
|                       
|                       
|                        | Oil                    |              | $     | 1,482 |  |   | $     | 1,039 | 
|                       
|                       
|                       
|                       
|                        | Materials and supplies |              |       | 823   |  |   |       | 1,053 | 
|                        |                        |              |       |       |  |   |       |      
|                        |                        |              | 2,305 |       |  |   | 2,092 |      
|                       
|                       
|                       
|                       
|Discontinued operations |                        |              |      |       |  |   | 4,629 |      
|                        |                        |              |       |       |  |   |       |      
|                        |                        | $            | 2,305 |       |  | $ | 6,721 |      
|                        |                        |              |       |       |  |   |       |      

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

|                        |                                                   |              |       |       |  |   |        |       | 
|----------------------- | ------------------------------------------------- | ------------ | ----- | ----- |  | - | ------ | ----- | 
|                        |                                                   |             
|                        |                                                   | December 31,
|                        |                                                   |             
|                        |                                                   | 2002         |       | 2001 
|                        |                                                   |              |       |      
|Continuing operations   |                                                   |              |       |       |  |   |        |      
|                       
|                       
|                       
|                       
|                        | Restricted cash                                   |              | $     | 5,000 |  |   | $      |      | 
|                       
|                       
|                       
|                       
|                        | Commodity hedging contracts and other derivatives |              |       | 29    |  |   |        | 34    | 
|                       
|                       
|                       
|                       
|                        | Debt issue costs, net                             |              |       | 612   |  |   |        | 3,566 | 
|                       
|                       
|                       
|                       
|                        | Receivable from PXP                               |              |       | 3,202 |  |   |        |      | 
|                       
|                       
|                       
|                       
|                        | Other                                             |              |       | 1,024 |  |   |        | 1,587 | 
|                        |                                                   |              |       |       |  |   |        |      
|                        |                                                   |              | 9,867 |       |  |   | 5,187  |      
|                       
|                       
|                       
|                       
|Discontinued operations |                                                   |              |      |       |  |   | 18,827 |      
|                        |                                                   |              |       |       |  |   |        |      
|                        |                                                   | $            | 9,867 |       |  | $ | 24,014 |      
|                        |                                                   |              |       |       |  |   |        |      

Costs incurred in connection with the issuance of long-term debt
are capitalized and amortized using the straight-line method
over the term of the related debt. Use of the straight-line
method does not differ materially from the effective
interest method of amortization.

Federal and State Income Taxes.Income taxes are
accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires recognition
of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of
assets and liabilities using tax rates in effect for the year in
which the differences are expected to reverse. A valuation
allowance is established to reduce deferred tax assets if it is
more than likely than not that the related tax benefits will not
be realized.

Under the terms of a tax allocation agreement, PXPs
taxable income or loss prior to the spin-off is included in the
consolidated income tax returns filed by us. Each member of a
consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the
consolidated group. Accordingly, although this agreement
allocates tax liabilities between us and PXP during the period
in which PXP is included in our consolidated group, we could be
liable if any federal tax liability is incurred, but not
discharged, by any other member of our consolidated group. To
the extent our net operating losses are used in the consolidated
return to offset PXPs taxable income from operations
during the period January 1, 2002 through the spin-off, PXP
will reimburse us for the reduction in our federal income tax
liability resulting from the utilization of such net operating
losses, but such reimbursement shall not exceed
$3.0 million exclusive of any interest

F-10



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accruing under the agreement. At December 31, 2002 current
assets and other assets include $0.2 million and
$3.2 million, respectively, of income taxes receivable from
PXP with respect to periods subsequent to the reorganization and
the reimbursement due us with respect to state taxes and the
utilization of net operating losses.

Revenue Recognition.Oil revenue from our interests in
producing wells is recognized when the production is delivered
and the title transfers. Transportation costs incurred in
connection with such operations are reflected as an operating
cost.

PAAs gathering and marketing revenues are accrued at the
time title to the product sold transfers to the purchaser, which
occurs upon receipt of the product by the purchaser, and
purchases are accrued at the time title to the product purchased
transfers to PAA, which occurs upon our receipt of the product.
PAAs terminalling and storage revenues are recognized at
the time service is performed and revenues for the
transportation of oil are recognized based upon regulated and
non-regulated tariff rates and the related transported volumes.

Derivative Financial Instruments (Hedging).We utilize
various derivative instruments to reduce our exposure to
decreases in the market price of oil. The derivative instruments
consist primarily of oil swap and option contracts entered into
with financial institutions. We also utilize interest rate swaps
to manage the interest rate exposure on our long-term debt.

Stock-based Employee Compensation. In October 1995, the
Financial Accounting Standards Board issued SFAS 123, which
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 APB 25. We have elected to follow APB 25 and
related interpretations in accounting for our employee stock
options because, as discussed below, the alternative fair value
accounting provided for under SFAS 123 requires the use of
option valuation models that were not developed for use in
valuing 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.

Pro forma information regarding net income and earnings per
share is required by SFAS 123 and has been determined as if
we had accounted for our employee stock options under the fair
value method as provided therein. 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 2002, 2001 and 2000: risk-free interest rates of
3.0% for 2002, 2.5% for 2001 and 6.3% for 2000; a volatility
factor of the expected market price of our common stock of 0.33
for 2002, 0.50 for 2001 and 0.50 for 2000; no expected
dividends; and weighted average expected option lives of
4.4 years in 2002, 5.3 years in 2001 and
2.6 years in 2000. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense
over the options vesting period.

The Black-Scholes option valuation model and other existing
models were developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the
input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. Because our
employee stock options have characteristics significantly
different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair
value estimate, in our opinion, the existing models do not
provide a reliable single measure of the fair value of its
employee stock options.

F-11



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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).

|                                                                                                                                                    |                     |                         |        |      |  |      |         |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ----------------------- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                     |                        
|                                                                                                                                                    |                     | Year Ended December 31,
|                                                                                                                                                    |                     |                        
|                                                                                                                                                    |                     | 2002                    |        | 2001 |  | 2000
|                                                                                                                                                    |                     |                         |        |      |  |     
|Net income, as reported                                                                                                                             |                     | $                       | 36,132 |      |  | $    | 126,086 |      |  | $ | 26,090 |     
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Add: Stock based employee compensation expense
    included in reported net income, net of related tax effects                                      |                     |                         | 929    |      |  |      | 2,586   |      |  |   |       |     
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                     |                         | (4,337 | )    |  |      | (3,002  | )    |  |   | (792   | )   
|                                                                                                                                                    |                     |                         |        |      |  |      |         |      |  |   |        |     
|Pro forma net income                                                                                                                                |                     | $                       | 32,724 |      |  | $    | 125,670 |      |  | $ | 25,298 |     
|                                                                                                                                                    |                     |                         |        |      |  |      |         |      |  |   |        |     
|Earnings per share:                                                                                                                                 |                     |                         |        |      |  |      |         |      |  |   |        |     
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                    | Basic-as reported   |                         | $      | 1.51 |  |      | $       | 5.98 |  |   | $      | 1.46 | 
|                                                                                                                                                    |                     |                         |        |      |  |      |         |      |  |   |        |     
|                                                                                                                                                    | Basic-pro forma     |                         | $      | 1.37 |  |      | $       | 5.96 |  |   | $      | 1.42 | 
|                                                                                                                                                    |                     |                         |        |      |  |      |         |      |  |   |        |     
|                                                                                                                                                    | Diluted-as reported |                         | $      | 1.48 |  |      | $       | 4.75 |  |   | $      | 1.39 | 
|                                                                                                                                                    |                     |                         |        |      |  |      |         |      |  |   |        |     
|                                                                                                                                                    | Diluted-pro forma   |                         | $      | 1.34 |  |      | $       | 4.74 |  |   | $      | 1.35 | 
|                                                                                                                                                    |                     |                         |        |      |  |      |         |      |  |   |        |     

Sale of Units by PAA.When PAA sells additional units to
a third party, resulting in a change in our percentage ownership
interest, we recognize a gain or loss in our consolidated
statement of operations if the selling price per unit is more or
less than our average carrying amount per unit.

Recent Accounting Pronouncements.Statement of Accounting
Standards, or SFAS, No. 143, Accounting for Asset
Retirement Obligations becomes effective January 1,
2003. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in
the carrying amount 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. For all
historical periods presented, we have included estimated future
costs of abandonment and dismantlement in our full cost
amortization base and these costs have been amortized as a
component of our depletion expense.

We have completed our assessment of SFAS No. 143 and we
estimate that at January 1, 2003 the present value of our
future Asset Retirement Obligation (ARO) for oil and
gas properties and equipment is approximately $2.6 million.
We estimate that the cumulative effect of our adoption of SFAS
No. 143 and the change in accounting principle will result
in an increase in net income during the first quarter of 2003 of
$1.5 million (reflecting a $2.9 million decrease in
accumulated DD&A, partially offset by $1.3 million in
accretion expense), $0.9 million net of taxes. We estimate
that we will record a liability of $2.6 million and an
asset of $1.2 million in connection with the adoption of
SFAS 143. There will be no impact on our cash flows as a
result of adopting SFAS No. 143.

In July 2002, SFAS No. 146, Accounting For Costs
Associated with Exit or Disposal Activities was issued.
SFAS 146 is effective for exit or disposal activities initiated
after December 31, 2002 and

F-12



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

does not require previously issued financial statements to be
restated. We will account for exit or disposal activities
initiated after December 31, 2002 in accordance with the
provisions of SFAS 146.

In December 2002, SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123 was issued. SFAS 148 amends
SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS 148
are effective for financial statements for fiscal years ending
after December 15, 2002. SFAS 148 does not change the
provisions of SFAS 123 that permit entities to continue to
apply the intrinsic value method of Accounting Principles
Bulletin No. 25, Accounting for Stock Issued to
Employees. We will continue to account for stock-based
compensation on accordance with the provisions of APB
No. 25. We have provided the disclosures required by
SFAS 148 in these financial statements.

In November 2002 FASB interpretation, or FIN 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantee of Indebtedness of
Others was issued. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under that guarantee.
FIN 45s provisions for initial recognition and
measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The
guarantors previous accounting for guarantees that were
issued before the date of FIN 45s initial application
may not be revised or restated to reflect the effect of the
recognition and measurement provisions of FIN 45. The
disclosure requirements are effective for financial statements
of both interim and annual periods that end after
December 15, 2002. The disclosures required by FIN 45
are included in these 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.

In the fourth quarter of 2000, we adopted Securities and
Exchange Commission (SEC) Staff Accounting Bulletin
101, Revenue Recognition in Financial Statements
(SAB 101). As a result, we record revenue from
oil production in the period it is sold as opposed to when it is
produced and carry any unsold production as inventory valued at
historical cost to produce. The total effect of implementing SAB
101 was to reduce reported sales volumes by 144,000 barrels for
2000 and net income for the year by $175,000, including a
$121,000 reduction for the cumulative effect of prior years.

Note 2  Discontinued Operations

As discussed in Note 1, on December 18, 2002 we
distributed the common shares of PXP to the holders of record of
our common stock as of December 11, 2002. As a result of
the spin-off, we have accounted for the business of PXP as a
discontinued operation.

F-13



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The results of operations of PXP, which have been reclassified
as discontinued operations for all periods presented in the
Consolidated Statements of Income, are summarized as follows (in
thousands):

|                                    |  |                         |          |      |  |      |         |   |  |   |         |  
|----------------------------------- |  | ----------------------- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                    |  |                        
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  | 2002                    |          | 2001 |  | 2000
|                                    |  |                         |          |      |  |     
|Revenues                            |  | $                       | 181,184  |      |  | $    | 204,139 |   |  | $ | 142,451 |  
|                                   
|                                   
|                                   
|                                   
|Costs and expenses                  |  |                         | (115,195 | )    |  |      | (98,110 | ) |  |   | (81,395 | )
|                                    |  |                         |          |      |  |      |         |   |  |   |         |  
|Income from operations              |  |                         | 65,989   |      |  |      | 106,029 |   |  |   | 61,056  |  
|                                   
|                                   
|                                   
|                                   
|Other income (expense)              |  |                         | (20,961  | )    |  |      | (16,948 | ) |  |   | (15,542 | )
|                                    |  |                         |          |      |  |      |         |   |  |   |         |  
|Income before income taxes          |  |                         | 45,028   |      |  |      | 89,081  |   |  |   | 45,514  |  
|                                   
|                                   
|                                   
|                                   
|Income tax expense                  |  |                         | (17,228  | )    |  |      | (34,388 | ) |  |   | (16,765 | )
|                                    |  |                         |          |      |  |      |         |   |  |   |         |  
|Income from discontinued operations |  | $                       | 27,800   |      |  | $    | 54,693  |   |  | $ | 28,749  |  
|                                    |  |                         |          |      |  |      |         |   |  |   |         |  

Amounts included in our Consolidated Balance Sheet at
December 31, 2001 with respect to the business of PXP are
summarized as follows (in thousands):

|                                         |  |              |         | 
|---------------------------------------- |  | ------------ | ------- | 
|                                         |  | December 31,
|                                         |  | 2001        
|                                         |  |             
|Assets                                   |  |              |         | 
|                                        
|                                        
|                                        
|                                        
|Current assets                           |  | $            | 42,811  | 
|                                        
|                                        
|                                        
|                                        
|Property and equipment, net              |  |              | 455,117 | 
|                                        
|                                        
|                                        
|                                        
|Other assets                             |  |              | 18,827  | 
|                                        
|                                        
|                                        
|                                        
|Liabilities and Stockholders
    Equity |  |              |         | 
|                                        
|                                        
|                                        
|                                        
|Current liabilities                      |  |              | 41,879  | 
|                                        
|                                        
|                                        
|                                        
|Long-term debt                           |  |              | 1,022   | 
|                                        
|                                        
|                                        
|                                        
|Other long-term liabilities              |  |              | 1,413   | 
|                                        
|                                        
|                                        
|                                        
|Accumulated other comprehensive income   |  |              | 15,884  | 

Note 3  Investment in Plains All American
Pipeline, L.P.

At December 31, 2002, our aggregate 25% 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) 20% or approximately
7.9 million of the common units (including approximately
1.3 million Class B common units). Our ownership in
PAA decreased in 2002 and 2001 as a result of the sale of a
portion of our interest and PAAs public equity offerings.

Sale of PAA Interest

In a series of transactions on June 8, 2001, we sold a
portion of our interest in PAA to a group of investors and
certain members of PAA management for aggregate consideration of
approximately $155.2 million (consisting of
$110.0 million in cash and $45.2 million in
Series F Cumulative Convertible Preferred Stock [the
Series F Preferred Stock]) and recognized a
pre-tax gain of $128.3 million in connection with this
sale. In addition, certain holders of the Series F
Preferred Stock and Series H Convertible Preferred Stock
(the Series H Preferred Stock) converted their
shares into shares of our common stock. We sold
(i) 5.2 million Subordinated Units of PAA (the
Subordinated Units) for $69.5 million in cash
and the redemption of 23,108 shares of Series F Preferred
Stock, valued at $45.2 million; and (ii) an aggregate
54% ownership interest in the general

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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

partner of PAA for $40.5 million in cash. In addition, the
investor group and certain other stockholders converted 26,892
shares of Series F Preferred Stock and 132,022 shares of
Series H Preferred Stock into a total of 6.6 million
shares of our common stock. On September 5, 2001, pursuant
to an option granted as part of the June 8, 2001
transactions, certain members of the executive management of PAA
acquired an aggregate additional 2% ownership interest in the
general partner of PAA for $1.5 million in cash and notes,
further reducing our ownership in the general partner of PAA to
44%. We recognized a gain of $1.1 million as a result of
this transaction. These transactions in the aggregate are
hereinafter referred to as the Transactions.

As a result of the Transactions, all of the Series F
Preferred Stock and all but approximately 36,000 shares of the
Series H Preferred Stock were retired or converted. The
remaining outstanding shares of the Series H Preferred
Stock converted to 1.2 million shares of our common stock
during the third quarter. Also as a result of the Transactions,
certain of our employees received transaction-related bonuses
and other payments and vested in benefits in accordance with the
terms of certain of our employee benefit plans.

The excess of the fair value of the Series F Preferred
stock as consideration for the PAA Units over the carrying value
of the Series F Preferred Stock ($21.4 million) for
accounting purposes is deemed to be a dividend to preferred
stockholders and is deducted in determining the income available
to common stockholders for the purpose of determining basic and
fully diluted earnings per share in 2001. In connection with the
conversion of the Series F Preferred Stock into common
stock, we made a $2.5 million inducement payment
representing a 20% premium to the amount of dividends that would
accrue on the Series F Preferred Stock between the closing
of the Transactions and the first date we could potentially
cause such conversion. Such amounts are included in preferred
dividends.

The Subordinated Units are subordinated in right to
distributions from PAA and are not publicly traded. However,
PAAs partnership agreement provides that, if certain
financial tests are met, the Subordinated Units (including those
retained by us) will convert into common units on a one-for-one
basis commencing in 2003. In connection with the Transactions,
we entered into Value Assurance Agreements with such purchasers
of the Subordinated Units 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
expire upon the earlier of (a) the conversion of the
Subordinated Units to common units or (b) June 8, 2006.

Also in connection with the Transactions, we entered into a
separation agreement with PAA pursuant to which, among other
things, (a) we agreed to indemnify PAA, the general partner
of PAA, and the subsidiaries of PAA against any losses or
liabilities resulting from (i) the operation of the
upstream business or (ii) federal or state securities laws,
or the regulations of any self-regulatory authority, or other
similar claims resulting from acts or omissions by us, our
subsidiaries, PAA, or PAAs subsidiaries on or before the
closing of the Transactions; and (b) PAA agreed to
indemnify us and our subsidiaries against any losses or
liabilities resulting from the operation of the midstream
business. We also entered into a pension and employee benefits
assumption and transition agreement pursuant to which the
general partner of PAA and us agreed to the transition of
certain employees to such general partner, the provision of
certain benefits with respect to such transfer, and the
provision of other transition services by us.

In addition, we agreed to contribute 287,500 of our Subordinated
Units to PAAs general partner to be used for option grants
to officers and key employees. These Subordinated Units are
considered to be a contribution to the general partner and we
will receive no reimbursement for such units. Also, at the time
of the Transactions, certain of our employees, who are now
employees of PAAs general partner, held
in-the-money but unvested Plains stock options which
were subject to

F-15



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

forfeiture due to the transfer of employment. We agreed to
substitute, based on the present value of such options, a
contingent grant of 51,000 Subordinated Units that vest on the
same schedule the stock options were to vest.

PAA Equity Offerings

In May 2001, PAA issued 4.0 million common units in a
public equity offering. We recognized a gain of
$19.6 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 the offering, we made a general
partner capital contribution of approximately $2.0 million.
In October 2001, PAA issued 4.5 million common units in a
public offering. As a result of the offering, we made a general
partner capital contribution of approximately $1.0 million,
and our aggregate ownership interest in PAA was reduced to
approximately 29%. We recognized a gain of approximately
$19.2 million resulting from the increase in book value of
our equity in PAA to reflect our proportionate share of the
increase in the underlying net assets of PAA resulting from this
public offering.

In August 2002, PAA issued 6.3 million common units in a
public equity offering. We recognized a gain of
$14.5 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 the offering, we made a general
partner capital contribution of approximately $1.3 million,
and our aggregate ownership interest in PAA was reduced to
approximately 25%.

PAA Financial Statement
Information

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

|                                                         |  |                         |           |      |  |   |           | 
|-------------------------------------------------------- |  | ----------------------- | --------- | ---- |  | - | --------- | 
|                                                         |  |                        
|                                                         |  | Year Ended December 31,
|                                                         |  |                        
|                                                         |  | 2002                    |           | 2001
|                                                         |  |                         |           |     
|Revenues                                                 |  | $                       | 8,384,223 |      |  | $ | 6,868,215 | 
|                                                        
|                                                        
|                                                        
|                                                        
|Cost of sales and operations                             |  |                         | 8,209,932 |      |  |   | 6,725,954 | 
|                                                        
|                                                        
|                                                        
|                                                        
|Gross margin                                             |  |                         | 174,291   |      |  |   | 142,261   | 
|                                                        
|                                                        
|                                                        
|                                                        
|Operating income                                         |  |                         | 94,560    |      |  |   | 71,368    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Income before cumulative effect of accounting
    change |  |                         | 65,292    |      |  |   | 43,671    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Net income                                               |  |                         | 65,292    |      |  |   | 44,179    | 

|                                        |  |              |           |      |  |   |           | 
|--------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                        |  |             
|                                        |  | December 31,
|                                        |  |             
|                                        |  | 2002         |           | 2001
|                                        |  |              |           |     
|Current assets                          |  | $            | 602,935   |      |  | $ | 558,082   | 
|                                       
|                                       
|                                       
|                                       
|Property and equipment, net             |  |              | 952,753   |      |  |   | 604,919   | 
|                                       
|                                       
|                                       
|                                       
|Other assets                            |  |              | 110,887   |      |  |   | 98,250    | 
|                                       
|                                       
|                                       
|                                       
|Total assets                            |  |              | 1,666,575 |      |  |   | 1,261,251 | 
|                                       
|                                       
|                                       
|                                       
|Current liabilities                     |  |              | 637,249   |      |  |   | 505,160   | 
|                                       
|                                       
|                                       
|                                       
|Long-term debt                          |  |              | 509,736   |      |  |   | 351,677   | 
|                                       
|                                       
|                                       
|                                       
|Other long-term liabilities             |  |              | 7,980     |      |  |   | 1,617     | 
|                                       
|                                       
|                                       
|                                       
|Partners capital                       |  |              | 511,610   |      |  |   | 402,797   | 
|                                       
|                                       
|                                       
|                                       
|Total liabilities and partners capital |  |              | 1,666,575 |      |  |   | 1,261,251 | 

F-16



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. On
January 1, 2001 we adopted SFAS No. 133
Accounting for Derivative Instruments and Hedging
Activities as amended by SFAS 137 and SFAS 138 (SFAS
133). Under 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
unrealized gain or loss on the derivative is deferred in
accumulated Other Comprehensive Income (OCI), a
component of Stockholders Equity. On January 1, 2001,
in accordance with the transition provisions of SFAS 133,
we recorded a loss of $0.1 million in OCI, representing the
cumulative effect of an accounting change to recognize at fair
value all cash flow derivatives. We recorded cash flow hedge
derivative assets and liabilities of $10.9 million and
$13.9 million, respectively, and a net-of-tax non-cash
charge of $2.0 million was recorded in earnings as a
cumulative effect adjustment. At December 31, 2002 all open
positions qualified for hedge accounting.

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. Gains and losses on oil hedging instruments
representing hedge ineffectiveness, which is measured on a
quarterly basis, are included in oil revenues in the period in
which they occur. No ineffectiveness was recognized in 2002 or
2001, except as discussed below. For purposes of our financial
statements, effective October 2001 we implemented Derivatives
Implementation Group, Issue G20, Cash Flow Hedges:
Assessing and Measuring the Effectiveness of a Purchased Option
Used in a Cash Flow Hedge, or DIG Issue G20, which
provides guidance for basing the assessment of hedge
effectiveness on total changes in an options cash flows
rather than only on changes in the options intrinsic
value. Implementation of DIG Issue G20 has reduced earnings
volatility since it allows us to include changes in the time
value of purchased options and collars in the assessment of
hedge effectiveness. Time value changes were previously
recognized in current earnings since we excluded them from the
assessment of hedge effectiveness. Oil revenues for the year
ended December 31, 2001 include a $0.3 million
non-cash loss related to the ineffective portion of the cash
flow hedges representing the fair value change in the time value
of options for the nine months before the implementation of DIG
Issue G20.

At December 31, 2001, OCI from continuing operations
consisted of $0.8 million ($0.5 million, net of tax)
of unrealized gains on our open oil hedging instruments,
$3.8 million ($2.3 million, net of tax) of unrealized
loss related to our equity in the OCI loss of PAA, and
$0.7 million ($0.4 million, net of tax) related to
pension liabilities. At December 31, 2002 OCI consisted of
unrealized losses of: (i) $0.4 million ($0.3 million,
net of tax) on our oil hedging instruments, (ii)
$3.7 million ($2.3 million, net of tax) related to our
equity in the OCI loss of PAA, and (iii) $0.5 million
($0.3 million, net of tax) related to pension liabilities.
At December 31, 2002, the liability related to our open oil
hedging instruments was included in current liabilities
($0.4 million), and deferred income taxes (a tax benefit of
$0.2 million).

During 2002 oil sales revenues were reduced by $0.6 million
to reflect non-cash expense related to the amortization of
option premiums. As of December 31, 2002, $0.4 million
($0.2 million, net of tax) of deferred net losses on our
oil hedging instruments recorded in OCI are expected to be
reclassified to earnings during the next twelve-month period.

F-17



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2002 we had the following open oil hedge
positions:

|      |                          |                 |  |       |  |  |  |     | 
|----- | ------------------------ | --------------- |  | ----- |  |  |  | --- | 
|      |                          |                
|      |                          | Barrels per Day
|      |                          |                
|      |                          | 2003            |  | 2004 
|      |                          |                 |  |      
|Swaps |                          |                 |  |       |  |  |  |    
|     
|     
|     
|     
|      | Average price $26.10/bbl |                 |  | 1,500 |  |  |  |    | 
|     
|     
|     
|     
|      | Average price $23.50/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

Long-term debt consists of the following at December 31,
2002 and 2001 (in thousands):

|                        |                                                                                                                            |         |        |           |  |         |        |           |  |   |     |   |  |   |         |         | 
|----------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------- | ------ | --------- |  | ------- | ------ | --------- |  | - | --- | - |  | - | ------- | ------- | 
|                        |                                                                                                                            |         |        |          
|                        |                                                                                                                            | 2002    |        | 2001     
|                        |                                                                                                                            |         |        |          
|                        |                                                                                                                            | Current |        | Long-Term |  | Current |        | Long-Term
|                        |                                                                                                                            |         |        |           |  |         |        |          
|Continuing operations   |                                                                                                                            |         |        |           |  |         |        |           |  |   |     |   |  |   |         |        
|                       
|                       
|                       
|                       
|                        | Secured term loan facility, bearing interest at
    4.4%                                                                   |         | $      | 18,000    |  |         | $      | 27,000    |  |   | $   |  |  |   | $       |        | 
|                       
|                       
|                       
|                       
|                        | Revolving credit facility, bearing interest at
    4.2%                                                                    |         |        |          |  |         |        |          |  |   |     |  |  |   |         | 11,500  | 
|                       
|                       
|                       
|                       
|                        | 10.25% senior subordinated notes net of
    repurchased notes of $7.55 million and unamortized premium
    of $2.1 million |         |        |          |  |         |        |          |  |   |     |  |  |   |         | 269,539 | 
|                       
|                       
|                       
|                       
|Discontinued operations |                                                                                                                            |         |       |           |  |         |       |           |  |   | 511 |   |  |   | 1,533   |        
|                        |                                                                                                                            |         |        |           |  |         |        |           |  |   |     |   |  |   |         |        
|                        |                                                                                                                            | $       | 18,000 |           |  | $       | 27,000 |           |  | $ | 511 |   |  | $ | 282,572 |        
|                        |                                                                                                                            |         |        |           |  |         |        |           |  |   |     |   |  |   |         |        

Aggregate total maturities of long-term debt in the next five
years are as follows: 2003  $18.0 million;
2004  $18.0 million; and 2005 
$9.0 million.

Secured Term Loan
Facility

On December 9, 2002 we entered into a $45.0 million
secured term loan facility with a group of banks. The term loan
is repayable in 10 quarterly installments of $4.5 million
each commencing on February 28, 2003 with a final maturity
of May 31, 2005. 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.

To secure the term loan, we pledged 100% of the shares of stock
of our subsidiaries and pledged 4,950,000 of our PAA common
units. To the extent that the outstanding principal under the
term loan exceeds the balance in the debt reserve account (as
defined in the agreement) 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 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

F-18



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 ($80 million at
December 31, 2002) and a consolidated debt service coverage
ratio (as defined in the agreement) of 1.0 to 1.0. At
December 31, 2002 we were in compliance with the covenants
contained in the term loan facility.

Revolving Credit Facility
and 10.25% Senior Subordinated Notes Due 2006

At December 31, 2001 we had a $225.0 million revolving
credit facility with a group of banks. At December 31,
2001, $11.5 million in borrowings and letters of credit of
$0.6 million were outstanding under the revolving credit
facility. On July 3, 2002 all amounts outstanding under the
revolving credit facility were repaid and the credit facility
was terminated.

At December 31, 2001 we had $267.5 million principal
amount of 10.25% Senior Subordinated Notes Due 2006 (the
10.25% notes) outstanding, bearing a coupon rate of
10.25%. The 10.25% notes were redeemable, at our option at
105.13% of the principal amount through March 15, 2002, at
103.42% on or after March 15, 2002, at 101.71% on or after
March 15, 2003 and at 100% on or after March 15, 2004
plus, in each case, accrued interest to the date of redemption.
In August 2002 we redeemed the 10.25% notes for
$287.0 million. The redemption payment consisted of the
$267.5 million principal amount outstanding; a
$9.1 million call premium due as a result of the early
redemption; and $10.4 million in interest accrued and
payable on the redemption date. Upon redemption, all guarantees
with respect to the 10.25% notes were terminated.

As a result of the redemption of the 10.25% notes and the
termination of our revolving credit facility, we recognized a
$10.3 million loss on debt extinguishment;

Note 6  Unauthorized Trading Losses

In November 1999, we discovered that a former employee of PAA
had engaged in unauthorized trading activity, resulting in
losses of approximately $174.0 million, including estimated
associated costs and legal expenses. Approximately
$7.1 million of the unauthorized trading losses were
recognized in 1998 and the remainder in 1999. In 2000, we
recognized an additional $8.0 million charge for litigation
related to the unauthorized trading losses. All litigation with
respect to this matter has been settled.

Note 7  PAA Acquisitions and Dispositions

All American Pipeline
Linefill Sale and Asset Disposition

In March 2000, PAA sold the segment of the All American Pipeline
that extends from Emidio, California to McCamey, Texas to a unit
of El Paso Corporation for $129.0 million. PAA realized net
proceeds of approximately $124.0 million after the
associated transaction costs and estimated costs to remove some
equipment. The proceeds from the sale were used to reduce the
outstanding debt of PAA. PAA recognized a gain of approximately
$20.1 million in connection with the sale.

PAA had suspended shipments of oil on this segment of the
pipeline in November 1999. At that time, PAA owned approximately
5.2 million barrels of oil in the segment of the pipeline.
PAA sold this oil from November 1999 to February 2000 for net
proceeds of approximately $100.0 million and recognized
gains of approximately $28.1 million and $16.5 million
in 2000 and 1999, respectively, in connection with the sale of
the linefill.

F-19



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8  Redeemable Preferred Stock

Series F Cumulative
Convertible Preferred Stock

On December 14, 1999, we sold in a private placement 50,000
shares of Series F Preferred Stock for $50.0 million.
As discussed in Note 3, in conjunction with the
Transactions we redeemed 23,108 shares of the Series F
Preferred Stock and the remaining 26,892 shares were
converted into 2.2 million shares of our common stock. Each
share of the Series F Preferred Stock had a stated value of
$1,000 per share and bore a dividend of 10% per annum.

Note 9  Common Stock and Non-Redeemable Preferred
Stock

Common and Preferred
Stock

We have authorized capital stock consisting of 50.0 million
shares of common stock, $0.10 par value, and 2 million
shares of preferred stock, $1.00 par value. At
December 31, 2002 and 2001, there were 24.1 million
shares and 23.6 million shares of common stock outstanding
(net of treasury shares), respectively, and 46,600 shares
of preferred stock outstanding.

Series D Cumulative
Convertible Preferred Stock

We have outstanding 46,600 shares of Series D Cumulative
Convertible Preferred Stock, or Series D Preferred, that
have an aggregate stated value of $23.3 million and are
redeemable at our option at 140% of stated value. If not
previously redeemed or converted, the Series D Preferred
will automatically convert into shares of common stock in 2012.
Each share of Series D Preferred has a stated value of $500
and bears an annual dividend of $30.00 per share.

As a result of the spin-off, the number of shares of common
stock into which the Series D Preferred is convertible
increased from 932,000 shares to 1,671,416 shares as a
result of the reduction in the conversion price from $25.00 per
share of common stock to $13.94 per share. The reduction in
the conversion price of the Series D Preferred was
determined by multiplying the former conversion price of the
Series D Preferred ($25.00) by a fraction, the denominator
of which was $22.27 (the closing price per share of our common
stock as of the record date for the spin-off), and the numerator
of which was $12.42 (the closing price per share of our common
stock as of the record date for the spin-off less the agreed on
fair market value per share of the PXP common stock distributed
in the spin-off). The holders of the Series D Preferred did
not receive any PXP securities as a result of the spin off.

Series H Convertible
Preferred Stock

In December 2000, we exchanged 169,571 shares of Series G
Preferred Stock for 169,571 shares of Series H
Preferred Stock. The Series H Preferred Stock was
convertible into the same number of shares of common stock as
the Series G Preferred Stock (33.33 shares of common),
but did not bear a dividend and did not contain a mandatory
redemption feature. As discussed in Note 3, in conjunction
with the Transactions, 132,022 shares of the Series H
Preferred Stock were converted into 4.4 million shares of
our common stock. In the third quarter of 2001 the remaining
outstanding shares were converted into 1.2 million common
shares.

Treasury Stock

Our Board of Directors has authorized the repurchase of up to
eight million shares of our common stock. In 2001, we
repurchased 2.8 million common shares at a cost of
$67.7 million, and

F-20



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

in 2000 we repurchased 1.3 million common shares at a cost
of $23.6 million. No repurchases were made in 2002.

Note 10  Earnings Per Share

The following is a reconciliation of the numerators and the
denominators of the basic and diluted earnings per share
computations for income (loss) from continuing operations before
extraordinary items and the cumulative effect of accounting
change for the years ended December 31, 2002, 2001 and 2000
(in thousands, except per share amounts):

|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |       |  
|----------------------------------------------------------------------------- | ------------------------------------------- | ----------------------- | ------ | ------- |  | ----- | ------ | ------- |  | ----- | ------- | ------- | - | - | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                              |                                             |                        
|                                                                              |                                             | Year Ended December 31,
|                                                                              |                                             |                        
|                                                                              |                                             |                         |        |         |  |      
|                                                                              |                                             | 2002                    |        | 2001    |  | 2000 
|                                                                              |                                             |                         |        |         |  |      
|                                                                              |                                             | Basic                   |        | Diluted |  | Basic |        | Diluted |  | Basic |         | Diluted
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |        
|Income from continuing operations                                             |                                             | $                       | 9,732  |         |  | $     | 9,732  |         |  | $     | 100,624 |         |   | $ | 100,624 |       |   | $ | 12,187  |       |   | $ | 12,187  |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Preferred dividends                                                           |                                             |                         | (1,400 | )       |  |       | (1,400 | )       |  |       | (27,245 | )       |   |   | (23,880 | )     |   |   | (14,725 | )     |   |   | (14,725 | )    
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|Income (loss) from continuing operations
    available to common stockholders |                                             |                         | 8,332  |         |  |       | 8,332  |         |  |       | 73,379  |         |   |   | 76,744  |       |   |   | (2,538  | )     |   |   | (2,538  | )    
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Income from discontinued operations                                           |                                             |                         | 27,800 |         |  |       | 27,800 |         |  |       | 54,693  |         |   |   | 54,693  |       |   |   | 28,749  |       |   |   | 28,749  |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Effect of accounting changes, net of tax                                      |                                             |                         |       |         |  |       |       |         |  |       | (1,986  | )       |   |   | (1,986  | )     |   |   | (121    | )     |   |   | (121    | )    
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|Net income available to common stockholders                                   |                                             | $                       | 36,132 |         |  | $     | 36,132 |         |  | $     | 126,086 |         |   | $ | 129,451 |       |   | $ | 26,090  |       |   | $ | 26,090  |      
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|Weighted average number of shares of common stock
    outstanding             |                                             |                         | 23,871 |         |  |       | 23,871 |         |  |       | 21,090  |         |   |   | 21,090  |       |   |   | 17,845  |       |   |   | 17,845  |      
|Effect of dilutive securities                                                 |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Convertible preferred stock                 |                         |        |        |  |       |        |        |  |       |         |        |   |   |         | 5,280 |   |   |         |      |   |   |         |      |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Employee stock options and warrants         |                         |        |        |  |       |        | 580     |  |       |         |        |   |   |         | 874   |   |   |         |      |   |   |         | 855   |  
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|Average common shares, including dilutive effect                              |                                             |                         | 23,871 |         |  |       | 24,451 |         |  |       | 21,090  |         |   |   | 27,244  |       |   |   | 17,845  |       |   |   | 18,700  |      
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|Earnings (loss) per share                                                     |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Continuing operations                       |                         | $      | 0.35    |  |       | $      | 0.34    |  |       | $       | 3.48    |   |   | $       | 2.81  |   |   | $       | (0.14 | ) |   | $       | (0.14 | )
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Discontinued operations                     |                         |        | 1.16    |  |       |        | 1.14    |  |       |         | 2.59    |   |   |         | 2.01  |   |   |         | 1.61  |   |   |         | 1.54  |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Effect of accounting changes                |                         |        |        |  |       |        |        |  |       |         | (0.09   | ) |   |         | (0.07 | ) |   |         | (0.01 | ) |   |         | (0.01 | )
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      
|                                                                              | Net income available to common stockholders |                         | $      | 1.51    |  |       | $      | 1.48    |  |       | $       | 5.98    |   |   | $       | 4.75  |   |   | $       | 1.46  |   |   | $       | 1.39  |  
|                                                                              |                                             |                         |        |         |  |       |        |         |  |       |         |         |   |   |         |       |   |   |         |       |   |   |         |      

In 2002 and 2000 our preferred stock was not included in the
computation of diluted earnings per share because the effect was
antidilutive. See Note 15 for additional information
concerning outstanding options and warrants.

F-21



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 11  Income Taxes

Our deferred income tax assets and liabilities at
December 31, 2002 and 2001 consist of the tax effect of
income tax carryforwards and differences related to the timing
of recognition of certain types of costs as follows (in
thousands):

|                                   |                                                                  |              |        |        |   |   |         |         |  
|---------------------------------- | ---------------------------------------------------------------- | ------------ | ------ | ------ | - | - | ------- | ------- | -
|                                   |                                                                  |             
|                                   |                                                                  | December 31,
|                                   |                                                                  |             
|                                   |                                                                  | 2002         |        | 2001  
|                                   |                                                                  |              |        |       
|U.S. Federal                       |                                                                  |              |        |        |   |   |         |        
|                                  
|                                  
|                                  
|                                  
|Deferred tax assets:               |                                                                  |              |        |        |   |   |         |        
|                                  
|                                  
|                                  
|                                  
|                                   | Net operating losses                                             |              | $      | 16,232 |   |   | $       | 18,142  |  
|                                  
|                                  
|                                  
|                                  
|                                   | Percentage depletion                                             |              |        |       |   |   |         | 2,450   |  
|                                  
|                                  
|                                  
|                                  
|                                   | Tax credit carryforwards                                         |              |        | 6,040  |   |   |         | 8,988   |  
|                                  
|                                  
|                                  
|                                  
|                                   | Excess outside tax basis over outside book basis                 |              |        | 423    |   |   |         | 9,979   |  
|                                  
|                                  
|                                  
|                                  
|                                   | Commodity hedging contracts and other                            |              |        | 1,941  |   |   |         | 4,926   |  
|                                   |                                                                  |              |        |        |   |   |         |        
|                                   |                                                                  |              | 24,636 |        |   |   | 44,485  |        
|                                  
|                                  
|                                  
|                                  
|Deferred tax liabilities:          |                                                                  |              |        |        |   |   |         |        
|                                  
|                                  
|                                  
|                                  
|                                   | Net oil & gas acquisition, exploration and
    development costs |              |        | (7,277 | ) |   |         | (63,693 | )
|                                  
|                                  
|                                  
|                                  
|                                   | Commodity hedging contracts and other                            |              |        |       |   |   |         | (9,028  | )
|                                   |                                                                  |              |        |        |   |   |         |        
|                                   |                                                                  |              | 17,359 |        |   |   | (28,236 | )      
|                                  
|                                  
|                                  
|                                  
|                                   | Valuation allowance                                              |              |        |       |   |   |         | (2,450  | )
|                                   |                                                                  |              |        |        |   |   |         |        
|                                   |                                                                  |              | 17,359 |        |   |   | (30,686 | )      
|                                   |                                                                  |              |        |        |   |   |         |        
|States                             |                                                                  |              |        |        |   |   |         |        
|                                  
|                                  
|                                  
|                                  
|                                   | Deferred tax liability                                           |              |        | (1,175 | ) |   |         | (14,074 | )
|                                  
|                                  
|                                  
|                                  
|                                   | EOR credit                                                       |              |        | 734    |   |   |         |        |  
|                                   |                                                                  |              |        |        |   |   |         |        
|                                   |                                                                  |              | (441   | )      |   |   | (14,074 | )      
|                                   |                                                                  |              |        |        |   |   |         |        
|Foreign                            |                                                                  |              |        |        |   |   |         |        
|                                  
|                                  
|                                  
|                                  
|                                   | Excess outside tax basis over outside book basis                 |              |        | 39     |   |   |         | 466     |  
|                                   |                                                                  |              |        |        |   |   |         |        
|Net deferred tax asset (liability) |                                                                  | $            | 16,957 |        |   | $ | (44,294 | )      
|                                   |                                                                  |              |        |        |   |   |         |        

At December 31, 2002, we have carryforwards of
approximately $46.4 million of regular tax net operating
losses (NOL), $2.2 million of alternative
minimum tax credits and $3.8 million of enhanced oil
recovery (EOR) credits. At December 31, 2002,
we also had approximately $15.0 million of alternative
minimum tax NOL carryforwards available as a deduction against
future alternative minimum tax income. The NOL carryforwards
expire in 2019.

The valuation allowance with respect to percentage depletion was
$2.5 million at December 31, 2001 and
$2.6 million as of December 31, 2000 and 1999. In 2002
the deferred tax asset and the related valuation allowance were
written off.

F-22



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Set forth below is a reconciliation between the income tax
provision (benefit) computed at the United States statutory
rate on income (loss) before income taxes and the income
tax provision in the accompanying consolidated statements of
income (in thousands):

|                                                                           |  |                         |        |      |  |      |        |   |  |   |       |  
|-------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                                           |  |                        
|                                                                           |  | Year Ended December 31,
|                                                                           |  |                        
|                                                                           |  | 2002                    |        | 2001 |  | 2000
|                                                                           |  |                         |        |      |  |     
|U.S. federal income tax provision at statutory
    rate                    |  | $                       | 5,575  |      |  | $    | 58,771 |   |  | $ | 6,230 |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|State income taxes, net of federal benefit                                 |  |                         | 559    |      |  |      | 5,292  |   |  |   | (549  | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Foreign income taxes, net of federal benefit                               |  |                         | 1,479  |      |  |      | 916    |   |  |   |      |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Other                                                                      |  |                         | (1,507 | )    |  |      | 2,093  |   |  |   | (53   | )
|                                                                           |  |                         |        |      |  |      |        |   |  |   |       |  
|Income tax expense (benefit) on income
    before extraordinary item       |  |                         | 6,106  |      |  |      | 67,072 |   |  |   | 5,628 |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Income tax benefit allocated to cumulative effect
    of accounting change |  |                         |       |      |  |      | (228   | ) |  |   | (76   | )
|                                                                           |  |                         |        |      |  |      |        |   |  |   |       |  
|Income tax provision                                                       |  | $                       | 6,106  |      |  | $    | 66,844 |   |  | $ | 5,552 |  
|                                                                           |  |                         |        |      |  |      |        |   |  |   |       |  

Under the terms of a tax allocation agreement, PXP has agreed to
indemnify us if the spin-off is not tax-free as a result of
various actions taken by PXP or with respect to PXPs
failure to take various actions. In addition, PXP agreed that,
during the three-year period following the spin-off, without our
prior written consent, they will not engage in transactions that
could adversely affect the tax treatment of the spin-off unless
they obtain a supplemental tax ruling from the IRS or a tax
opinion acceptable to us from a nationally recognized tax
counsel to the effect that the proposed transaction would not
adversely affect the tax treatment of the spin-off or provide
adequate economic security to us to ensure PXP would be able to
comply with its obligation under this agreement. PXP may not be
able to control some of the events that could trigger this
indemnification obligation.

Note 12  Early Extinguishment of Debt

In 2002 we adopted SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS 145
rescinds SFAS 4 and SFAS 64 related to classification
of gains and losses on debt extinguishment such that most debt
extinguishment gains and losses are no longer be classified as
extraordinary. SFAS 145 also amends SFAS 13 with
respect to sales-leaseback transactions. The provisions of
SFAS 145 with respect to sales-leaseback transactions have
no effect on our financial statements. As a result of the
provisions of SFAS 145 with respect to debt
extinguishments, the following items are not classified as
extraordinary items in the Consolidated Statement of Income:
(i) as a result of the redemption of the 10.25% notes and
the termination of our credit facility, in 2002 we recognized a
$10.3 million loss on debt extinguishment; and (ii) in
2000, PAA recognized a $15.2 million charge to income
($5.0 million net of minority interest of $7.0 million
and deferred income taxes of $3.2 million) consisting
primarily of unamortized debt issue costs related to the
refinancing of PAAs credit facilities.

In addition, interest and other income for 2000 includes
$4.4 million of previously deferred net gains from interest
rate swaps terminated as a result of the debt extinguishment.

F-23



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 13  Related Party Transactions

Reimbursement of Expenses of
the General Partner and Its Affiliates

Prior to the Transactions, the general partner of PAA was a
wholly-owned subsidiary of Plains. As a result of the
Transactions another entity was named general partner and our
ownership in that entity is 44%. Previously, we had sole
responsibility for conducting PAAs business and managing
its operations. We did not receive any management fee or other
compensation in connection with the management of PAAs
business, but were reimbursed for all direct and indirect
expenses incurred on its behalf. For the period from
January 1, 2001 to June 8, 2001, and for the year
ended December 31, 2000, we were reimbursed approximately
$31.2 million and $63.8 million, respectively, for
direct and indirect expenses on PAAs behalf. The
reimbursed costs consisted primarily of employee salaries and
benefits. PAA does not employ any persons to manage its
business. These functions are provided by employees of the
general partner.

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 years ended December 31, 2002, 2001 and 2000, PAA paid
approximately $22.7 million, $21.3 million and
$22.3 million, respectively, for the purchase of oil under
the agreement, including the royalty share of production. We
paid $0.2 million in marketing fees to PAA in each of 2002,
2001 and 2000.

Financing

In December 1999, we loaned PAA $114.0 million, which was
repaid in May 2000. Interest on the notes was $3.3 million
and $0.6 million for the years ended December 31, 2000
and 1999, respectively.

Transaction Grant
Agreements

In 1998 at no cost to PAA, we agreed to grant 400,000 of our PAA
common units (including distribution equivalent rights
attributable to such units) to certain key officers and
employees of the general partner and its affiliates. The grants
vested over a three year period subject to PAA paying
distributions on common and subordinated units. Of these grants,
69,000 vested in 1999 and 133,000 vested in 2000. The remaining
grants vested in 2001 as a result of the Transactions. PAA
recognized noncash compensation expense related to the
transaction grants of approximately $4.8 million,
$2.7 million and $1.0 million in the years ended
December 31, 2001, 2000, and 1999, respectively, and we
reflected capital contributions of a similar amount. The noncash
compensation is included in general and administrative expense
in the Consolidated Statements of Income in 2000. Our share of
this expense is included in our equity in the earnings of PAA in
2002 and 2001.

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.

Master separation agreement. The master separation
agreement provides for the separation of substantially all of
our upstream assets and liabilities, other than our Florida
operations. The master separation agreement provides for, among
other things: the separation; cross-indemnification

F-24



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

provisions; allocation of fees related to these transactions
between us and PXP; other provisions governing our relationship
with PXP, including mandatory dispute arbitration, sharing
information, confidentiality and other covenants; and a
noncompetition provision.

Intellectual property agreement. The intellectual
property agreement provides that we will transfer ownership and
all rights associated with certain trade names, trademarks and
service marks to PXP. PXP will grant us a full license to use
certain trade names subject to certain limitations.

Plains Exploration & Production transition services
agreement.This agreement provides that we will provide PXP
management, tax, accounting, payroll, insurance, employee
benefits, legal and financial services on an interim basis.
Through December 31, 2002 we had charged PXP
$10.8 million of the maximum $30.0 million allowed under
this agreement to reimburse us for our costs of providing such
services. We do not expect to charge significant additional
amounts under this agreement.

Plains Resources transition services agreement. This
agreement became effective as of the date of the spin-off and
provides that PXP will provide us tax, accounting, payroll,
employee benefits, legal and financial services on an interim
basis. PXP will charge us on a monthly basis for the costs of
providing such services. No charges were made to us in 2002
under the terms of this agreement. At December 31, 2002
current assets include a $1.2 million receivable from PXP
related to services provided under this agreement.

Technical services agreement. The technical services
agreement provides that PXP will provide our subsidiary, Calumet
Florida, certain engineering and technical support services
required to support operation and maintenance of the oil and gas
properties owned by Calumet, including geological, geophysical,
surveying, drilling and operations services, environmental and
other governmental or regulatory compliance related to oil and
gas activities and other oil and gas engineering services as
requested, and accounting services. PXP will charge us on a
monthly basis for the costs of providing such services. No
charges were made to us in 2002 under the terms of this
agreement.

Other

The Executive Chairman of our Board of Directors and our Chief
Executive Officer and President own a limited partnership that
owns 20% of Plains All American GP LLC, the general partner of
PAA.

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 the Executive Chairman of
our Board of Directors. In 2002 and 2001 we paid Gulf Coast
$0.4 million and $0.2 million, respectively, for
aircraft chartering services provided by Gulf Coast using an
aircraft owned by our Executive Chairman. The charters were
arranged through arms-length dealings with Gulf Coast and the
rates were market based.

Note 14  Benefit Plans

We have a nonqualified retirement plan (the Plan)
for certain of our former officers. Benefits under the Plan are
based on salary at the time of adoption, vest over a 15-year
period and are payable over a 15-year period commencing at
age 60. The Plan is unfunded. In connection with the
spin-off, certain of the obligations were transferred to PXP and
we paid PXP $0.5 million for the assumption of such
obligations.

F-25



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net pension expense for the years ended December 31, 2002,
2001 and 2000 is comprised of the following components (in
thousands):

|                                                     |  |              |     |      |  |      |     |  |  |   |     | 
|---------------------------------------------------- |  | ------------ | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                     |  |             
|                                                     |  | Year Ended  
|                                                     |  | December 31,
|                                                     |  |             
|                                                     |  | 2002         |     | 2001 |  | 2000
|                                                     |  |              |     |      |  |     
|Service cost  benefits earned during
    the period |  | $            | 196 |      |  | $    | 156 |  |  | $ | 99  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Interest on projected benefit obligation             |  |              | 142 |      |  |      | 131 |  |  |   | 96  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Amortization of prior service cost                   |  |              | 19  |      |  |      | 31  |  |  |   | 37  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Unrecognized loss                                    |  |              | 37  |      |  |      | 17  |  |  |   |    | 
|                                                     |  |              |     |      |  |      |     |  |  |   |     | 
|Net pension expense                                  |  | $            | 394 |      |  | $    | 335 |  |  | $ | 232 | 
|                                                     |  |              |     |      |  |      |     |  |  |   |     | 

Summarized information of our retirement plan for the periods
indicated is as follows (in thousands):

|                                                           |                                                               |              |   |        |   |  |   |        |  
|---------------------------------------------------------- | ------------------------------------------------------------- | ------------ | - | ------ | - |  | - | ------ | -
|                                                           |                                                               |             
|                                                           |                                                               | December 31,
|                                                           |                                                               |             
|                                                           |                                                               | 2002         |   | 2001  
|                                                           |                                                               |              |   |       
|Change in benefit obligation:                              |                                                               |              |   |        |   |  |   |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Benefit obligation at beginning of year                       |              | $ | 1,907  |   |  | $ | 1,821  |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Service cost                                                  |              |   | 40     |   |  |   | 155    |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Interest cost                                                 |              |   | 126    |   |  |   | 131    |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Settlement losses                                             |              |   | 131    |   |  |   | 271    |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Transfer of obligation to PXP                                 |              |   | (510   | ) |  |   |       |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Benefits paid                                                 |              |   | (69    | ) |  |   | (67    | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Settlement payments                                           |              |   | (252   | ) |  |   | (1,159 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Actuarial (gains) losses                                      |              |   | 4      |   |  |   | 755    |  
|                                                           |                                                               |              |   |        |   |  |   |       
|                                                           | Benefit obligation at end of year                             |              | $ | 1,377  |   |  | $ | 1,907  |  
|                                                           |                                                               |              |   |        |   |  |   |       
|Amounts recognized in the consolidated balance
    sheets: |                                                               |              |   |        |   |  |   |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Projected benefit obligation for service rendered
    to date |              | $ | 1,377  |   |  | $ | 1,907  |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Plan assets at fair value                                     |              |   |       |   |  |   |       |  
|                                                           |                                                               |              |   |        |   |  |   |       
|                                                           | Benefit obligation in excess of fair value of
    plan assets |              |   | (1,377 | ) |  |   | (1,907 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Unrecognized (gain) loss                                      |              |   | 521    |   |  |   | 720    |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Unrecognized prior service costs                              |              |   | 124    |   |  |   | 310    |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Adjustment to recognize minimum liability                     |              |   | (645   | ) |  |   | (1,030 | )
|                                                           |                                                               |              |   |        |   |  |   |       
|                                                           | Net amount recognized                                         |              | $ | (1,377 | ) |  | $ | (1,907 | )
|                                                           |                                                               |              |   |        |   |  |   |       

The weighted-average discount rate used in determining the
projected benefit obligation was 6.75% and 7.25% for the years
ended December 31, 2002 and 2001, respectively.

We also maintain a 401(k) defined contribution plan whereby we
match 100% of an employees contribution (subject to
certain limitations in the plan). Matching contributions were
made 50% in cash and 50% in common stock of the Company, with
the number of shares for the stock match based on the market
value of the common stock at the time the shares are granted,
through September 30, 2002. Thereafter, matching
contributions were made 100% in cash. At the time of the
spin-off the plan was transferred to PXP and we established a
new 401(k) plan for the employees that remained with us. The new
plan is substantially identical to the plan transferred to PXP.
For the

F-26



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

years ended December 31, 2002, 2001 and 2000, defined
contribution plan expense was $0.5 million,
$0.3 million and $1.4 million, respectively. Such
expense for 2000 includes amounts attributable to employees of
the general partner of PAA.

Note 15  Stock Compensation Plans

Stock Options

Historically, we have used stock options as a long-term
incentive for our employees, officers and directors under
various stock option plans. We have options outstanding under
our 2001 and 1996 plans, under which a maximum of
5.6 million shares of common stock were reserved for
issuance. Generally, the options are granted: (i) at an
exercise price equal to or greater than the market price of the
underlying stock on the date of grant; and (ii) with a pro
rata vesting period of two to five years and an exercise
period of five to ten years. Certain options have vesting
provisions related to the market price of our common stock. If
such options do not vest under such provisions, they vest at the
end of a five-year period.

As a result of the spin-off, the exercise price for our stock
options was adjusted to approximately 61% of the exercise price
at the date of grant. The adjustment was based on the
relationship of the closing price (with dividend) of our common
stock on the spin-off date ($23.05 per share) less the closing
price (on a when-issued basis) of PXPs common
stock on the spin-off date ($9.10 per share), both as reported
on the NYSE, and the closing price of PXP common stock ($9.10
per share).

Performance options to purchase a total of 500,000 shares of
common stock were granted to two executive officers in 1996.
Terms of the options provided for an exercise price of $13.50,
the market price on the date of grant, and were to vest if
shares of our common stock traded at or above $24.00 per share
for any 20 trading days in any 30 consecutive trading day period
prior to August 2001, or upon a change in control if certain
conditions were met. The performance options vested in the
second quarter of 2001 and we recognized $4.0 million of
noncash compensation expense, which is included in general and
administrative expense.

In May 2001 we granted options on 2,250,000 shares under the
terms of our 2001 plan subject to the approval of such plan by
our board of directors. The market price of our common stock at
the time the plan was approved in July 2001 exceeded the
exercise price with respect to 1,450,000 of such options and,
accordingly, we recognized noncash compensation with respect to
such options. During 2002 and 2001, $0.5 million and
$0.3 million, respectively, in compensation expense with
respect to such options is included in general and
administrative expense.

F-27



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of our stock options as of
December 31, 2002, 2001, and 2000, and changes during the
years ending on those dates are presented below (shares in
thousands):

|                                                                   |  |        |       |          |  |        |       |          |  |        |        |          |  |   |       |  |  |   |       |   |  |   |       | 
|------------------------------------------------------------------ |  | ------ | ----- | -------- |  | ------ | ----- | -------- |  | ------ | ------ | -------- |  | - | ----- |  |  | - | ----- | - |  | - | ----- | 
|                                                                   |  |        |       |          |  |       
|                                                                   |  | 2002   |       | 2001     |  | 2000  
|                                                                   |  |        |       |          |  |       
|                                                                   |  |        |       | Weighted |  |        |       | Weighted |  |        |        | Weighted
|                                                                   |  |        |       | Average  |  |        |       | Average  |  |        |        | Average 
|                                                                   |  |        |       | Exercise |  |        |       | Exercise |  |        |        | Exercise
|Fixed Options                                                      |  | Shares |       | Price    |  | Shares |       | Price    |  | Shares |        | Price   
|                                                                   |  |        |       |          |  |        |       |          |  |        |        |         
|Outstanding at beginning of year                                   |  |        | 3,667 |          |  | $      | 20.30 |          |  |        | 2,749  |          |  | $ | 12.11 |  |  |   | 2,811 |   |  | $ | 11.06 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Granted                                                            |  |        | 1,474 |          |  |        | 19.32 |          |  |        | 2,464  |          |  |   | 24.02 |  |  |   | 419   |   |  |   | 13.91 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Exercised                                                          |  |        | (457  | )        |  |        | 12.00 |          |  |        | (1,431 | )        |  |   | 11.51 |  |  |   | (444  | ) |  |   | 6.96  | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Forfeited                                                          |  |        | (337  | )        |  |        | 23.37 |          |  |        | (115   | )        |  |   | 14.06 |  |  |   | (37   | ) |  |   | 14.37 | 
|                                                                   |  |        |       |          |  |        |       |          |  |        |        |          |  |   |       |  |  |   |       |   |  |   |       | 
|Outstanding at end of year                                         |  |        | 4,347 |          |  | $      | 13.16 |          |  |        | 3,667  |          |  | $ | 20.30 |  |  |   | 2,749 |   |  | $ | 12.11 | 
|                                                                   |  |        |       |          |  |        |       |          |  |        |        |          |  |   |       |  |  |   |       |   |  |   |       | 
|Options exercisable at year-end                                    |  |        | 1,491 |          |  | $      | 12.06 |          |  |        | 1,084  |          |  | $ | 13.32 |  |  |   | 1,708 |   |  | $ | 11.07 | 
|                                                                   |  |        |       |          |  |        |       |          |  |        |        |          |  |   |       |  |  |   |       |   |  |   |       | 
|Weighted-average fair value of options granted
    during the year |  | $      | 6.41  |          |  |        |       |          |  | $      | 10.12  |          |  |   |       |  |  | $ | 5.39  |   |  |   |       | 

The following table summarizes information about stock options
outstanding at December 31, 2002 (share amounts in
thousands):

|                        |  |             |       |             |  |          |     |             |  |          |       |  |  |  |       |  |  |   |       | 
|----------------------- |  | ----------- | ----- | ----------- |  | -------- | --- | ----------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                        |  |             |       | Weighted    |  |          |     |             |  |         
|                        |  |             |       | Average     |  | Weighted |     |             |  | Weighted
|                        |  | Number      |       | Remaining   |  | Average  |     | Number      |  | Average 
|                        |  | Outstanding |       | Contractual |  | Exercise |     | Exercisable |  | Exercise
|Range of Exercise Price |  | at 12/31/02 |       | Life        |  | Price    |     | at 12/31/02 |  | Price   
|                        |  |             |       |             |  |          |     |             |  |         
|$ 3.79  $ 9.54         |  |             | 556   |             |  |          | 1.9 |             |  | $        | 7.03  |  |  |  | 478   |  |  | $ | 6.81  | 
|                       
|                       
|                       
|                       
|10.29   12.79          |  |             | 764   |             |  |          | 8.0 |             |  |          | 12.21 |  |  |  | 154   |  |  |   | 11.09 | 
|                       
|                       
|                       
|                       
|13.92   13.92          |  |             | 1,000 |             |  |          | 8.4 |             |  |          | 13.92 |  |  |  |      |  |  |   |      | 
|                       
|                       
|                       
|                       
|14.35   14.37          |  |             | 934   |             |  |          | 3.8 |             |  |          | 14.36 |  |  |  | 169   |  |  |   | 14.36 | 
|                       
|                       
|                       
|                       
|14.50   16.11          |  |             | 1,093 |             |  |          | 4.0 |             |  |          | 15.22 |  |  |  | 690   |  |  |   | 15.34 | 
|                        |  |             |       |             |  |          |     |             |  |          |       |  |  |  |       |  |  |   |       | 
|$ 3.79  $16.11         |  |             | 4,347 |             |  |          | 5.4 |             |  | $        | 13.16 |  |  |  | 1,491 |  |  | $ | 12.06 | 
|                        |  |             |       |             |  |          |     |             |  |          |       |  |  |  |       |  |  |   |       | 

Share Grant

In May 2001, an officer was granted the right to receive an
amount, payable in our common stock, equal to the excess of the
fair market value (as defined in our 2001 plan) of a
share of common stock on the effective date and $22.00,
multiplied by one million. On the effective date, May 8,
2001, the closing price of our common stock was $23.00 and
accordingly, the employee will receive $1.0 million, to be
paid in five annual installments as of each anniversary of the
effective date, in the form of a direct grant of shares of
common stock. The number of shares is determined by dividing the
annual installment by the fair market value of a share on the
applicable anniversary date. We will recognize $1.0 million
of noncash compensation expense ratably over the five-year
period. General and administrative expense includes
$0.3 million of noncash compensation expense in each of
2002 and 2001 with respect to this grant.

Restricted Stock
Awards

During 2002 certain officers were granted awards totaling
180,000 restricted shares of our common stock which will vest in
three equal annual installments beginning on the first
anniversary of the date of grant. General and administrative
expense for 2002 includes $0.3 million of noncash
compensation expense with respect to these share grants.

F-28



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In March 2003 our officers and directors were granted awards
totaling 141,500 restricted shares of our common stock. With
respect to 40,000 of such shares, vesting will occur in two
equal annual installments beginning on the first anniversary of
the effective date of the grant. The remaining
101,500 restricted shares will vest at the end of three
years from the effective date of the grant. If after eighteen
months from the date of grant our common stock trades 50% higher
than the grant price for thirty consecutive trading days, the
101,500 restricted shares will vest immediately.

Note 16  Commitments, Contingencies and Industry
Concentration

Commitments and
Contingencies

Historically, we leased certain real property, equipment and
operating facilities under various operating leases. Prior to
the spin-off substantially all of such leases were transferred
to PXP. Our future non-cancelable commitments under operating
leases at December 31, 2002, which relate to certain real
property, are as follows: 2003  $22,000;
2004  $23,000; 2005  $23,000; and
2006  $6,000. Total expenses related to operating
lease commitments for the years ended December 31, 2002,
2001 and 2000 were $0.7 million, $0.7 million and
$7.3 million, respectively. Such amounts for 2000 include
$6.7 million attributable to PAA.

Although we obtained environmental studies on our properties in
Florida and we believe that such properties have been operated
in accordance with standard oil field practices, current or
future local, state and federal environmental laws and
regulations may require substantial expenditures to comply with
such rules and regulations

Consistent with normal industry practices, substantially all of
our oil and gas leases require that, upon termination of
economic production, the working interest owners plug and
abandon non-producing wellbores, remove tanks, production
equipment and flow lines and restore the wellsite. We have
estimated that the costs to perform these tasks is approximately
$9.0 million, net of salvage value and other
considerations. For valuation and realization purposes of the
affected oil and gas properties, these estimated future costs
are also deducted from estimated future gross revenues to arrive
at the estimated future net revenues and the Standardized
Measure disclosed in Note 20. As is common within the industry,
we have entered into various commitments and operating
agreements related to the exploration and development of and
production from proved oil and gas properties and the marketing,
transportation, terminalling and storage of oil. It is
managements belief that such commitments will be met
without a material adverse effect on our financial position,
results of operations or cash flows.

Industry
Concentration

Financial instruments which potentially subject us to
concentrations of credit risk consist principally of accounts
receivable with respect to our oil operations and derivative
instruments related to our hedging activities. PAA is the
exclusive marketer/purchaser for all of our equity oil
production. This concentration has the potential to impact our
overall exposure to credit risk, either positively or
negatively, in that PAA may be affected by changes in economic,
industry or other conditions. We do not believe the loss of PAA
as the exclusive purchaser of our equity production would have a
material adverse affect on our results of operations. We believe
PAA could be replaced by other purchasers under contracts with
similar terms and conditions

There are a limited number of alternative methods of
transportation for our production. Substantially all of our oil
and gas production is transported by pipelines, trucks and
barges owned by third parties. The inability or unwillingness of
these parties to provide transportation services to us for a
reasonable fee could result in our having to find transportation
alternatives, increased

F-29



---



##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

transportation costs or involuntary curtailment of a significant
portion of our oil and gas production which could have a
negative impact on future results of operations or cash flows.

Note 17  Litigation

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. 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. 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 18  Financial Instruments

The following disclosure of the estimated fair value of
financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial
Instruments (SFAS 107). The estimated fair value
amounts have been determined using available market information
and valuation methodologies described below. Considerable
judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions
or valuation methodologies may have a material effect on the
estimated fair value amounts.

The carrying values of items comprising current assets and
current liabilities approximate fair values due to the
short-term maturities of these instruments. Derivative financial
instruments are stated at fair value. The carrying amounts and
fair values of our other financial instruments are as follows
(in thousands):

|                |                      |              |   |        |  |          |   |        |  |  |   |         |  |  |   |         | 
|--------------- | -------------------- | ------------ | - | ------ |  | -------- | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|                |                      |             
|                |                      | December 31,
|                |                      |             
|                |                      |              |   |       
|                |                      | 2002         |   | 2001  
|                |                      |              |   |       
|                |                      | Carrying     |   | Fair   |  | Carrying |   | Fair  
|                |                      | Amount       |   | Value  |  | Amount   |   | Value 
|                |                      |              |   |        |  |          |   |       
|Long-Term Debt: |                      |              |   |        |  |          |   |        |  |  |   |         |  |  |   |        
|               
|               
|               
|               
|                | Bank debt            |              | $ | 45,000 |  |          | $ | 45,000 |  |  | $ | 11,500  |  |  | $ | 11,500  | 
|               
|               
|               
|               
|                | Subordinated debt    |              |   |       |  |          |   |       |  |  |   | 269,539 |  |  |   | 272,130 | 
|               
|               
|               
|               
|                | Other long-term debt |              |   |       |  |          |   |       |  |  |   | 1,022   |  |  |   | 1,022   | 

The carrying value of bank debt approximates its fair value, as
interest rates are variable, based on prevailing market rates.
The fair value of subordinated debt is based on quoted market
prices based on trades of subordinated debt.

F-30



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 19  Supplemental Disclosures of Cash Flow
Information

Selected cash payments and noncash activities were as follows
(in thousands):

|                                                                      |                                                         |                         |        |       |  |      |        |       |  |   |        |       | 
|--------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------- | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                                      |                                                         |                        
|                                                                      |                                                         | Year Ended December 31,
|                                                                      |                                                         |                        
|                                                                      |                                                         | 2002                    |        | 2001  |  | 2000
|                                                                      |                                                         |                         |        |       |  |     
|Cash paid for interest (net of amount capitalized)                    |                                                         | $                       | 25,129 |       |  | $    | 27,939 |       |  | $ | 56,154 |      
|                                                                      |                                                         |                         |        |       |  |      |        |       |  |   |        |      
|Cash paid for taxes                                                   |                                                         | $                       | 4,282  |       |  | $    | 7,048  |       |  | $ | 987    |      
|                                                                      |                                                         |                         |        |       |  |      |        |       |  |   |        |      
|Noncash sources and (uses) of investing and
    financing activities: |                                                         |                         |        |       |  |      |        |       |  |   |        |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Tax benefit from exercise of employee stock
    options |                         | $      | 2,248 |  |      | $      | 6,990 |  |   | $      | 1,901 | 
|                                                                      |                                                         |                         |        |       |  |      |        |       |  |   |        |      

Note 20  Oil and Gas Activities

Costs Incurred

Our oil and gas acquisition, exploration, exploitation and
development activities are conducted in the United States. The
following table summarizes the costs incurred during the last
three years (in thousands).

|                                   |                   |                         |       |      |  |      |        |     |  |   |        |     | 
|---------------------------------- | ----------------- | ----------------------- | ----- | ---- |  | ---- | ------ | --- |  | - | ------ | --- | 
|                                   |                   |                        
|                                   |                   | Year Ended December 31,
|                                   |                   |                        
|                                   |                   | 2002                    |       | 2001 |  | 2000
|                                   |                   |                         |       |      |  |     
|Property acquisitions costs:       |                   |                         |       |      |  |      |        |     |  |   |        |    
|                                  
|                                  
|                                  
|                                  
|                                   | Proved properties |                         | $     |     |  |      | $      | 153 |  |   | $      | 480 | 
|                                  
|                                  
|                                  
|                                  
|Exploration costs                  |                   |                         |      |      |  |      | 43     |     |  |   | 579    |    
|                                  
|                                  
|                                  
|                                  
|Exploitation and development costs |                   |                         | 5,860 |      |  |      | 10,526 |     |  |   | 9,364  |    
|                                   |                   |                         |       |      |  |      |        |     |  |   |        |    
|                                   |                   | $                       | 5,860 |      |  | $    | 10,722 |     |  | $ | 10,423 |    
|                                   |                   |                         |       |      |  |      |        |     |  |   |        |    

Costs incurred for discontinued operations for the years ended
December 31, 2002, 2001 and 2000 was $64.5 million,
$125.8 million and $70.5 million, respectively.

Capitalized Costs

The following table presents the aggregate capitalized costs
subject to amortization relating to our oil and gas acquisition,
exploration, exploitation and development activities, and the
aggregate related accumulated DD&A (in thousands).

|                  |  |              |          |      |  |   |          |  
|----------------- |  | ------------ | -------- | ---- |  | - | -------- | -
|                  |  |             
|                  |  | December 31,
|                  |  |             
|                  |  | 2002         |          | 2001
|                  |  |              |          |     
|Proved properties |  | $            | 349,517  |      |  | $ | 339,864  |  
|                 
|                 
|                 
|                 
|Accumulated DD&A  |  |              | (299,187 | )    |  |   | (295,472 | )
|                  |  |              |          |      |  |   |          |  
|                  |  | $            | 50,330   |      |  | $ | 44,392   |  
|                  |  |              |          |      |  |   |          |  

The DD&A rate per equivalent unit of production was $3.73,
$2.74 and $1.56 for the years ended December 31, 2002,
2001, and 2000, respectively.

Capitalized costs for discontinued operations at
December 31, 2002 and 2001 was $462.2 million and
$421.2 million, respectively.

F-31



---



##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Costs Not Subject to
Amortization

The following table summarizes the categories of costs
comprising the amount of unproved properties not subject to
amortization (in thousands).

|                     |  |              |   |      |  |      |       |  |  |   |       | 
|-------------------- |  | ------------ | - | ---- |  | ---- | ----- |  |  | - | ----- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2002         |   | 2001 |  | 2000
|                     |  |              |   |      |  |     
|Acquisition costs    |  | $            |  |      |  | $    | 2,515 |  |  | $ | 2,997 | 
|                    
|                    
|                    
|                    
|Exploration costs    |  |              |  |      |  |      | 3,579 |  |  |   | 4,031 | 
|                    
|                    
|                    
|                    
|Capitalized interest |  |              |  |      |  |      | 1,042 |  |  |   | 816   | 
|                     |  |              |   |      |  |      |       |  |  |   |       | 
|                     |  | $            |  |      |  | $    | 7,136 |  |  | $ | 7,844 | 
|                     |  |              |   |      |  |      |       |  |  |   |       | 

During 2001 and 2000, we capitalized $0.5 million and
$0.6 million, respectively, of interest related to the
costs of unproved properties in the process of development.

Costs not subject to amortization for discontinued operations at
December 31, 2002, 2001 and 2000 was $30.0 million,
$33.4 million and $34.7 million, respectively.

Results of Operations for
Oil and Gas Producing Activities

The results of operations from oil and gas producing activities
below exclude non-oil and gas revenues, general and
administrative expenses, interest charges, interest income and
interest capitalized. Income tax (expense) or benefit was
determined by applying the statutory rates to pretax operating
results (in thousands).

|                                                                                                      |  |                         |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                      |  |                        
|                                                                                                      |  | Year Ended December 31,
|                                                                                                      |  |                        
|                                                                                                      |  | 2002                    |        | 2001 |  | 2000
|                                                                                                      |  |                         |        |      |  |     
|Revenues from oil and gas producing activities                                                        |  | $                       | 18,662 |      |  | $    | 16,030 |   |  | $ | 10,643 |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Production costs                                                                                      |  |                         | (6,536 | )    |  |      | (7,397 | ) |  |   | (5,912 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Oil transportation expenses                                                                           |  |                         | (3,775 | )    |  |      | (4,449 | ) |  |   | (3,752 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Depreciation, depletion and amortization                                                              |  |                         | (3,239 | )    |  |      | (3,302 | ) |  |   | (2,151 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Income tax (expense) benefit                                                                          |  |                         | (1,971 | )    |  |      | (353   | ) |  |   | 370    |  
|                                                                                                      |  |                         |        |      |  |      |        |   |  |   |        |  
|Results of operations from producing activities
    (excluding corporate overhead and interest costs) |  | $                       | 3,141  |      |  | $    | 529    |   |  | $ | (802   | )
|                                                                                                      |  |                         |        |      |  |      |        |   |  |   |        |  

The results of operations from discontinued oil and gas
producing activities for the years ended December 31, 2002,
2001 and 2000 was $49.2 million, $71.6 million and
$42.8 million, respectively.

Supplemental Reserve
Information (Unaudited)

The following information summarizes our net proved reserves of
oil (including condensate and gas liquids) and gas and the
present values thereof for the three years ended
December 31, 2002. The following reserve information is
based upon reports of the independent petroleum consulting firms
of Netherland, Sewell & Associates, Inc. The estimates
are in accordance with regulations prescribed by the SEC.

We believe the reserve estimates presented herein, in accordance
with generally accepted engineering and evaluation principles
consistently applied, are reasonable. However, there are
numerous uncertainties inherent in estimating quantities and
values of proved reserves and in projecting future rates of
production and timing of development expenditures, including
many factors beyond our control. Reserve engineering is a
subjective process of estimating the recovery

F-32



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

from underground accumulations of oil and gas that cannot be
measured in an exact manner, and the accuracy of any reserve
estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Because
all reserve estimates are to some degree speculative, the
quantities of oil and gas that are ultimately recovered,
production and operating costs, the amount and timing of future
development expenditures and future oil and gas sales prices may
all differ from those assumed in these estimates. In addition,
different reserve engineers may make different estimates of
reserve quantities and cash flows based upon the same available
data. Therefore, the Standardized Measure shown below represents
estimates only and should not be construed as the current market
value of the estimated oil and gas reserves attributable to our
properties. In this regard, the information set forth in the
following tables includes revisions of reserve estimates
attributable to proved properties included in the preceding
years estimates. Such revisions reflect additional
information from subsequent exploitation and development
activities, production history of the properties involved and
any adjustments in the projected economic life of such
properties resulting from changes in product prices.

Decreases in the prices of oil have had, and could have in the
future, an adverse effect on the carrying value of our proved
reserves and our revenues, profitability and cash flow. All of
our reserves are comprised of oil properties that are sensitive
to oil price volatility.

Estimated Quantities of Oil
Reserves (Unaudited)

The following table sets forth certain data pertaining to our
proved and proved developed reserves for the three years ended
December 31, 2002 (in thousands).

|                          |                                                                    |                             |  |        |   |      |  |        |   |  |  |        |  
|------------------------- | ------------------------------------------------------------------ | --------------------------- |  | ------ | - | ---- |  | ------ | - |  |  | ------ | -
|                          |                                                                    |                            
|                          |                                                                    | As of or for the Year Ended
|                          |                                                                    | December 31,               
|                          |                                                                    |                            
|                          |                                                                    | 2002                        |  | 2001   |   | 2000
|                          |                                                                    |                             |  |        |   |     
|                          |                                                                    |                            
|                          |                                                                    | Oil (MBbls)                
|                         
|                         
|                         
|                         
|Proved Reserves           |                                                                    |                             |  |        |   |      |  |        |   |  |  |       
|                         
|                         
|                         
|                         
|                          | Beginning balance                                                  |                             |  | 17,343 |   |      |  | 18,775 |   |  |  | 23,709 |  
|                         
|                         
|                         
|                         
|                          | Revision of previous estimates                                     |                             |  | (60    | ) |      |  | (2,470 | ) |  |  | (4,092 | )
|                         
|                         
|                         
|                         
|                          | Extensions, discoveries, improved recovery and
    other additions |                             |  |       |   |      |  | 1,992  |   |  |  |       |  
|                         
|                         
|                         
|                         
|                          | Production                                                         |                             |  | (970   | ) |      |  | (954   | ) |  |  | (842   | )
|                          |                                                                    |                             |  |        |   |      |  |        |   |  |  |       
|                          | Ending balance                                                     |                             |  | 16,313 |   |      |  | 17,343 |   |  |  | 18,775 |  
|                          |                                                                    |                             |  |        |   |      |  |        |   |  |  |       
|Proved Developed Reserves |                                                                    |                             |  |        |   |      |  |        |   |  |  |       
|                         
|                         
|                         
|                         
|                          | Beginning balance                                                  |                             |  | 15,456 |   |      |  | 17,853 |   |  |  | 19,383 |  
|                          |                                                                    |                             |  |        |   |      |  |        |   |  |  |       
|                          | Ending balance                                                     |                             |  | 14,499 |   |      |  | 15,456 |   |  |  | 17,853 |  
|                          |                                                                    |                             |  |        |   |      |  |        |   |  |  |       

Proved oil and gas reserves for discontinued operations totaled
240.2 MMBbls of oil and 77.1 Bcf of gas at
December 31, 2002; 223.3 MMBbls of oil and 96.2 Bcf of
gas at December 31, 2001, and 204.4 MMBbls of oil and
93.5 Bcf of gas at December 31, 2000.

F-33



---



##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Standardized Measure of
Discounted Future Net Cash Flows (Unaudited)

The Standardized Measure of discounted future net cash flows
relating to proved oil reserves is presented below (in
thousands):

|                                                             |  |              |          |      |  |      |          |   |  |   |          |  
|------------------------------------------------------------ |  | ------------ | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                             |  |             
|                                                             |  | December 31,
|                                                             |  |             
|                                                             |  | 2002         |          | 2001 |  | 2000
|                                                             |  |              |          |      |  |     
|Future cash inflows                                          |  | $            | 330,377  |      |  | $    | 171,319  |   |  | $ | 207,129  |  
|                                                            
|                                                            
|                                                            
|                                                            
|Future development costs                                     |  |              | (30,992  | )    |  |      | (24,131  | ) |  |   | (26,543  | )
|                                                            
|                                                            
|                                                            
|                                                            
|Future production expense                                    |  |              | (151,539 | )    |  |      | (112,503 | ) |  |   | (126,809 | )
|                                                            
|                                                            
|                                                            
|                                                            
|Future income tax expense                                    |  |              | (27,136  | )    |  |      |         |   |  |   |         |  
|                                                             |  |              |          |      |  |      |          |   |  |   |          |  
|Future net cash flows                                        |  |              | 120,710  |      |  |      | 34,685   |   |  |   | 53,777   |  
|                                                            
|                                                            
|                                                            
|                                                            
|Discounted at 10% per year                                   |  |              | (47,371  | )    |  |      | (8,140   | ) |  |   | (12,567  | )
|                                                             |  |              |          |      |  |      |          |   |  |   |          |  
|Standardized measure of discounted future net
    cash flows |  | $            | 73,339   |      |  | $    | 26,545   |   |  | $ | 41,210   |  
|                                                             |  |              |          |      |  |      |          |   |  |   |          |  

The Standardized Measure of discounted future net cash flows
related to discontinued operations at December 31, 2002,
2001 and 2000 was $883.5 million, $384.5 million and
$789.4 million, respectively.

The Standardized Measure of discounted future net cash flows
(discounted at 10%) from production of proved reserves was
developed as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. An estimate was made of the quantity of proved reserves
    and the future periods in which they are expected to be produced
    based on year-end economic conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | 2. In accordance with SEC guidelines, the engineers
    estimates of future net revenues from our proved properties and
    the present value thereof are made using oil sales prices in
    effect as of the dates of such estimates and are held constant
    throughout the life of the properties, except where such
    guidelines permit alternate treatment, including the use of
    fixed and determinable contractual price escalations. We have
    entered into various arrangements to fix or limit the NYMEX oil
    price for a significant portion of our oil production.
    Arrangements in effect at December 31, 2002 are discussed
    in Note 3. Such arrangements are not reflected in the
    reserve reports. The overall average year-end realized price
    used in the reserve reports as of December 31, 2002, was
    $20.25 per barrel of oil. Such price as of December 31,
    2001 was $9.82 per barrel of oil.
|
| | 3. The future gross revenue streams were reduced by
    estimated future operating costs (including production and ad
    valorem taxes) and future development and abandonment costs, all
    of which were based on current costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | 4. The reports reflect the pre-tax Present Value of Proved
    Reserves to be $87.9 million, $26.5 million and
    $41.2 million at December 31, 2002, 2001 and 2000,
    respectively. SFAS No. 69 requires us to further reduce
    these estimates by an amount equal to the present value of
    estimated income taxes which might be payable by us in future
    years to arrive at the Standardized Measure. Future income taxes
    were calculated by applying the statutory federal and state
    income tax rate to pre-tax future net cash flows, net of the tax
    basis of the properties involved and utilization of available
    tax carryforwards related to oil operations.                                                                                                                                                                                                                                                   

F-34



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##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The principal sources of changes in the Standardized Measure of
the future net cash flows for the three years ended
December 31, 2002, are as follows (in thousands):

|                                                                        |  |                         |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                        |  |                        
|                                                                        |  | Year Ended December 31,
|                                                                        |  |                        
|                                                                        |  | 2002                    |         | 2001 |  | 2000
|                                                                        |  |                         |         |      |  |     
|Balance, beginning of year                                              |  | $                       | 26,545  |      |  | $    | 41,210  |   |  | $ | 134,380 |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Sales, net of production expenses                                       |  |                         | (8,964  | )    |  |      | (5,355  | ) |  |   | (7,549  | )
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Net change in sales and transfer prices, net of
    production expenses |  |                         | 77,743  |      |  |      | (16,188 | ) |  |   | (95,420 | )
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Changes in estimated future development costs                           |  |                         | (3,185  | )    |  |      | 1,374   |   |  |   | 2,094   |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Extensions, discoveries and improved recovery,
    net of costs         |  |                         |        |      |  |      | 5,768   |   |  |   |        |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Previously estimated development costs incurred
    during the year     |  |                         | 915     |      |  |      | 840     |   |  |   | 3,508   |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Revision of quantity estimates and timing of
    estimated production   |  |                         | (8,125  | )    |  |      | (6,239  | ) |  |   | (15,629 | )
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Accretion of discount                                                   |  |                         | 2,986   |      |  |      | 5,135   |   |  |   | 14,515  |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Net change in income taxes                                              |  |                         | (14,576 | )    |  |      |        |   |  |   | 5,311   |  
|                                                                        |  |                         |         |      |  |      |         |   |  |   |         |  
|Balance, end of year                                                    |  | $                       | 73,339  |      |  | $    | 26,545  |   |  | $ | 41,210  |  
|                                                                        |  |                         |         |      |  |      |         |   |  |   |         |  

Note 21  Quarterly Financial Data (Unaudited)

As a result of the spin-off, the historical results of
operations of PXP are reflected as discontinued operations. The
following table shows summary financial data for 2002 and 2001
(in thousands, except per share data):

|                                                        |                         |         |        |         |  |         |       |         |  |      |        |      |  |   |        |      |  |   |        |      | 
|------------------------------------------------------- | ----------------------- | ------- | ------ | ------- |  | ------- | ----- | ------- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                        |                         | First   |        | Second  |  | Third   |       | Fourth  |  |     
|                                                        |                         | Quarter |        | Quarter |  | Quarter |       | Quarter |  | Year
|                                                        |                         |         |        |         |  |         |       |         |  |     
|2002                                                    |                         |         |        |         |  |         |       |         |  |      |        |      |  |   |        |      |  |   |        |     
|                                                       
|                                                       
|                                                       
|                                                       
|Revenues                                                |                         | $       | 4,056  |         |  | $       | 4,659 |         |  | $    | 5,151  |      |  | $ | 4,796  |      |  | $ | 18,662 |     
|                                                       
|                                                       
|                                                       
|                                                       
|Costs and expenses                                      |                         |         | 5,261  |         |  |         | 5,196 |         |  |      | 4,950  |      |  |   | 4,790  |      |  |   | 20,197 |     
|                                                       
|                                                       
|                                                       
|                                                       
|Operating profit (loss)                                 |                         |         | (1,205 | )       |  |         | (537  | )       |  |      | 201    |      |  |   | 6      |      |  |   | (1,535 | )   
|                                                       
|                                                       
|                                                       
|                                                       
|Equity in earnings of PAA                               |                         |         | 4,350  |         |  |         | 5,256 |         |  |      | 4,454  |      |  |   | 4,747  |      |  |   | 18,807 |     
|                                                       
|                                                       
|                                                       
|                                                       
|Gains on PAA unit transactions and
    public offerings |                         |         |       |         |  |         |      |         |  |      | 14,512 |      |  |   |       |      |  |   | 14,512 |     
|                                                       
|                                                       
|                                                       
|                                                       
|Income from continuing operations                       |                         |         | 732    |         |  |         | 1,456 |         |  |      | 3,767  |      |  |   | 3,777  |      |  |   | 9,732  |     
|                                                       
|                                                       
|                                                       
|                                                       
|Income from discontinued operations                     |                         |         | 5,864  |         |  |         | 8,218 |         |  |      | 7,418  |      |  |   | 6,300  |      |  |   | 27,800 |     
|                                                       
|                                                       
|                                                       
|                                                       
|Net income                                              |                         |         | 6,596  |         |  |         | 9,674 |         |  |      | 11,185 |      |  |   | 10,077 |      |  |   | 37,532 |     
|                                                       
|                                                       
|                                                       
|                                                       
|Cumulative preferred dividends                          |                         |         | (350   | )       |  |         | (350  | )       |  |      | (350   | )    |  |   | (350   | )    |  |   | (1,400 | )   
|                                                       
|                                                       
|                                                       
|                                                       
|Income available to common stockholders                 |                         |         | 6,246  |         |  |         | 9,324 |         |  |      | 10,835 |      |  |   | 9,727  |      |  |   | 36,132 |     
|Basic EPS                                               |                         |         |        |         |  |         |       |         |  |      |        |      |  |   |        |      |  |   |        |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Continuing operations   |         |        | 0.02    |  |         |       | 0.05    |  |      |        | 0.14 |  |   |        | 0.14 |  |   |        | 0.35 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Discontinued operations |         |        | 0.25    |  |         |       | 0.34    |  |      |        | 0.31 |  |   |        | 0.26 |  |   |        | 1.16 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Net income              |         |        | 0.27    |  |         |       | 0.39    |  |      |        | 0.45 |  |   |        | 0.40 |  |   |        | 1.51 | 
|Diluted EPS                                             |                         |         |        |         |  |         |       |         |  |      |        |      |  |   |        |      |  |   |        |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Continuing operations   |         |        | 0.02    |  |         |       | 0.04    |  |      |        | 0.14 |  |   |        | 0.14 |  |   |        | 0.34 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Discontinued operations |         |        | 0.24    |  |         |       | 0.33    |  |      |        | 0.30 |  |   |        | 0.26 |  |   |        | 1.14 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Net income              |         |        | 0.26    |  |         |       | 0.37    |  |      |        | 0.44 |  |   |        | 0.40 |  |   |        | 1.48 | 

F-35



---



##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                         |                                        |         |        |         |   |         |         |         |  |      |        |      |  |   |        |      |  |   |         |       |  
|-------------------------------------------------------- | -------------------------------------- | ------- | ------ | ------- | - | ------- | ------- | ------- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------- | ----- | -
|                                                         |                                        | First   |        | Second  |   | Third   |         | Fourth  |  |     
|                                                         |                                        | Quarter |        | Quarter |   | Quarter |         | Quarter |  | Year
|                                                         |                                        |         |        |         |   |         |         |         |  |     
|2001                                                     |                                        |         |        |         |   |         |         |         |  |      |        |      |  |   |        |      |  |   |         |      
|                                                        
|                                                        
|                                                        
|                                                        
|Revenues                                                 |                                        | $       | 5,566  |         |   | $       | 2,873   |         |  | $    | 4,572  |      |  | $ | 3,019  |      |  | $ | 16,030  |      
|                                                        
|                                                        
|                                                        
|                                                        
|Costs and expenses                                       |                                        |         | 6,647  |         |   |         | 12,675  |         |  |      | 4,017  |      |  |   | 4,406  |      |  |   | 27,745  |      
|                                                        
|                                                        
|                                                        
|                                                        
|Operating profit (loss)                                  |                                        |         | (1,081 | )       |   |         | (9,802  | )       |  |      | 555    |      |  |   | (1,387 | )    |  |   | (11,715 | )    
|                                                        
|                                                        
|                                                        
|                                                        
|Equity in earnings of PAA                                |                                        |         | 6,836  |         |   |         | 3,755   |         |  |      | 5,207  |      |  |   | 2,742  |      |  |   | 18,540  |      
|                                                        
|                                                        
|                                                        
|                                                        
|Gains on PAA unit transactions and
    public offerings  |                                        |         | 1,958  |         |   |         | 148,213 |         |  |      | 918    |      |  |   | 19,068 |      |  |   | 170,157 |      
|                                                        
|                                                        
|                                                        
|                                                        
|Income from continuing operations                        |                                        |         | 3,379  |         |   |         | 83,022  |         |  |      | 2,686  |      |  |   | 11,537 |      |  |   | 100,624 |      
|                                                        
|                                                        
|                                                        
|                                                        
|Income from discontinued operations                      |                                        |         | 17,573 |         |   |         | 17,080  |         |  |      | 12,468 |      |  |   | 7,572  |      |  |   | 54,693  |      
|                                                        
|                                                        
|                                                        
|                                                        
|Income before cumulative effect of
    accounting change |                                        |         | 20,952 |         |   |         | 100,102 |         |  |      | 15,154 |      |  |   | 19,109 |      |  |   | 155,317 |      
|                                                        
|                                                        
|                                                        
|                                                        
|Cumulative effect of accounting change                   |                                        |         | (1,986 | )       |   |         |        |         |  |      |       |      |  |   |       |      |  |   | (1,986  | )    
|                                                        
|                                                        
|                                                        
|                                                        
|Cumulative preferred dividends                           |                                        |         | (1,599 | )       |   |         | (24,947 | )       |  |      | (350   | )    |  |   | (349   | )    |  |   | (27,245 | )    
|                                                        
|                                                        
|                                                        
|                                                        
|Income available to common stockholders                  |                                        |         | 17,367 |         |   |         | 75,155  |         |  |      | 14,804 |      |  |   | 18,760 |      |  |   | 126,086 |      
|Basic EPS                                                |                                        |         |        |         |   |         |         |         |  |      |        |      |  |   |        |      |  |   |         |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Continuing operations                  |         |        | 0.10    |   |         |         | 2.96    |  |      |        | 0.10 |  |   |        | 0.47 |  |   |         | 3.48  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Discontinued operations                |         |        | 1.01    |   |         |         | 0.87    |  |      |        | 0.53 |  |   |        | 0.32 |  |   |         | 2.59  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cumulative effect of accounting change |         |        | (0.11   | ) |         |         |        |  |      |        |     |  |   |        |     |  |   |         | (0.09 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net income                             |         |        | 1.00    |   |         |         | 3.83    |  |      |        | 0.63 |  |   |        | 0.79 |  |   |         | 5.98  |  
|Diluted EPS                                              |                                        |         |        |         |   |         |         |         |  |      |        |      |  |   |        |      |  |   |         |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Continuing operations                  |         |        | 0.07    |   |         |         | 2.08    |  |      |        | 0.10 |  |   |        | 0.45 |  |   |         | 2.75  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Discontinued operations                |         |        | 0.73    |   |         |         | 0.60    |  |      |        | 0.48 |  |   |        | 0.30 |  |   |         | 2.01  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cumulative effect of accounting change |         |        | (0.07   | ) |         |         |        |  |      |        |     |  |   |        |     |  |   |         | (0.07 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net income                             |         |        | 0.73    |   |         |         | 2.68    |  |      |        | 0.58 |  |   |        | 0.75 |  |   |         | 4.69  |  

Note 22  Operating Segments

Prior to completion of the Transactions, our operations
consisted of two operating segments: (1) Upstream
Operations  engages in the acquisition, exploitation,
development, exploration and production of oil and gas and (2)
Midstream Operations  engages in pipeline
transportation, purchases and resales of oil at various points
along the distribution chain and the leasing of certain
terminalling and storage assets. As a result of the Transactions
we no longer have a Midstream segment.

F-36



---



##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                                             |                                     |                                       |         |           |         |       |         |           |           |   |           |           |           | 
|------------------------------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------------------- | ------- | --------- | ------- | ----- | ------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                                                                             |                                     | Upstream                              |         | Midstream |         | Total
|                                                                                                             |                                     |                                       |         |           |         |      
|                                                                                                             |                                     |                                      
|                                                                                                             |                                     | (In thousands)                       
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|2000                                                                                                         |                                     |                                       |         |           |         |       |         |           |           |   |           |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Revenues:                                                                                                    |                                     |                                       |         |           |         |       |         |           |           |   |           |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | External customers                  |                                       | $       | 149,342   |         |       | $       | 6,425,644 |           |   | $         | 6,574,986 |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Intersegment(a)                     |                                       |         |          |         |       |         | 215,543   |           |   |           | 215,543   |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Gain on sale of assets              |                                       |         |          |         |       |         | 48,188    |           |   |           | 48,188    |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Interest and other income (expense) |                                       |         | (3,468    | )       |       |         | 10,879    |           |   |           | 7,411     |          
|                                                                                                             |                                     |                                       |         |           |         |       |         |           |           |   |           |          
|                                                                                                             |                                     | Total revenues of reportable segments |         | $         | 145,874 |       |         | $         | 6,700,254 |   |           | $         | 6,846,128 | 
|                                                                                                             |                                     |                                       |         |           |         |       |         |           |           |   |           |          
|Segment gross margin(b)                                                                                      |                                     | $                                     | 86,202  |           |         | $     | 126,066 |           |           | $ | 212,268   |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Segment gross profit(c)                                                                                      |                                     |                                       | 76,297  |           |         |       | 85,195  |           |           |   | 161,492   |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Segment income (loss) before income taxes,
    extraordinary item and cumulative effect of accounting change |                                     |                                       | 23,009  |           |         |       | 91,033  |           |           |   | 114,042   |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Interest expense                                                                                             |                                     |                                       | 27,346  |           |         |       | 28,482  |           |           |   | 55,828    |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Depreciation, depletion and amortization                                                                     |                                     |                                       | 22,474  |           |         |       | 24,747  |           |           |   | 47,221    |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Income tax expense                                                                                           |                                     |                                       | 6,503   |           |         |       | 19,080  |           |           |   | 25,583    |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Extraordinary item, net of tax and minority
    interest                                                     |                                     |                                       |        |           |         |       | (4,988  | )         |           |   | (4,988    | )        
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Capital expenditures                                                                                         |                                     |                                       | 81,475  |           |         |       | 12,603  |           |           |   | 94,078    |          
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Assets                                                                                                       |                                     |                                       | 458,678 |           |         |       | 935,651 |           |           |   | 1,394,329 |          



---



|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(a) | Intersegment revenues and transfers were conducted on an
    arms-length basis.                                     
|   
|(b) | Gross margin is calculated as operating revenues less operating
    expenses.                                        
|   
|(c) | Gross profit is calculated as operating revenues less operating
    expenses and general and administrative expenses.

The following table reconciles segment revenues to amounts
reported in our financial statements for the year ended
December 31, 2000 (in thousands):

|                                                                                     |  |   |           |  
|------------------------------------------------------------------------------------ |  | - | --------- | -
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Revenues of reportable segments                                                      |  | $ | 6,846,128 |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Intersegment                                                                         |  |   | (215,543  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net gain recorded upon the formation of PAA not
    allocated to reportable segments |  |   |          |  
|                                                                                     |  |   |           |  
|Total company revenues                                                               |  | $ | 6,630,585 |  
|                                                                                     |  |   |           |  

F-37



---



##### Table of Contents



PLAINS RESOURCES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

PAA is the exclusive purchaser of all of our equity oil
production. The following table reflects for the year ended
December 31, 2000, during which period PAA was included in
our consolidated financial statements, customers accounting for
more than 10% of consolidated sales (excluding hedging effects):

|                              |  |               |     | 
|----------------------------- |  | ------------- | --- | 
|                              |  | Percentage of
|                              |  | Consolidated 
|Customer                      |  | Sales        
|                              |  |              
|Marathon Ashland Petroleum(1) |  |               | 12% | 

|            |  |               |     | 
|----------- |  | ------------- | --- | 
|            |  | Percentage of
|            |  | Oil Sales(2) 
|            |  |              
|Conoco Inc. |  |               | 55% | 
|           
|           
|           
|           
|ExxonMobil  |  |               | 33% | 



---



|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These customers pertain to our midstream segment Represents
    percentage of oil and gas sales revenues plus marketing,
    transportation, storage and terminalling revenues.
|   
|(2) | These percentages represent the entities that purchased our
    equity oil production from PAA.                                                                                

We do not believe the loss of PAA as the exclusive purchaser of
our equity production would have a material adverse effect on
our results of operations. We believe PAA could be replaced by
other purchasers under contracts with similar terms and
conditions.

F-38



---



##### Table of Contents








EXHIBIT INDEX


| |      |  |  |                                                                                                                                                                                                                                                                                              
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1  |  |  | Stock Purchase Agreement dated as of
    March 15, 1998, among Plains Resources Inc., Plains All
    American Inc. and Wingfoot Ventures Seven Inc. (incorporated by
    reference to Exhibit 2(b) to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    1997).
| | 3.1  |  |  | Second Restated Certificate of Incorporation of
    the Company (incorporated by reference to Exhibit 3(a) to
    the Companys Annual Report on Form 10-K for the year
    ended December 31, 1995).                                                                                        
| | 3.2  |  |  | Bylaws of the Company                                                                                                                                                                                                                                                                        
| | 3.3  |  |  | Certificate of Designation, Preference and Rights
    of Series D Cumulative Convertible Preferred Stock
    (incorporated by reference to Exhibit 3(c) to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 1997).                                    
| | 3.4  |  |  | First Amendment to the Plains Resources Inc.
    Bylaws (incorporated by reference to Exhibit 3.1 to the
    Companys Quarterly Report on Form 10-Q for the three
    months ended June 30, 2001).                                                                                          
| | 4.1  |  |  | Specimen Common Stock Certificate (incorporated
    by reference to Exhibit 4 to the Companys
    Form S-1 Registration Statement (Reg. No. 33-33986)).                                                                                                                                     
| | 10.1 |  |  | The Companys 1992 Stock Incentive Plan
    (incorporated by reference to Exhibit 4.3 to the
    Companys Form S-8 Registration Statement (Reg.
    No. 33-48610)).                                                                                                                         
| | 10.2 |  |  | First Amendment to the Companys 1992 Stock
    Incentive Plan (incorporated by reference to Exhibit 10(n)
    to the Companys Annual Report on Form 10-K for the
    year ended December 31, 1996).                                                                                        
| | 10.3 |  |  | Second Amendment to the Companys 1992 Stock
    Incentive Plan (incorporated by reference to Exhibit 10(b)
    to the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended June 30, 1997).                                                                            
| | 10.4 |  |  | Third Amendment to Plains Resources Inc. 1992
    Stock Incentive Plan dated May 21, 1998 (incorporated by
    reference to Exhibit 10(aa) to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    September 30, 1998).                                        
| | 10.5 |  |  | The Companys 1996 Stock Incentive Plan
    (incorporated by reference to Exhibit 4 to the
    Companys Form S-8 Registration Statement (Reg.
    No. 333-06191)).                                                                                                                          
| | 10.6 |  |  | First Amendment to Plains Resources Inc. 1996
    Stock Incentive Plan dated May 21, 1998 (incorporated by
    reference to Exhibit 10(z) to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    September 30, 1998)                                          
| | 10.7 |  |  | Second Amendment to Plains Resources 1996 Stock
    Incentive Plan dated May 20, 1999 (incorporated by
    reference to Exhibit 10(q) to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    June 30, 1999).                                                  
| | 10.8 |  |  | Third Amendment to Plains Resources 1996 Stock
    Incentive Plan dated June 7, 2000(incorporated by reference
    to Exhibit 10.23 to the Companys Annual Report on
    Form 10-K for the Year Ended December 31, 2000).                                                                   
| | 10.9 |  |  | Forms of Officer Stock Option Agreement
    (incorporated by reference to Exhibits 4.1 and 4.2 to the
    Companys Form S-8 Registration Statement
    (Registration No. 333-45562).                                                                                                        



---



##### Table of Contents



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.10 |  |  | Contribution, Conveyance and Assumption Agreement
    among Plains All American Pipeline, L.P. and certain other
    parties dated as of November 23, 1998 (incorporated by
    reference to Exhibit 10.03 to Annual Report on
    Form 10-K for the Year Ended December 31, 1998 for
    Plains All American Pipeline, L.P.).                                                                                                                                                                
| | 10.11 |  |  | Crude Oil Marketing Agreement among Plains
    Resources Inc., Plains Illinois Inc., Stocker Resources, L.P.,
    Calumet Florida, Inc. and Plains Marketing, L.P. dated as of
    November 23, 1998 (incorporated by reference to
    Exhibit 10.07 to Annual Report on Form 10-K for the
    Year Ended December 31, 1998 for Plains All American
    Pipeline, L.P.).                                                                                                                      
| | 10.12 |  |  | First Amendment to Contribution, Conveyance and
    Assumption Agreement dated as of December 15, 1998
    (incorporated by reference to Exhibit 10.13 to Annual
    Report on Form 10-K for the Year Ended December 31,
    1998 for Plains All American Pipeline, L.P.).                                                                                                                                                                                                                    
| | 10.13 |  |  | Performance Stock Option Agreement dated as of
    May 8, 2001 between Plains Resources Inc. and James C.
    Flores (incorporated by reference to Exhibit 10.2 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                                                                             
| | 10.14 |  |  | Separation Agreement dated as of June 8,
    2001 by and among Plains Resources Inc., Plains Holdings Inc.
    (formerly known as Plains All American Inc.), Plains All
    American GP LLC, Plains AAP, LP and Plains All American
    Pipeline, L.P. (incorporated by reference to Exhibit 10.3
    to the Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                           
| | 10.15 |  |  | Pension and Employee Benefits Assumption and
    Transition Agreement, dated as of June 8, 2001, by and
    between Plains Resources Inc., Plains Holdings Inc. (formerly
    known as Plains All American Inc.) and Plains All American GP
    LLC (incorporated by reference to Exhibit 10.4 to the
    Companys Quarterly Report on Form 10-Q for the three
    months ended June 30, 2001).                                                                                              
| | 10.16 |  |  | Value Assurance Agreement dated as of
    June 8, 2001 by and among Plains Resources Inc. and Sable
    Holdings L.P. and schedule of other Value Assurance Agreements
    substantially identical thereto (incorporated by reference to
    Exhibit 10.5 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30, 2001).                                                                                                                                       
| | 10.17 |  |  | Contribution, Assignment and Amendment Agreement
    dated as of June 8, 2001, between Plains Holdings Inc.
    (formerly known as Plains All American Inc.), Plains AAP, LP and
    Plains All American GP LLC. (incorporated by reference to
    Exhibit 10.6 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30, 2001).                                                                                                                                 
| | 10.18 |  |  | Registration Rights Agreement dated as of
    May 8, 2001, among Plains Resources Inc. and James C.
    Flores. (incorporated by reference to Exhibit 10.7 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                                                                                  
| | 10.19 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains Resources Inc., Strome Hedgecap
    Fund L.P., Strome Series Fund 1, Strome Series Fund 2
    and Mark E. Strome. (incorporated by reference to
    Exhibit 10.8 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30,
    2001).                                                                                                                                                   
| | 10.20 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains All American Pipeline, L.P.,
    Sable Holdings, L.P., E-Holdings III, L.P., KAFU Holdings,
    LP, PAA Management, L.P., Mark E. Strome, Strome Hedgecap
    Fund, L.P., John T. Raymond, and Plains Holdings Inc.
    (formerly known as Plains All American Inc.) (incorporated by
    reference to Exhibit 10.9 to the Companys Quarterly
    Report on Form 10-Q for the three months ended
    June 30, 2001).
| | 10.21 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains Resources Inc. and EnCap Energy
    Capital Fund III, L.P., EnCap Energy Capital Fund III-B,
    L.P., BOCP Energy Partners, L.P. and Energy Capital Investment
    Company PLC. (incorporated by reference to Exhibit 10.10 to
    the Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                       
| | 10.22 |  |  | Registration Rights Agreement dated as of
    June 8, 2001, among Plains Resources Inc. and Kayne
    Anderson Capital Advisors, L.P. (incorporated by reference to
    Exhibit 10.11 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30, 2001).                                                                                                                                                                                                           



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##### Table of Contents



| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.23  |  |  | Amended and Restated Limited Liability Company
    Agreement of Plains All American GP LLC, dated as of
    June 8, 2001. (incorporated by reference to
    Exhibit 10.12 to the Companys Quarterly Report on
    Form 10-Q for the three months ended June 30,
    2001).                                                                                                                                       
| | 10.24  |  |  | Amended and Restated Limited Partnership
    Agreement of Plains AAP, L.P, dated June 8, 2001.
    (incorporated by reference to Exhibit 10.13 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                  
| | 10.25  |  |  | Plains Resources Inc. 2001 Stock Incentive Plan.
    (incorporated by reference to Exhibit 10.15 to the
    Companys Quarterly Report on Form 10-Q for the
    three months ended June 30, 2001).                                                                                                                                                                                                                
| | 10.26  |  |  | Value Assurance Agreement, dated as of
    August 17, 2001, by and among Plains Resources Inc. and
    First Union Investors, Inc. (incorporated by reference to
    Exhibit 10.34 of the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001).                                                                                                                                         
| | 10.27  |  |  | Combination Incentive Stock Option and
    Nonqualified Stock Option Agreement, dated as of June 7,
    2001, between John T. Raymond and Plains Resources Inc.
    (incorporated by reference to Exhibit 10.36 of the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2001).                                                                                                        
| | 10.28  |  |  | Performance Stock Option Agreement, dated as of
    June 7, 2001, between John T. Raymond and Plains
    Resources Inc. (incorporated by reference to Exhibit 10.37
    of the Companys Annual Report on Form 10-K for the
    year ended December 31, 2001).                                                                                                                                                    
| | 10.29  |  |  | Secured Term Loan Agreement dated as of
    December 6, 2002, by and among the Company, Bank of
    Montreal as Administrative Agent, Bank One, NA, as Syndication
    Agent, Wells Fargo Bank Texas, NA, as Collateral Agent and
    Documentation Agent, and the Lenders named therein (incorporated
    by reference to Exhibit 10.1 of the Companys Current
    Report on Form 8-K filed on January 2, 2003).
| | 10.30  |  |  | Amended and Restated Employment Agreement, dated
    as of September 19, 2002, by and between James C.
    Flores and the Company (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the three months ended September 30,
    2002).                                                                                                                           
| | 10.31  |  |  | Amended and Restated Employment Agreement, dated
    as of September 19, 2002, by and between John T.
    Raymond and the Company (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the three months ended September 30,
    2002).                                                                                                                           
| | 10.32* |  |  | Form of Officer Restricted Stock Award Agreement.                                                                                                                                                                                                                                                                                                                                                                 
| | 10.33* |  |  | Form of Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                                                                                                                          
| | 10.34* |  |  | Form of Incentive Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                         
| | 10.35* |  |  | Form of Non-Qualified Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                     
| | 10.36  |  |  | Master Separation Agreement dated July 3,
    2002 between PXP and the Company (incorporated by reference to
    Exhibit 10.1 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                                                                                                                                                                                                 
| | 10.37  |  |  | Plains Exploration & Production Company
    Transition Services Agreement dated July 3, 2002 between
    PXP and the Company (incorporated by reference to
    Exhibit 10.2 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                                                                                                                                                   
| | 10.38  |  |  | Extension of Term of Plains Exploration &
    Production Company Transition Services Agreement, dated as of
    December 18, 2002, between PXP and the Company
    (incorporated by reference to Exhibit 10.3 to PXPs
    Registration Statement on Form S-4 filed on
    February 12, 2003).                                                                                                                    
| | 10.39  |  |  | Plains Resources Inc. Transition Services
    Agreement dated July 3, 2002 between the Company and PXP
    (incorporated by reference to Exhibit 10.3 to PXPs
    Amendment No. 1 to Form S-1 filed on August 28,
    2002).                                                                                                                                                                                     
| | 10.40  |  |  | Second Amended and Restated Tax Allocation
    Agreement dated November 20, 2002 between PXP and the
    Company (incorporated by reference to Exhibit 10.4 to
    PXPs Amendment No. 1 to Form 10 filed on
    November 21, 2002).                                                                                                                                                                              



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##### Table of Contents



| |        |  |  |                                                                                                                                                                                                                                              
| | ------ |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.41  |  |  | Technical Services Agreement dated July 3,
    2002 between PXP and the Company (incorporated by reference to
    Exhibit 10.5 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                           
| | 10.42  |  |  | Intellectual Property Agreement dated
    July 3, 2002 between PXP and the Company (incorporated by
    reference to Exhibit 10.6 to PXPs Amendment
    No. 1 to Form S-1 filed on August 28, 2002).                                        
| | 10.43  |  |  | Employee Matters Agreement dated July 3,
    2002 between PXP and the Company (incorporated by reference to
    Exhibit 10.7 to PXPs Amendment No. 1 to
    Form S-1 filed on August 28, 2002).                                             
| | 10.44  |  |  | Amendment No. 1 to Employee Matters
    Agreement, dated as of September 18, 2002, between the
    Company and PXP (incorporated by reference to Exhibit 10.22
    to PXPs Amendment No. 2 to Form S-1 filed on
    October 4, 2002).       
| | 10.45  |  |  | Amendment No. 1 to Master Separation
    Agreement, dated as of November 20, 2002, between the
    Company and PXP (incorporated by reference to Exhibit 10.24
    to PXPs Amendment No. 1 to Form 10 filed on
    November 21, 2002).      
| | 10.46  |  |  | Amendment No. 2 to Employee Matters
    Agreement, dated as of November 20, 2002, between the
    Company and PXP (incorporated by reference to Exhibit 10.25
    to PXPs Amendment No. 1 to Form 10 filed on
    November 21, 2002).       
| | 10.47  |  |  | Amendment No. 3 to Employee Matters
    Agreement, dated as of December 2, 2002, between PXP and
    the Company (incorporated by reference to Exhibit 10.23 to
    PXPs Registration Statement on Form S-4 filed on
    February 12, 2003).
| | 10.48  |  |  | First Amendment to Plains Resources Inc. 2001
    Stock Incentive Plan (incorporated by reference to
    Exhibit 10.6 to the Companys Quarterly Report on
    Form 10-Q for the three months ended September 30,
    2002).                 
| | 10.49* |  |  | Second Amendment to Plains Resources Inc. 2001
    Stock Incentive Plan.                                                                                                                                                                     
| | 21.1*  |  |  | Subsidiaries of the Company                                                                                                                                                                                                                  
| | 23.1*  |  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                       
| | 23.2*  |  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                       
| | 23.3*  |  |  | Consent of Netherland, Sewell and Associates, Inc.                                                                                                                                                                                           
| | 99.1   |  |  | The financial statements of Plains All American
    Pipeline, L.P. included on pages F-1 through F-37 of
    PAAs Annual Report on Form 10-K for the year ended
    December 31, 2002.                                                      
| | 99.2*  |  |  | 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.                                                                                      
| | 99.3*  |  |  | 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.                                                                                      



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|* | Filed herewith