<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                                  FORM 10-K/A

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  For the fiscal year ended December 31, 2001

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                        Commission file number: 0-9808

                             PLAINS RESOURCES INC.
            (Exact name of registrant as specified in its charter)

               Delaware                              13-2898764
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               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:

<TABLE>
<CAPTION>
             Title of each class             Name of each exchange on which registered
             -------------------             -----------------------------------------
   <S>                                       <C>
    Common Stock, par value $0.10 per share           New York Stock Exchange
</TABLE>

       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 [X]  No [_]

   On February 28, 2002, there were 23,649,537 shares of the registrant's
Common Stock outstanding. The aggregate 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 $498,176,000 on February 28, 2002 (based on
$22.50 per share, the last sale price of the Common Stock as reported on the
New York Stock Exchange on such 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 2002 Annual Meeting of Stockholders.

   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. [_]

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<PAGE>

     We are amending our annual report on Form 10-K to revise the Condensed
Consolidating Statement of Cash Flows for the Year Ended December 31, 2001
included in Note 22--"Consolidating Financial Statements" of the Notes to our
Consolidated Financial Statements (located on page F-45). The revision consists
of correcting the classification of $131,785,000 of acquisition, exploration and
development costs from the "Nonguarantor Subsidiaries" column to the "Guarantor
Subsidiaries" column and a corresponding correction in advances from (payments
to) affiliates.

    Except as noted above,  no other information included in our original report
on Form 10-K has been amended by this Form 10-K/A.


<PAGE>


                             PLAINS RESOURCES INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Financial Statements
  Report of Independent Accountants....................................... F-2
  Consolidated Balance Sheets as of December 31, 2001 and 2000............ F-3
  Consolidated Statements of Operations for the years ended December 31,
   2001, 2000 and 1999.................................................... F-4
  Consolidated Statements of Cash Flows for the years ended December 31,
   2001, 2000 and 1999.................................................... F-5
  Consolidated Statements of Comprehensive Income for the years ended
   December 31, 2001, 2000, and 1999...................................... F-6
  Consolidated Statements of Changes in Non-redeemable Preferred Stock,
   Common Stock and Other Stockholders' Equity for the years ended
   December 31, 2001, 2000 and 1999....................................... F-7
  Notes to Consolidated Financial Statements.............................. F-8
</TABLE>

   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
<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Plains Resources Inc.

   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, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 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 1 to the consolidated financial statements, the
Company changed its method of accounting for its crude oil inventories in
connection with its adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements", effective January 1, 2000.

   As discussed in Note 3 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
March 13, 2002

                                      F-2

<PAGE>


                     PLAINS RESOURCES INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           (in thousands of dollars)

<TABLE>
<CAPTION>
                                                              December 31,
                                                          ---------------------
                                                            2001        2000
                                                          ---------  ----------
<S>                                                       <C>        <C>
                         ASSETS
Current Assets
  Cash and cash equivalents.............................  $   1,179  $    5,080
  Accounts receivable...................................     20,039     357,790
  Commodity hedging contracts and other derivatives.....     23,257       6,033
  Inventory.............................................      6,721      54,844
  Other current assets..................................      1,527      11,662
                                                          ---------  ----------
                                                             52,723     435,409
                                                          ---------  ----------
Property and Equipment, at cost
  Oil and natural gas properties--full cost method
   Subject to amortization..............................    900,898     762,245
   Not subject to amortization..........................     40,506      42,581
  Crude oil pipeline, gathering and terminal assets.....         --     470,460
  Other property and equipment..........................      4,003       6,453
                                                          ---------  ----------
                                                            945,407   1,281,739
  Less allowance for depreciation, depletion and
   amortization.........................................   (437,982)   (437,465)
                                                          ---------  ----------
                                                            507,425     844,274
                                                          ---------  ----------
Investment in Plains All-American Pipeline, L.P.........     64,626          --
                                                          ---------  ----------
Other Assets............................................     24,014     114,646
                                                          ---------  ----------
                                                          $ 648,788  $1,394,329
                                                          =========  ==========
          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Accounts payable and other current liabilities........  $  53,895  $  399,773
  Interest payable......................................      8,286      13,536
  Notes payable.........................................        511       1,811
                                                          ---------  ----------
                                                             62,692     415,120
                                                          ---------  ----------
Long-Term Debt
  Bank debt.............................................     11,500      27,300
  Bank debt of subsidiary...............................         --     320,000
  Subordinated debt.....................................    269,539     277,543
  Other.................................................      1,022       1,533
                                                          ---------  ----------
                                                            282,061     626,376
                                                          ---------  ----------
Other Long-Term Liabilities.............................      4,889       3,422
                                                          ---------  ----------
Deferred Income Taxes...................................     44,294          --
                                                          ---------  ----------
Commitments and Contingencies (Note 15)
Minority Interest in Plains All American Pipeline,
 L.P....................................................         --     162,271
                                                          ---------  ----------
Cumulative Convertible Preferred Stock, stated at
 liquidation preference.................................         --      50,000
                                                          ---------  ----------
Non-redeemable Preferred Stock, Common Stock and Other
 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
  Series H Cumulative Convertible Preferred Stock, $1.00
   par value, 175,000 shares authorized; nil and 169,571
   shares issued and outstanding, at stated value.......         --      84,785
  Common Stock, $0.10 par value, 50,000,000 shares
   authorized; 27,677,411 and 18,746,612 shares issued
   for 2001 and 2000....................................      2,768       1,875
  Additional paid-in capital............................    268,520     139,203
  Retained earnings (deficit)...........................     37,676     (88,410)
  Accumulated other comprehensive income................     13,930          --
  Treasury stock, at cost...............................    (91,342)    (23,613)
                                                          ---------  ----------
                                                            254,852     137,140
                                                          ---------  ----------
                                                          $ 648,788  $1,394,329
                                                          =========  ==========
</TABLE>

                See notes to consolidated financial statements.

                                      F-3

<PAGE>


                     PLAINS RESOURCES INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                -------------------------------
                                                  2001      2000        1999
                                                --------  ---------  ----------
<S>                                             <C>       <C>        <C>
Revenues
  Crude oil and liquids.......................  $186,476  $ 133,325  $  111,128
  Natural gas.................................    28,771     16,017       5,095
  Marketing, transportation, storage and
   terminalling...............................        --  6,425,644  10,796,998
  Gain on sale of assets......................        --     48,188      16,457
  Other operating revenues....................       473
                                                --------  ---------  ----------
                                                 215,720  6,623,174  10,929,678
                                                --------  ---------  ----------
Costs and Expenses
  Production expenses.........................    71,192     62,140      55,645
  General and administrative..................    21,293     50,776      31,402
  Marketing, transportation, storage and
   terminalling...............................        --  6,292,615  10,689,308
  Unauthorized trading losses and related
   expenses...................................        --      7,963     166,440
  Depreciation, depletion and amortization....    28,921     47,221      36,998
                                                --------  ---------  ----------
                                                 121,406  6,460,715  10,979,793
                                                --------  ---------  ----------
Income (Loss) from Operations.................    94,314    162,459     (50,115)
Other Income (Expense)
  Equity in earnings of Plains All American
   Pipeline, L.P..............................    18,540         --          --
  Gains on Plains All American Pipeline, L.P.
   unit transactions and public offerings.....   170,157         --       9,787
  Interest expense............................   (26,385)   (55,828)    (46,378)
  Interest and other income...................       151      7,411       1,237
                                                --------  ---------  ----------
Income (Loss) Before Income Taxes, Minority
 Interest, Extraordinary Items and Cumulative
 Effect of Accounting Changes.................   256,777    114,042     (85,469)
  Minority interest in Plains All American
   Pipeline, L.P..............................        --    (42,535)     40,203
  Income tax (expense) benefit:
   Current....................................    (9,947)    (1,020)          7
   Deferred...................................   (91,513)   (24,563)     20,472
                                                --------  ---------  ----------
Income (Loss) Before Extraordinary Items and
 Cumulative Effect of Accounting Changes......   155,317     45,924     (24,787)
  Extraordinary items, net of tax benefit and
   minority interest..........................        --     (4,988)       (544)
  Cumulative effect of accounting changes, net
   of tax benefit.............................    (1,986)      (121)         --
                                                --------  ---------  ----------
Net Income (Loss).............................   153,331     40,815     (25,331)
  Cumulative preferred dividends..............   (27,245)   (14,725)    (10,026)
                                                --------  ---------  ----------
Income (Loss) Available to Common
 Stockholders.................................  $126,086  $  26,090  $  (35,357)
                                                ========  =========  ==========
Basic Earnings Per Share
  Income (loss) before extraordinary items and
   cumulative effect of accounting changes....  $   6.07  $    1.75  $    (2.02)
  Extraordinary items.........................        --      (0.28)      (0.03)
  Cumulative effect of accounting changes.....     (0.09)     (0.01)         --
                                                --------  ---------  ----------
  Net income (loss)...........................  $   5.98  $    1.46  $    (2.05)
                                                ========  =========  ==========
Diluted Earnings Per Share
  Income (loss) before extraordinary items and
   cumulative effect of accounting changes....  $   4.82  $    1.56  $    (2.02)
  Extraordinary items.........................        --      (0.17)      (0.03)
  Cumulative effect of accounting changes.....     (0.07)        --          --
                                                --------  ---------  ----------
  Net income (loss)...........................  $   4.75  $    1.39  $    (2.05)
                                                ========  =========  ==========
</TABLE>

                See notes to consolidated financial statements.

                                      F-4

<PAGE>


                     PLAINS RESOURCES INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                ------------------------------
                                                  2001       2000       1999
                                                --------  ----------  --------
<S>                                             <C>       <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................  $153,331  $   40,815  $(25,331)
Items not affecting cash flows from operating
 activities:
  Depreciation, depletion and amortization....    28,921      47,221    36,998
  Equity in earnings of Plains All American
   Pipeline, L.P..............................   (18,540)         --        --
  Distributions received from Plains All
   American Pipeline, L.P.....................    31,553          --        --
  Noncash gains...............................  (170,157)    (48,188)  (26,244)
  Minority interest in income of a
   subsidiary.................................        --      35,566   (40,203)
  Loss on early extinguishment of debt, net of
   tax........................................        --
  Deferred income taxes.......................    91,513      21,297   (20,472)
  Cumulative effect of adoption of SFAS 133...     1,986          --        --
  Change in derivative fair value.............     1,227          --        --
  Noncash compensation expense................     4,514       2,682     1,013
  Allowance for doubtful accounts.............        --       5,000        --
  Other noncash items.........................     1,626      10,925       (61)
Change in assets and liabilities from
 operating activities:
  Accounts receivable and other...............    21,023     102,651  (226,438)
  Inventory...................................     1,133     (13,977)   33,930
  Accounts payable and other current
   liabilities................................   (29,636)   (143,453)  171,974
  Pipeline linefill...........................        --     (16,679)       (3)
  Other long-term liabilities.................     1,634      (8,000)   18,873
                                                --------  ----------  --------
Net cash provided by (used in) operating
 activities...................................   120,128      35,860   (75,964)
                                                --------  ----------  --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition, exploration and developments
 costs........................................  (131,785)    (78,726)  (77,899)
Additions to other property and assets........      (561)     (3,133)   (2,472)
Plains All American Pipeline, L.P.
 acquisitions and assets......................        --     (12,219) (189,425)
Proceeds from the sale of Plains All American
 Pipeline, L.P. units.........................   106,941          --        --
Investment in Plains All American Pipeline,
 L.P..........................................    (3,978)         --        --
Proceeds from asset sales.....................        --     224,261     3,400
                                                --------  ----------  --------
Net cash provided by (used in) investing
 activities...................................   (29,383)    130,183  (266,396)
                                                --------  ----------  --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt..................   204,900   1,698,575   744,971
Proceeds from short-term debt.................        --      51,300   131,119
Proceeds from sale of common stock............     9,169       2,301     5,542
Proceeds from issuance of preferred stock.....        --          --    50,000
Proceeds from issuance of common units, net...        --          --    50,759
Purchase of senior subordinated notes.........    (7,550)         --        --
Principal payments of long-term debt..........  (221,211) (1,799,186) (449,332)
Principal payments of short-term debt.........        --    (108,719)  (82,150)
Purchase of common stock......................   (67,729)    (23,613)       --
Costs incurred in connection with financing
 arrangements.................................        --      (6,748)  (19,448)
Preferred stock dividends.....................    (8,698)    (13,409)   (4,245)
Distributions to Plains All American Pipeline,
 L.P. unitholders.............................        --     (29,432)  (22,201)
Other.........................................      (102)       (260)     (971)
                                                --------  ----------  --------
Net cash provided by (used in) financing
 activities...................................   (91,221)   (229,191)  404,044
                                                --------  ----------  --------
Net increase (decrease) in cash and cash
 equivalents..................................      (476)    (63,148)   61,684
Decrease in cash due to deconsolidation of
 Plains All American Pipeline, L.P............    (3,425)         --        --
Cash and cash equivalents, beginning of year..     5,080      68,228     6,544
                                                --------  ----------  --------
Cash and cash equivalents, end of year........  $  1,179  $    5,080  $ 68,228
                                                ========  ==========  ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-5

<PAGE>


                     PLAINS RESOURCES INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                    --------------------------
                                                      2001     2000     1999
                                                    --------  ------- --------
<S>                                                 <C>       <C>     <C>
Net Income (Loss).................................. $153,331  $40,815 $(25,331)

Other Comprehensive Income:
 Unrealized gains on derivatives:
  Cumulative effect of accounting change, net of
   taxes of $4,383.................................    6,856       --       --
  Unrealized gains arising during the year, net of
   taxes of $8,329.................................   12,803       --       --
  Reclassification adjustment for gains realized in
   net income, net of tax benefit of $1,921........   (2,989)      --       --
                                                    --------  ------- --------
                                                      16,670       --       --
 Minimum pension liability adjustment, net of tax
  benefit of $272..................................     (421)      --       --
                                                    --------  ------- --------
                                                      16,249       --       --
                                                    --------  ------- --------
 Equity in other comprehensive income changes of
  Plains All American Pipeline, L.P.
   Cumulative effect of accounting change, net of
    tax benefit of $1,496..........................   (2,340)      --       --
   Change in fair value of open hedging positions,
    net of taxes of $5.............................       21       --       --
                                                    --------  ------- --------
                                                     (2,319)       --       --
                                                    --------  ------- --------
Other Comprehensive Income.........................   13,930       --       --
                                                    --------  ------- --------
Comprehensive Income (Loss)........................ $167,261  $40,815 $(25,331)
                                                    ========  ======= ========
</TABLE>



                See notes to consolidated financial statements.

                                      F-6

<PAGE>


                     PLAINS RESOURCES INC. AND SUBSIDIARIES

  CONSOLIDATED STATEMENTS OF CHANGES IN NON-REDEEMABLE PREFERRED STOCK, COMMON
                      STOCK AND OTHER STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                 2001              2000              1999
                            ----------------  ----------------  ---------------
                            Shares   Amount   Shares   Amount   Shares  Amount
                            ------  --------  ------  --------  ------ --------
<S>                         <C>     <C>       <C>     <C>       <C>    <C>
Series D Cumulative
 Convertible Preferred
 Stock
  Balance, beginning of
   year...................      47  $ 23,300      47  $ 23,300      47 $ 21,946
  Preferred stock
   dividends..............      --        --      --        --      --    1,354
                            ------  --------  ------  --------  ------ --------
  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...................  18,747     1,875  17,924     1,792  16,882    1,688
  Common stock issued upon
   exercise of options,
   warrants and other.....   1,041       103     557        56     943       94
  Conversion of preferred
   stock into common......   7,889       790     266        27      99       10
                            ------  --------  ------  --------  ------ --------
  Balance, end of year....  27,677     2,768  18,747     1,875  17,924    1,792
                            ======  --------  ======  --------  ====== --------
Additional Paid-in Capital
  Balance, beginning of
   year...................           139,203           130,027          124,679
  Common stock issued upon
   exercise of options,
   warrants and other.....            18,429             5,223            3,583
  Conversion of preferred
   stock into common......           110,888             3,958            1,765
  Redemption of preferred
   stock..................                --                (5)              --
                                    --------          --------         --------
  Balance, end of year....           268,520           139,203          130,027
                                    --------          --------         --------
Retained Earnings
 (Deficit)
  Balance, beginning of
   year...................           (88,410)         (114,500)         (79,143)
  Preferred stock
   dividends..............           (27,245)          (14,725)         (10,026)
  Net income (loss).......           153,331            40,815          (25,331)
                                    --------          --------         --------
  Balance, end of year....            37,676           (88,410)        (114,500)
                                    --------          --------         --------
Accumulated Other
 Comprehensive Income
  Balance, beginning of
   year...................                --                --               --
  Other comprehensive
   income.................            13,930                --               --
                                    --------          --------         --------
  Balance, end of year....            13,930                --               --
                                    --------          --------         --------
Treasury Stock
  Balance, beginning of
   year...................  (1,291)  (23,613)     --        --      --       --
  Purchase of common
   stock..................  (2,830)  (67,729) (1,291)  (23,613)     --       --
                            ------  --------  ------  --------  ------ --------
  Balance, end of year....  (4,121)  (91,342) (1,291)  (23,613)     --       --
                            ======  --------  ======  --------  ====== --------
Total.....................          $254,852          $137,140         $ 40,619
                                    ========          ========         ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-7

<PAGE>


                             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 record our
proportionate share of PAA's net assets and 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.

   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 crude oil and natural gas. Our Upstream
activities are all located in the United States. Prior to the reduction in our
interest in PAA, we also participated directly in the "Midstream" oil and gas
business, which consists of the marketing, transportation and terminalling of
crude oil. We continue to participate indirectly in the Midstream oil and gas
business through our minority interest 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 natural gas
reserves. The costs of unproved properties are excluded from amortization
until the properties are evaluated. Interest is capitalized on oil and natural
gas properties not subject to amortization and in the process of development.
Proceeds from the sale of oil and natural 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 natural 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 is recorded at
cost and consists primarily of office furniture and fixtures and computer
hardware and software. Acquisitions, renewals, and betterments are
capitalized; maintenance and repairs are expensed. Depreciation is provided
using the straight-line method over estimated useful lives of three to seven
years. 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.

                                      F-8

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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) crude oil and natural gas reserves, (2) depreciation, depletion and
amortization, including future abandonment costs, (3) income taxes and related
valuation allowance, (4) allowance for doubtful accounts receivable and (5)
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, 2001 and 2000, 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 any possible credit
risk is minimal.

   Accounts Receivable, Net. At December 31, 2000, PAA had an allowance for
doubtful accounts receivable of $5.0 million that is reflected in the
consolidated balance sheet as a reduction of certain accounts receivable which
are included in Other Assets. At December 31, 2001 the allowance is reflected
in our investment in PAA.

   Inventory. Plains' crude oil inventories are carried at cost. Materials and
supplies inventory is stated at the lower of cost or market with cost
determined on an average cost method. PAA's crude oil inventories are carried
at the lower of cost, adjusted for deferred gains or losses, or market value
using an average cost method.

   Inventory consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2001    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Plains, excluding PAA
     Crude oil................................................. $ 1,467 $ 3,347
     Materials and supplies....................................   5,254   4,716
                                                                ------- -------
                                                                  6,721   8,063
                                                                ------- -------
   PAA
     Crude oil.................................................      --  45,914
     Materials and supplies....................................      --     867
                                                                ------- -------
                                                                     --  46,781
                                                                ------- -------
                                                                $ 6,721 $54,844
                                                                ======= =======
</TABLE>

                                      F-9

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                 December 31,
                                                               ----------------
                                                                2001     2000
                                                               ------- --------
   <S>                                                         <C>     <C>
   Plains, excluding PAA
     Deferred tax asset....................................... $    -- $ 47,974
     Land.....................................................   8,853    8,853
     Commodity hedging contracts and other derivatives........   5,661       --
     Debt issue costs, net....................................   3,566    7,249
     Other....................................................   5,934    3,318
                                                               ------- --------
                                                                24,014   67,394
                                                               ------- --------
   PAA
     Pipeline linefill, at cost...............................      --   34,312
     Debt issue costs, net....................................      --    7,259
     Long-term receivable, net................................      --    5,000
     Other....................................................      --      681
                                                               ------- --------
                                                                    --   47,252
                                                               ------- --------
                                                               $24,014 $114,646
                                                               ======= ========
</TABLE>

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.

   Revenue Recognition. Oil and gas 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, which are
immaterial, are reflected as a reduction of sales revenues.

   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 crude 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 crude
oil. The derivative instruments consist primarily of crude 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.

                                     F-10

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Stock Options. We have elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and
related interpretations in accounting for our employee stock options. Under
APB 25, no compensation expense is recognized when the number of options to be
issued is known and the exercise price of the options equals the fair value
(market price) of the underlying stock on the date of grant.

   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. The following Statements of Financial
Accounting Standards ("SFAS's") were issued in June 2001: SFAS No. 141,
Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and
SFAS No. 143, Accounting for Asset Retirement Obligations. In August 2001,
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
was also issued. SFAS No. 141 requires the use of the purchase method of
accounting for all business combinations. It applies to all business
combinations initiated after June 30, 2001 and to all business combinations
accounted for by the purchase method that are completed after June 30, 2001.
SFAS No. 142 requires that goodwill as well as other intangible assets with
indefinite lives not be amortized but be tested annually for impairment and is
effective for fiscal years beginning after December 15, 2001. SFAS No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and long-lived assets to be disposed of. It supersedes, with
exceptions, SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of and is effective for fiscal years
beginning after December 15, 2001. SFAS No. 141, No. 142 and No. 144 had no
effect on our financial statements. We will account for all future business
combinations and any related goodwill in accordance with the provisions of
SFAS No. 141 and SFAS No. 142.

   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.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently assessing the impact
of SFAS No. 143 and at this time cannot reasonably estimate the effect of this
statement on its consolidated financial position, results of operations or
cash flows.

   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 crude
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. 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. The effect of this change
in accounting for crude oil inventories on prior periods was deminimus.

Note 2--Investment in Plains All American Pipeline, L.P.

   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

                                     F-11

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 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) 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 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. In the first quarter of 2002 PAA paid a distribution of $0.5125
per unit ($2.05 annualized).

   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.

                                     F-12

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 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. In connection with these substitute options, we
recognized $0.5 million in noncash compensation expense in 2001.

   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. 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.

   At March 31, 2001, our aggregate ownership interest in PAA was
approximately 54%. Following the sale of common units by PAA in the
aforementioned public equity offerings and the Transactions, our aggregate
ownership interest in PAA was approximately 29%. At December 31, 2001, our
aggregate 29% 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) 24% or
approximately 7.9 million of the common units (including approximately 1.3
million Class B common units).

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

<TABLE>
<CAPTION>
                                                                     Year Ended
                                                                    December 31,
                                                                        2001
                                                                    ------------
   <S>                                                              <C>
   Revenues........................................................  $6,868,215
   Cost of sales and operations....................................   6,725,954
   Gross margin....................................................     142,261
   Operating income................................................      71,368
   Income before cumulative effect of accounting change............      43,671
   Net income......................................................      44,179
<CAPTION>
                                                                         At
                                                                    December 31,
                                                                        2001
                                                                    ------------
   <S>                                                              <C>
   Current assets..................................................  $  558,082
   Property and equipment, net.....................................     604,919
   Other assets....................................................      98,250
   Total assets....................................................   1,261,251
   Current liabilities.............................................     505,160
   Long-term debt..................................................     351,677
   Other long-term liabilities.....................................       1,617
   Partners' capital...............................................     402,797
   Total liabilities and partners' capital.........................   1,261,251
</TABLE>

                                     F-13

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3--Derivative Instruments and Hedging Activities

   On January 1, 2001, we adopted Statement of Financial Accounting Standards
("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. 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 ("OCI"), a component of 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 hedge transaction, 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, 2001, all open positions qualified for hedge
accounting.

   Unrealized gains and losses on hedging instruments reflected in OCI and
adjustments to carrying amounts on hedged volumes are included in oil and gas
revenues in the period that the related volumes are delivered. Gains and
losses from hedging instruments, which represent hedge ineffectiveness as well
as any amounts excluded from the assessment of hedge effectiveness, are
recognized currently in oil and gas revenues. Effective October 2001, we
implemented Derivatives Implementation Group ("DIG") Issue G20, "Cash Flow
Hedges: Assessing and Measuring the Effectiveness of a Purchased Option Used
in a Cash Flow Hedge", which provides guidance for assessing the effectiveness
on total changes in an option's cash flows rather than only on changes in the
option's intrinsic value. Implementation of this DIG issue will reduce
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
time value changes from the assessment of hedge effectiveness. Oil and gas
revenues for the year ended December 31, 2001 include a $3.4 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 prior
to the implementation of DIG Issue G20.

   We utilize various derivative instruments to hedge our exposure to price
fluctuations on crude oil sales. The derivative instruments consist primarily
of cash-settled crude oil option and swap contracts entered into with
financial institutions. We do not currently have any natural gas hedges. We
also utilize interest rate swaps and collars to manage the interest rate
exposure on our long-term debt. In October

                                     F-14

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2001 we entered into a three-year interest rate swap agreement, fixing at
5.29% the interest rate on $7.5 million of borrowing under our revolving
credit facility. At December 31, 2001, we had the following open crude oil
hedge positions:

<TABLE>
<CAPTION>
                                                                    Barrels Per
                                                                        Day
                                                                    ------------
                                                                     2002  2003
                                                                    ------ -----
   <S>                                                              <C>    <C>
   Puts
     Average price $20.00/bbl......................................  2,000    --
   Calls
     Average price $35.17/bbl......................................  9,000    --
   Swaps
     Average price $24.00/bbl...................................... 17,000    --
     Average price $23.16/bbl......................................     -- 7,500
</TABLE>

   On January 1, 2001, in accordance with the transition provisions of SFAS
133, we recorded a gain of $4.5 million in OCI, representing the cumulative
effect of an accounting change to recognize at fair value all cash flow
derivatives, including our equity in the cash flow derivatives of PAA. We
recorded cash flow hedge derivative assets and liabilities of $20.6 million
and $18.1 million, respectively, and a net-of-tax non-cash charge of $2.0
million was recorded in earnings as a cumulative effect adjustment.

   For the year ended December 31, 2001, net unrealized gains of $9.8 million
were added to OCI and the fair value of open positions increased $16.2
million. At December 31, 2000, we had an interest rate swap arrangement to
protect interest rate fluctuations on a portion of our outstanding debt. The
position was terminated prior to maturity and as a result $0.6 million related
to such position was relieved from OCI when the debt was repaid in June 2001.

   At December 31, 2001, net unrealized gains on our option and swap contracts
included in OCI was $16.7 million. The related assets and liabilities were
included in commodity hedging contracts and other derivatives ($21.8 million),
other assets ($5.7 million), and deferred income taxes ($10.8 million).
Additionally, OCI includes our $2.3 million net of tax equity in the
unrealized OCI losses of PAA. As of December 31, 2001, $13.2 million of
deferred net gains on derivative instruments recorded in OCI are expected to
be reclassified to earnings during the next twelve-month period.

                                     F-15

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 4--Long-Term Debt and Credit Facilities

   Short-term debt and long-term debt consists of the following at December
31, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                  2001              2000
                                            ----------------- -----------------
                                            Current Long-Term Current Long-Term
                                            ------- --------- ------- ---------
<S>                                         <C>     <C>       <C>     <C>
Plains
  Revolving credit facility, bearing
   interest at 4.2% and 8.4%, at December
   31, 2001 and 2000, respectively.........  $ --   $ 11,500  $   --  $ 27,300
  10.25% Senior Subordinated Notes, due
   2006, net of repurchased notes of $7.55
   million and nil, and unamortized premium
   of $2.1 million and $2.5 million at
   December 31, 2001 and 2000,
   respectively............................    --    269,539      --   277,543
  Other long-term debt.....................   511      1,533     511     2,044
                                             ----   --------  ------  --------
                                              511    282,572     511   306,887
PAA
  Letter of credit facility and hedged
   inventory facility, bearing interest at
   a weighted average interest rate of
   8.4%....................................    --         --   1,300        --
  Plains Marketing, L.P. revolving credit
   facility, bearing interest at 9.2%, at
   December 31, 2000.......................    --         --      --   320,000
                                             ----   --------  ------  --------
                                             $511   $282,572  $1,811  $626,887
                                             ====   ========  ======  ========
</TABLE>

   Aggregate total maturities of long-term debt in the next five years are as
follows: 2002--$0.5 million; 2003--$1.9 million; 2004--$6.3 million; 2005--
$4.3 million; and 2006--$267.5 million.

 Plains Long-Term Debt and Credit Facilities

 Revolving Credit Facility

   We have a $225.0 million revolving credit facility with a group of banks.
The revolving credit facility is guaranteed by all of our upstream
subsidiaries and is collateralized by our upstream oil and natural gas
properties and those of the guaranteeing subsidiaries and the stock of all the
upstream subsidiaries. The borrowing base under the revolving credit facility
at December 31, 2001, is $225.0 million and is subject to redetermination from
time to time by the lenders in good faith, in the exercise of the lenders'
sole discretion, and in accordance with customary practices and standards in
effect from time to time for crude oil and natural gas loans to borrowers
similar to our company. Our borrowing base may be affected from time to time
by the performance of our oil and natural gas properties and changes in oil
and natural gas prices. We incur a commitment fee of 3/8% per annum on the
unused portion of the borrowing base. In addition, we pay a fee of 1 3/8% per
annum of the face amount of letters of credit that are issued under our
revolving credit facility. The revolving credit facility, as amended,
terminates on July 1, 2003, at which time the remaining outstanding balance
converts to a term loan, repayable in eight equal quarterly installments
commencing October 1, 2003, with a final maturity of July 1, 2005. The
revolving credit facility bears interest, at our option, of either LIBOR plus
1 3/8% or the Base Rate (as defined therein). At December 31, 2001, letters of
credit of $0.6 million were outstanding under the revolving credit facility.

                                     F-16

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The revolving credit facility contains covenants which, among other things,
limit the payment of cash dividends on common stock, limit repurchases of
common stock, limit the amount of consolidated debt, limit our ability to make
certain loans and investments and provide that we must maintain a specified
relationship between current assets and current liabilities. At December 31,
2001 we were in compliance with such covenants and could have borrowed the
full $225.0 million available under the facility.

   Under the terms of the revolving credit facility we can purchase any
combination of our own common stock, our senior subordinated notes and PAA
common units and pay cash dividends on our common stock (up to $30.0 million)
up to a total of $150.0 million. At December 31, 2001 we had $117.5 million
remaining under this limit. The Board of Directors, subject to the $150.0
million limit, has authorized the purchase of up to eight million shares of
our common stock, our senior subordinated notes and PAA units in the open
market from time to time as market conditions are deemed favorable.

   In October 2001 we entered into a three-year interest rate swap agreement,
fixing the interest rate on $7.5 million of borrowing under our revolving
credit facility at 5.29%

 10.25% Senior Subordinated Notes Due 2006

   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%. In 1996 we issued $150.0 million principal amount at
99.38% of par to yield 10.35%. In 1997 $50.0 million principal amount was
issued at approximately 107% of par and in 1999 $75.0 million principal amount
was issued at approximately 101% of par. In 2001 we repurchased $7.5 million
principal amount at 99.5% of par.

   The 10.25% Notes are 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.

   The Indenture contains covenants that include, but are not limited to,
covenants that: (1) limit the incurrence of additional indebtedness; (2) limit
certain investments; (3) limit restricted payments; (4) limit the disposition
of assets; (5) limit the payment of dividends and other payment restrictions
affecting subsidiaries; (6) limit transactions with affiliates; (7) limit the
creation of liens; and (8) restrict mergers, consolidations and transfers of
assets. In the event of a Change of Control and a corresponding Rating
Decline, as both are defined in the Indenture, we will be required to make an
offer to repurchase the 10.25% Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of the repurchase.

   The 10.25% Notes are unsecured general obligations and are subordinated in
right of payment to all our existing and future senior indebtedness and are
guaranteed by certain of our Upstream subsidiaries on a full, unconditional,
joint and several basis.

 PAA Credit Facilities

   At December 31, 2000, PAA's bank credit agreements consisted of a $400.0
million senior secured revolving credit facility and a $300.0 million senior
secured letter of credit and borrowing facility, both of which were secured by
substantially all of PAA's assets. PAA's credit facilities were nonrecourse to
us.

                                     F-17

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 5--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.

Note 6--PAA Acquisitions and Dispositions

 Scurlock Acquisition

   On May 12, 1999, PAA completed the acquisition of Scurlock Permian LLC
("Scurlock") and certain other pipeline assets from Marathon Ashland Petroleum
LLC. Including working capital adjustments and closing and financing costs,
the cash purchase price was approximately $141.7 million.

   Financing for the Scurlock acquisition was provided through: (i) borrowings
of approximately $92.0 million under a PAA bank facility; (ii) the sale to the
general partner of 1.3 million Class B common units of PAA for a total cash
consideration of $25.0 million, or $19.125 per unit, the price equal to the
market value of PAA's common units on May 12, 1999; and (iii) a $25.0 million
draw under PAA's existing revolving credit agreement.

   The funds for the purchase of the Class B units by the general partner were
provided by a capital contribution from us. We financed our capital
contribution through our revolving credit facility.

   The assets, liabilities and results of operations of Scurlock are included
in our consolidated financial statements effective May 1, 1999. The Scurlock
acquisition has been accounted for using the purchase method of accounting and
the purchase price was allocated in accordance with Accounting Principles
Board Opinion No. 16, Business Combinations ("APB 16") as follows (in
thousands):

<TABLE>
   <S>                                                                 <C>
   Crude oil pipeline, gathering and terminal assets.................. $125,120
   Other property and equipment.......................................    1,546
   Pipeline linefill..................................................   16,057
   Other assets (debt issue costs)....................................    3,100
   Other long-term liabilities (environmental accrual)................   (1,000)
   Net working capital items..........................................   (3,090)
                                                                       --------
   Cash paid.......................................................... $141,733
                                                                       ========
</TABLE>

                                     F-18

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Pro Forma Results for the Scurlock Acquisition

   The following unaudited pro forma data is presented to show pro forma
revenues, net loss and basic and diluted net loss per share for the year ended
December 31, 1999 as if the Scurlock acquisition, which was effective May 1,
1999, had occurred on January 1, 1999 (in thousands, except per share data):

<TABLE>
   <S>                                                             <C>
   Revenues....................................................... $11,323,577
                                                                   ===========
   Net loss....................................................... $   (27,147)
                                                                   ===========
   Net loss per share available to common stockholders:
     Basic and diluted............................................ $     (2.15)
                                                                   ===========
</TABLE>

 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 crude oil on this segment of the pipeline in
November 1999. At that time, PAA owned approximately 5.2 million barrels of
crude oil in the segment of the pipeline. PAA sold this crude 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.

Note 7--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 2, 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.
Dividends were payable semi-annually in either cash or additional shares of
Series F Preferred Stock at our option and were cumulative from the date of
issue. Dividends paid in additional shares of Series F Preferred Stock were
limited to an aggregate of six dividend periods. Each share of Series F
Preferred Stock was convertible into 81.63 shares of common stock (an initial
effective conversion price of $12.25 per share). At December 31, 2000 there
were 50,000 shares of Series F Preferred Stock outstanding.

   The Series F Preferred Stock is stated at liquidation preference on the
consolidated balance sheet at December 31, 2000. Liquidation preference
represents the number of shares outstanding multiplied by the stated value of
the shares. Any unpaid cash dividends are accrued in accounts payable and
other current liabilities on the consolidated balance sheet.

 Series E and Series G Convertible Preferred Stock

   In July 1998 we issued $85.0 million of Series E Cumulative Convertible
Preferred Stock (the "Series E Preferred Stock"). Each share of the Series E
Preferred Stock had a stated value of $500 per share and bore a dividend of
9.5% per annum. Dividends were payable semi-annually in either

                                     F-19

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

cash or additional shares of Series E Preferred Stock at our option and were
cumulative from the date of issue. Each share of Series E Preferred Stock was
convertible into 27.78 shares of common stock (an initial effective conversion
price of $18.00 per share). In February 2000 each outstanding share of the
Series E Preferred Stock was exchanged for a share of a new Series G
Cumulative Convertible Preferred Stock (the "Series G Preferred Stock") which
had a conversion price of $15.00 per share. Other than the reduced conversion
price, the terms of the Series G Preferred Stock were substantially identical
to those of the Series E Preferred Stock

   In December 2000, we exchanged or redeemed all of the shares of Series G
Preferred Stock that had not been previously converted into shares of common
stock. We exchanged 169,571 shares of Series G Preferred Stock for 169,571
shares of Series H Preferred Stock and in connection therewith paid $2.0
million, the amount equal to accrued dividends, and converted 1,825 shares of
Series G Preferred Stock into 62,226 shares of common stock. The remaining 213
shares of the Series G Preferred Stock were redeemed at 105% of stated value
in accordance with the original terms. In connection with that redemption, we
paid $114,000 consisting of $112,000 for stated value and $2,000 for accrued
and unpaid dividends.

Note 8--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, 2001 and 2000, there were 23.6 million shares and
17.5 million shares of common stock outstanding (net of treasury shares),
respectively, and 46,600 and 266,171 shares of preferred stock outstanding.

 Stock Warrants and Options

   At December 31, 2001, we had a warrant outstanding which entitles the
holder thereof to purchase an aggregate 150,000 shares of common stock at
$25.00 per share expiring in 2002. We have various stock option plans for our
employees and directors (see Note 14).

 Series D Cumulative Convertible Preferred Stock

   In November 1997, we issued 46,600 shares of Series D Cumulative
Convertible Preferred Stock (the "Series D Preferred Stock"). The Series D
Preferred Stock has an aggregate stated value of $23.3 million and is
redeemable at our option at 140% of stated value. If not previously redeemed
or converted, the Series D Preferred Stock will automatically convert into
932,000 shares of common stock in 2012. Each share of the Series D Preferred
Stock has a stated value of $500 and is convertible into common stock at a
ratio of $25.00 of stated value for each share of Common Stock to be issued.
The Series D Preferred Stock bears an annual dividend of $30.00 per share.

 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 2, 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.

                                     F-20

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 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 in 2000 we repurchased 1.3 million common
shares at a cost of $23.6 million.

Note 9--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, 2001, 2000 and 1999 (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                       For the Year Ended December 31,
                      --------------------------------------------------------------------------------------------------
                                    2001                             2000                             1999
                      -------------------------------- -------------------------------- --------------------------------
                                                 Per                              Per                              Per
                        Income       Shares     Share    Income       Shares     Share    Income       Shares     Share
                      (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
                      ----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
<S>                   <C>         <C>           <C>    <C>         <C>           <C>    <C>         <C>           <C>
Income (loss) before
 extraordinary item
 and cumulative
 effect of
 accounting change..   $155,317                          $45,924                         $(24,787)
Less: preferred
 stock dividends....    (27,245)                         (14,725)                         (10,026)
                       --------                          -------                         --------
Income (loss)
 available to common
 stockholders.......    128,072      21,090     $6.07     31,199      17,845     $1.75    (34,813)     17,262     $(2.02)
                       ========                          =======                         ========
Effect of dilutive
 securities:
Preferred Stock
 conversion.........      3,365       5,280               14,725      10,673
Employee stock
 options and
 warrants...........         --         874                   --         855                   --          --
                       --------      ------              -------      ------             --------      ------
Income (loss)
 available to common
 stockholders
 assuming dilution..   $131,437      27,244     $4.82    $45,924      29,373     $1.56   $(34,813)     17,262     $(2.02)
                       ========      ======     =====    =======      ======     =====   ========      ======     ======
</TABLE>

   In 1999, we recorded a net loss and our options and warrants were not
included in the computations of diluted earnings per share because their
assumed conversion was antidilutive. In addition, our preferred stock that was
outstanding at December 31, 1999 was convertible into 7.0 million shares of
common stock but was not included in the computation of diluted earnings per
share in 1999 because the effect was antidilutive. See Note 14 for additional
information concerning outstanding options and warrants.

                                      F-21

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 10--Income Taxes

   Our deferred income tax assets and liabilities at December 31, 2001 and
2000 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):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               2001     2000
                                                             --------  -------
<S>                                                          <C>       <C>
U.S. Federal
Deferred tax assets:
  Net operating losses...................................... $ 18,142  $64,370
  Percentage depletion......................................    2,450    2,450
  Tax credit carryforwards..................................    8,988    4,662
  Excess outside tax basis over outside book basis..........    9,979   24,504
  Other.....................................................    4,926    1,669
                                                             --------  -------
                                                               44,485   97,655
Deferred tax liabilities:
  Net oil & gas acquisition, exploration and development
   costs....................................................  (63,693) (42,946)
  Commodity hedging contracts and other ....................   (9,028)      --
                                                             --------  -------
  Net deferred tax asset (liability)........................  (28,236)  54,709
  Valuation allowance.......................................   (2,450)  (2,555)
                                                             --------  -------
                                                              (30,686)  52,154
                                                             --------  -------
Foreign
  Excess outside tax basis over outside book basis..........      466       --
                                                             --------  -------
States
Deferred tax liability......................................  (14,074)  (4,180)
                                                             --------  -------
Net deferred tax assets (liability)......................... $(44,294) $47,974
                                                             ========  =======
</TABLE>

   At December 31, 2001, we have carryforwards of approximately $51.8 million
of regular tax net operating losses ("NOL"), $7.0 million of statutory
depletion, $5.1 million of alternative minimum tax credits and $3.8 million of
enhanced oil recovery credits. At December 31, 2001, we also had approximately
$34.1 million of alternative minimum tax NOL carryforwards available as a
deduction against future alternative minimum tax income. The NOL carryforwards
expire in 2019.

   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 operations (in thousands):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ---------------------------
                                                     2001     2000      1999
                                                   --------  -------  --------
<S>                                                <C>       <C>      <C>
U.S. federal income tax provision at statutory
 rate............................................  $ 89,872  $25,028  $(15,842)
State income taxes, net of federal benefit.......    10,050    2,018    (1,298)
Foreign income taxes, net of federal benefit.....       916       --        --
Full cost ceiling test limitation................        --       --    (3,617)
Other............................................       622   (1,463)      278
                                                   --------  -------  --------
Income tax expense (benefit) on income before
 extraordinary item..............................   101,460   25,583   (20,479)
Income tax benefit allocated to extraordinary
 item............................................        --   (3,190)     (293)
Income tax benefit allocated to cumulative effect
 of accounting change............................    (1,270)     (76)       --
                                                   --------  -------  --------
Income tax (benefit) provision...................  $100,190  $22,317  $(20,772)
                                                   ========  =======  ========
</TABLE>

                                     F-22

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In accordance with certain provisions of the Tax Reform Act of 1986, a
change of greater than 50% of our beneficial ownership within a three-year
period (an "Ownership Change") will place an annual limitation on our ability
to utilize our existing tax carryforwards. Under the Final Treasury
Regulations issued by the Internal Revenue Service, we do not believe that an
Ownership Change has occurred as of December 31, 2001.

Note 11--Early Extinguishment of Debt

   In 2000, PAA recognized a $15.2 million extraordinary loss ($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. In 1999, PAA
recognized a $1.5 million extraordinary loss ($0.5 million net of minority
interest of $0.7 million and deferred tax of $0.3 million) related to the
write-off of certain debt issue costs and penalties associated with the
prepayment of debt.

Note 12--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 years ended December 31, 2000 and 1999, we were
reimbursed approximately $31.2 million, $63.8 million and $44.7 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.

 Crude Oil Marketing Agreement

   PAA is the exclusive marketer/purchaser for all of our equity crude oil
production. The marketing agreement provides that PAA will purchase for resale
at market prices all of our equity crude oil production for which PAA charges
a fee of $0.20 per barrel. For the years ended December 31, 2001, 2000 and
1999, we paid approximately $223.1 million, $244.9 million and $131.5 million,
respectively, for the purchase of crude oil under the agreement, including the
royalty share of production.

 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

                                     F-23

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 Operations for the years ended December 31, 2000
and 1999. Our share of this expense is included in our equity in the earnings
of PAA in 2001.

Note 13--Benefit Plans

   We have a nonqualified retirement plan (the "Plan") for certain of our
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.

   Net pension expense for the years ended December 31, 2001, 2000 and 1999 is
comprised of the following components (in thousands):
<TABLE>
<CAPTION>
                                                                   Year Ended
                                                                  December 31,
                                                                 --------------
                                                                 2001 2000 1999
                                                                 ---- ---- ----
   <S>                                                           <C>  <C>  <C>
   Service cost--benefits earned during the period.............. $156 $ 99 $109
   Interest on projected benefit obligation.....................  131   96   83
   Amortization of prior service cost...........................   31   37   37
   Unrecognized loss............................................   17   --    6
                                                                 ---- ---- ----
   Net pension expense.......................................... $335 $232 $235
                                                                 ==== ==== ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                             ----------------
                                                              2001     2000
                                                             -------  -------
   <S>                                                       <C>      <C>
   Change in benefit obligation:
     Benefit obligation at beginning of year................ $ 1,821  $ 1,233
     Service cost...........................................     155       99
     Interest cost..........................................     131       96
     Settlement losses......................................     271       --
     Special termination benefits...........................      --      175
     Benefits paid..........................................     (67)      --
     Settlement payments....................................  (1,159)      --
     Actuarial (gains) losses...............................     755      218
                                                             -------  -------
   Benefit obligation at end of year........................ $ 1,907  $ 1,821
                                                             =======  =======
   Amounts recognized in the consolidated balance sheets:
     Projected benefit obligation for service rendered to
      date.................................................. $ 1,907  $ 1,821
     Plan assets at fair value..............................      --       --
                                                             -------  -------
     Benefit obligation in excess of fair value of plan
      assets................................................  (1,907)  (1,821)
     Unrecognized (gain) loss...............................     720      185
     Unrecognized prior service costs.......................     310      508
     Adjustment to recognize minimum liability..............  (1,030)    (693)
                                                             -------  -------
     Net amount recognized.................................. $(1,907) $(1,821)
                                                             =======  =======
</TABLE>

                                     F-24

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The weighted-average discount rate used in determining the projected
benefit obligation was 7.25% and 7.5% for the years ended December 31, 2001
and 2000, 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 are 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. For the years
ended December 31, 2001, 2000 and 1999, defined contribution plan expense was
$0.3 million, $1.4 million and $1.0 million, respectively. Such expense for
2000 and 1999 includes amounts attributable to employees of the general
partner of PAA.

Note 14--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.

   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 2001, $0.3 million in compensation expense with respect to
such options is included in general and administrative expense.

                                     F-25

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A summary of the status of our stock options as of December 31, 2001, 2000,
and 1999, and changes during the years ending on those dates are presented
below (shares in thousands):

<TABLE>
<CAPTION>
                                  2001             2000             1999
                             ---------------- ---------------- ----------------
                                     Weighted         Weighted         Weighted
                                     Average          Average          Average
                                     Exercise         Exercise         Exercise
       Fixed Options         Shares   Price   Shares   Price   Shares   Price
       -------------         ------  -------- ------  -------- ------  --------
<S>                          <C>     <C>      <C>     <C>      <C>     <C>
Outstanding at beginning of
 year......................   2,749   $12.11  2,811    $11.06  2,749    $10.53
Granted....................   2,464    24.02    419     13.91    237     15.09
Exercised..................  (1,431)   11.51   (444)     6.96   (158)     7.94
Forfeited..................    (115)   14.06    (37)    14.37    (17)     9.93
                             ------           -----            -----
Outstanding at end of
 year......................   3,667   $20.30  2,749    $12.11  2,811    $11.06
                             ======           =====            =====
Options exercisable at
 year-end..................   1,084   $13.32  1,708    $11.07  1,836    $ 9.50
                             ======           =====            =====
Weighted-average fair value
 of options granted during
 the year..................  $10.12           $5.39            $5.40
</TABLE>

   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, because the exercise price of our employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense has been recognized in the accompanying financial
statements.

   Pro forma information regarding net income (loss) 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 2001, 2000 and 1999: risk-free interest rates of 2.5% for 2001,
6.3% for 2000, and 5.1% for 1999; a volatility factor of the expected market
price of our common stock of .0.50 for 2001, 0.50 for 2000 and 0.50 for 1999;
no expected dividends; and weighted average expected option lives of 5.3 years
in 2001, 2.6 years in 2000 and 2.7 years in 1999. 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 management's opinion, the
existing models do not provide a reliable single measure of the fair value of
its employee stock options.

                                     F-26

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Set forth below is a summary of our net income (loss) before extraordinary
item 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).
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                     -------------------------
                                                       2001    2000     1999
                                                     -------- ------- --------
<S>                                                  <C>      <C>     <C>
As Reported:
  Net income (loss) before extraordinary item and
   cumulative effect of accounting change........... $155,317 $45,924 $(24,787)
  Net income (loss) per common share, basic.........     6.07    1.75    (2.02)
  Net income (loss) per common share, diluted.......     4.82    1.56    (2.02)
Pro Forma:
  Net income (loss) before extraordinary item and
   cumulative effect of accounting change........... $152,335 $45,132 $(25,125)
  Net income (loss) per common share, basic.........     5.93    1.70    (2.04)
  Net income (loss) per common share, diluted.......     4.72    1.54    (2.04)
</TABLE>

   The following table summarizes information about stock options outstanding
at December 31, 2001 (share amounts in thousands):

<TABLE>
<CAPTION>
                                               Weighted             Weighted
                    Number    Weighted Average Average    Number    Average
    Range of      Outstanding    Remaining     Exercise Exercisable Exercise
 Exercise Price   at 12/31/01 Contractual Life  Price   at 12/31/01  Price
 --------------   ----------- ---------------- -------- ----------- --------
<S>               <C>         <C>              <C>      <C>         <C>
$ 6.25 to $14.19       702       2.4 years      $10.08       542     $ 8.97
 14.31 to  21.12       508       1.9 years       16.39       461      16.43
 23.00 to  23.00     1,000       9.4 years       23.00        --         --
 23.74 to  25.30     1,457       5.0 years       24.74        81      24.73
$ 6.25 to $25.30     3,667       5.3 years      $20.30     1,084     $13.32
</TABLE>

 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 for 2001
includes $0.3 million in compensation expense with respect to this share
grant.

                                     F-27

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 15--Commitments, Contingencies and Industry Concentration

 Commitments and Contingencies

   We lease certain real property, equipment and operating facilities under
various operating leases. Future non-cancelable commitments related to these
items at December 31, 2001, are summarized below (in thousands):

<TABLE>
   <S>                                                                      <C>
   2002.................................................................... $616
   2003....................................................................  593
   2004....................................................................  595
   2005....................................................................  573
   2006....................................................................  143
   Thereafter..............................................................   --
</TABLE>

   Total expenses related to these commitments for the years ended December
31, 2001, 2000 and 1999 were $0.7 million, $7.3 million and $9.3 million,
respectively. Such amounts for 2000 and 1999 include $6.7 million and $8.8
million, respectively, attributable to PAA.

   Under the amended terms of an asset purchase agreement with respect to
certain of our onshore California properties, commencing with the year
beginning January 1, 2000, and each year thereafter, we are required to plug
and abandon 20% of the then remaining inactive wells, which currently
aggregate approximately 149. To the extent we elect not to plug and abandon
the number of required wells, we are required to escrow an amount equal to the
greater of $25,000 per well or the actual average plugging cost per well in
order to provide for the future plugging and abandonment of such wells. In
addition, we are required to expend a minimum of $600,000 per year in each of
the ten years beginning January 1, 1996, and $300,000 per year in each of the
succeeding five years to remediate oil contaminated soil from existing well
sites, provided there are remaining sites to be remediated. In the event we do
not expend the required amounts during a calendar year, we are required to
contribute an amount equal to 125% of the actual shortfall to an escrow
account. We may withdraw amounts from the escrow account to the extent we
expend excess amounts in a future year. Through December 31, 2001, we have not
been required to make contributions to an escrow account.

   In connection with the acquisition of our interest in the Point Arguello
field, offshore California, we assumed our 26% share of (1) plugging and
abandoning all existing well bores, (2) removing conductors, (3) flushing
hydrocarbons from all lines and vessels and (4) removing/abandoning all
structures, fixtures and conditions created subsequent to closing. The seller
retained the obligation for all other abandonment costs, including but not
limited to (1) removing, dismantling and disposing of the existing offshore
platforms, (2) removing and disposing of all existing pipelines and (3)
removing, dismantling, disposing and remediation of all existing onshore
facilities.

   Although we obtained environmental studies on our properties in California,
Florida and Illinois and we believe that such properties have been operated in
accordance with standard oil field practices, certain of the fields have been
in operation for more than 90 years, and current or future local, state and
federal environmental laws and regulations may require substantial
expenditures to comply with such rules and regulations. In connection with the
purchase of certain of our onshore California properties, we received a
limited indemnity for certain conditions if they violate applicable local,
state and federal environmental laws and regulations in effect on the date of
such agreement. We believe that we do not have any material obligations for
operations conducted prior to our acquisition of the properties, other than
our obligation to plug existing wells and those normally associated with

                                     F-28

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

customary oil field operations of similarly situated properties, 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 or that any portion of such amounts will be recoverable
under the indemnity.

   Consistent with normal industry practices, substantially all of our crude
oil and natural 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 $17.0 million, net of salvage value and other considerations.
Such estimated costs are amortized to expense through the unit-of-production
method as a component of accumulated depreciation, depletion and amortization.
Results from operations for 2001, 2000 and 1999 each include $0.5 million of
expense associated with these estimated future costs. For valuation and
realization purposes of the affected crude oil and natural 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 19.

   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 crude oil and natural gas properties and the marketing,
transportation, terminalling and storage of crude 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
and gas 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. The contract counterparties for our derivative commodity
contracts are all major financial institutions with Standard & Poor's ratings
of A or better. Three of the financial institutions are participating lenders
in our revolving credit facility, with one such counterparty holding contracts
that represent approximately 37% of the fair value of all open positions at
December 31, 2001.

   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 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.

                                     F-29

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 16--Litigation

   Texas Securities Litigation. In November and December of 1999, class action
lawsuits were filed in the United States District Court for the Southern
District of Texas alleging that PAA. and certain of the general partner's
officers and directors violated federal securities laws, primarily in
connection with unauthorized trading by a former employee. The consolidated
class action filed by purchasers of our common stock and options is captioned
Koplovitz v. Plains Resources Inc., et al. The consolidated action filed by
purchasers of PAA's common units is captioned Di Giacomo v. Plains All
American Pipeline, L.P., et al.

   We and PAA reached an agreement with representatives for the plaintiffs for
the settlement of all of the class actions, and in January 2001, PAA deposited
approximately $30.0 million under the terms of the settlement agreement. The
total cost of the settlement to us and PAA, including interest and expenses,
and after insurance reimbursements, was $14.9 million. Of that amount, $1.0
million was allocated to us by agreement between special independent
committees of our board of directors and the board of directors of Plains
Holdings Inc. (formerly known as Plains All American Inc.), the then general
partner of PAA. The settlement has received final approval by the court. The
settlement agreement does not affect the Texas Derivative Litigation and
Delaware Derivative Litigation described below.

   Delaware Derivative Litigation. Beginning December 3, 1999 derivative
lawsuits were filed in the Delaware Chancery Court, New Castle County naming
Plains Holdings Inc., the then general partner of PAA, its directors and
certain of its officers as defendants, alleging that the defendants breached
the fiduciary duties they owed to PAA and its unitholders by failing to
monitor properly the activities of its employees. The court has consolidated
all of the cases under the caption In Re Plains All American Inc. Shareholders
Litigation. A motion to dismiss was filed on behalf of the defendants on
August 11, 2000.

   An agreement has been reached with the plaintiffs to settle the Delaware
litigation by PAA making an aggregate payment of approximately $1.1 million.
On March 6, 2002 the Delaware court approved this settlement.

   Texas Derivative Litigation. On July 11, 2000, a derivative lawsuit was
filed in the United States District Court for the Southern District of Texas
entitled Fernandez v. Plains All American Inc., et al., naming Plains Holdings
Inc., the then general partner of PAA, its directors and certain of its
officers as defendants. This lawsuit contains the same claims and seeks the
same relief as the Delaware derivative litigation described above. A motion to
dismiss was filed on behalf of the defendants on August 14, 2000. PAA has
reached an agreement in principle to settle the Texas derivative litigation.
The settlement, which is subject to court approval, contemplates a payment of
$112,500 by PAA and does not contemplate any payment by the Company.

   We, in the ordinary course of business, are a claimant and/or defendant in
various other legal proceedings. Management does 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.

                                     F-30

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 17--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 included in other assets are
stated at fair value. The carrying amounts and fair values of our other
financial instruments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                         December 31,
                                               ---------------------------------
                                                     2001             2000
                                               ---------------- ----------------
                                               Carrying  Fair   Carrying  Fair
                                                Amount   Value   Amount   Value
                                               -------- ------- -------- -------
   <S>                                         <C>      <C>     <C>      <C>
   Long-Term Debt:
     Bank debt................................ $11,500  $11,500 $27,300  $27,300
     Subordinated debt........................ 269,539  272,130 277,543  274,313
     Other long-term debt.....................   1,022    1,022   1,533    1,533
</TABLE>

   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.

Note 18--Supplemental Disclosures of Cash Flow Information

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

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -----------------------
                                                       2001    2000    1999
                                                      ------- ------- -------
   <S>                                                <C>     <C>     <C>
   Cash paid for interest (net of amount
    capitalized)..................................... $27,939 $56,154 $44,329
                                                      ======= ======= =======
   Cash paid for taxes............................... $ 7,048 $   987 $   548
                                                      ======= ======= =======
   Noncash sources and (uses) of investing and
    financing activities:
     Series D Preferred Stock dividends.............. $    -- $    -- $(1,354)
                                                      ======= ======= =======
     Exchange of preferred stock for common stock.... $    -- $    62 $    71
                                                      ======= ======= =======
     Series E Preferred Stock dividends.............. $    -- $    -- $(2,030)
                                                      ======= ======= =======
     Tax benefit from exercise of employee stock
      options........................................ $ 6,990 $ 1,901 $   440
                                                      ======= ======= =======
</TABLE>

                                     F-31

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 19--Crude Oil and Natural Gas Activities

 Costs Incurred

   Our oil and natural 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).

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                         2001    2000    1999
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Property acquisitions costs:
     Unproved properties............................... $    44 $    73 $   879
     Proved properties.................................   1,798   2,433   2,880
   Exploration costs...................................     329     872   4,101
   Exploitation and development costs.................. 134,304  77,550  65,119
                                                        ------- ------- -------
                                                        136,475 $80,928 $72,979
                                                        ======= ======= =======
</TABLE>

 Capitalized Costs

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

<TABLE>
<CAPTION>
                                                               December 31,
                                                             ------------------
                                                               2001      2000
                                                             --------  --------
   <S>                                                       <C>       <C>
   Proved properties........................................ $900,898  $762,245
   Accumulated DD&A......................................... (435,269) (408,337)
                                                             --------  --------
                                                             $465,629  $353,908
                                                             ========  ========
</TABLE>

   The DD&A rate per equivalent unit of production was $2.75, $2.25, and $2.13
for the years ended December 31, 2001, 2000, and 1999, respectively.

 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).

<TABLE>
<CAPTION>
                                                              December 31,
                                                         -----------------------
                                                          2001    2000    1999
                                                         ------- ------- -------
   <S>                                                   <C>     <C>     <C>
   Acquisition costs.................................... $30,038 $34,087 $42,261
   Exploration costs....................................   3,579   4,456   4,842
   Capitalized interest.................................   6,890   4,038   4,928
                                                         ------- ------- -------
                                                         $40,507 $42,581 $52,031
                                                         ======= ======= =======
</TABLE>

   Unproved property costs not subject to amortization consist mainly of
acquisition and lease costs and seismic data related to unproved areas. We
will continue to evaluate these properties over the

                                     F-32

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

lease terms; however, the timing of the ultimate evaluation and disposition of
a significant portion of the properties has not been determined. Costs
associated with seismic data and all other costs will become subject to
amortization as the prospects to which they relate are evaluated.
Approximately 13%, 11% and 16% of the balance in unproved properties at
December 31, 2001, related to additions made in 2001, 2000 and 1999,
respectively.

   During 2001, 2000 and 1999, we capitalized $3.6 million, $4.4 million and
$4.4 million, respectively, of interest related to the costs of unproved
properties in the process of development.

 Supplemental Reserve Information (Unaudited)

   The following information summarizes our net proved reserves of crude oil
(including condensate and natural gas liquids) and natural gas and the present
values thereof for the three years ended December 31, 2001. The following
reserve information is based upon reports of the independent petroleum
consulting firms of Netherland, Sewell & Associates, Inc., and Ryder Scott
Company in 2001, and H.J. Gruy and Associates, Inc., Netherland, Sewell &
Associates, Inc., and Ryder Scott Company in 2000 and 1999. The estimates are
in accordance with regulations prescribed by the SEC.

   In management's opinion, the reserve estimates presented herein, in
accordance with generally accepted engineering and evaluation principles
consistently applied, are believed to be 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 from
underground accumulations of crude oil and natural 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 crude oil and natural gas that are ultimately recovered,
production and operating costs, the amount and timing of future development
expenditures and future crude oil and natural 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 crude oil and natural 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 crude oil and natural gas 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. Almost all of our
reserve base (approximately 94% of year-end 2001 reserve volumes) is comprised
of crude oil properties that are sensitive to crude oil price volatility.

                                     F-33

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Estimated Quantities of Crude Oil and Natural Gas Reserves (Unaudited)

   The following table sets forth certain data pertaining to our proved and
proved developed reserves for the three years ended December 31, 2001 (in
thousands).

<TABLE>
<CAPTION>
                               As of or for the Year Ended December 31,
                             -------------------------------------------------
                                  2001             2000             1999
                             ---------------  ---------------  ---------------
                               Oil     Gas      Oil     Gas      Oil     Gas
                             (MBbl)   (MMcf)  (MBbl)   (MMcf)  (MBbl)   (MMcf)
                             -------  ------  -------  ------  -------  ------
<S>                          <C>      <C>     <C>      <C>     <C>      <C>
Proved Reserves
  Beginning balance......... 223,162  93,486  218,922  90,873  120,208  86,781
  Revision of previous
   estimates................ (15,457) (5,485)  (9,834) (3,597)  62,895  (8,234)
  Extensions, discoveries,
   improved recovery and
   other additions..........  42,210  11,571   22,429   9,252   37,393  15,488
  Sale of reserves in-
   place....................      --      --       --      --       --      --
  Purchase of reserves in-
   place....................      --      --       --      --    6,442      --
  Production................  (9,279) (3,355)  (8,355) (3,042)  (8,016) (3,162)
                             -------  ------  -------  ------  -------  ------
  Ending balance............ 240,636  96,217  223,162  93,486  218,922  90,873
                             =======  ======  =======  ======  =======  ======
Proved Developed Reserves
  Beginning balance......... 123,532  52,184  120,141  49,255   73,264  58,445
                             =======  ======  =======  ======  =======  ======
  Ending balance............ 134,704  59,101  123,532  52,184  120,141  49,255
                             =======  ======  =======  ======  =======  ======
</TABLE>

 Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

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

<TABLE>
<CAPTION>
                                                     December 31,
                                           ----------------------------------
                                              2001        2000        1999
                                           ----------  ----------  ----------
   <S>                                     <C>         <C>         <C>
   Future cash inflows.................... $3,833,456  $6,057,344  $4,837,010
   Future development costs...............   (329,393)   (275,862)   (231,914)
   Future production expense.............. (1,826,634) (2,875,301) (1,758,572)
   Future income tax expense..............   (511,040)   (887,107)   (845,133)
                                           ----------  ----------  ----------
   Future net cash flows..................  1,166,389   2,019,074   2,001,391
   Discounted at 10% per year.............   (742,981) (1,099,413) (1,073,591)
                                           ----------  ----------  ----------
   Standardized measure of discounted
    future net cash flows................. $  423,408  $  919,661  $  927,800
                                           ==========  ==========  ==========
</TABLE>

   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 crude oil and natural gas 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

                                     F-34

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  fixed and determinable contractual price escalations. We have entered into
  various arrangements to fix or limit the NYMEX crude oil price for a
  significant portion of our crude oil production. Arrangements in effect at
  December 31, 2001 are discussed in Note 3. Such arrangements are not
  reflected in the reserve reports. The overall average year-end prices used
  in the reserve reports as of December 31, 2001, were $14.91 per barrel of
  crude oil and $2.56 per Mcf of natural gas. Such prices as of December 31,
  2000 were $21.02 per barrel of crude oil and $14.63 per Mcf of natural gas.

     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 $0.7 billion, $1.3 billion and $1.2 billion at December 31, 2001, 2000
  and 1999, 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 and gas operations.

   The principal sources of changes in the Standardized Measure of the future
net cash flows for the three years ended December 31, 2001, are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                              -------------------------------
                                                2001       2000       1999
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
Balance, beginning of year................... $ 919,661  $ 927,800  $ 226,943
Sales, net of production expenses............  (144,055)  (166,571)   (60,578)
Net change in sales and transfer prices, net
 of production expenses......................  (674,439)    96,104    516,097
Changes in estimated future development
 costs.......................................   (18,134)   (14,593)   (52,951)
Extensions, discoveries and improved
 recovery, net of costs......................    94,775    141,638    112,573
Previously estimated development costs
 incurred during the year....................    87,721     31,363     22,842
Purchase of reserves in-place................        --         --     53,724
Revision of quantity estimates...............  (166,869)  (104,200)   404,705
Accretion of discount........................   145,375    115,605     22,694
Net change in income taxes...................   179,373   (107,485)  (318,249)
                                              ---------  ---------  ---------
Balance, end of year......................... $ 423,408  $ 919,661  $ 927,800
                                              =========  =========  =========
</TABLE>

                                     F-35

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 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).

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    2001      2000      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenues from oil and gas producing activities... $215,247  $149,342  $116,223
Production costs.................................  (71,192)  (62,140)  (55,645)
Depreciation, depletion and amortization.........  (27,009)  (19,953)  (18,177)
Income tax expense...............................  (45,987)  (26,227)  (16,536)
                                                  --------  --------  --------
Results of operations from producing activities
 (excluding corporate overhead and interest
 costs).......................................... $ 71,059  $ 41,022  $ 25,865
                                                  ========  ========  ========
</TABLE>

                                     F-36

<PAGE>

                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 20--Quarterly Financial Data (Unaudited)

   The following table shows summary financial data for 2001 and 2000 (in
thousands, except per share data):

<TABLE>
<CAPTION>
                            First       Second      Third      Fourth
                           Quarter     Quarter     Quarter   Quarter(1)   Total
                          ----------  ----------  ---------- ---------- ----------
<S>                       <C>         <C>         <C>        <C>        <C>
2001
Revenues................  $   58,232  $   58,424  $   54,168 $   44,896 $  215,720
Operating profit........      31,172      22,510      25,217     15,415     94,314
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)
Net income..............      18,966     100,102      15,154     19,109    153,331
Basic EPS
 Income before
  cumulative effect of
  accounting change.....        1.11        3.83        0.63       0.79       6.07
 Cumulative effect of
  accounting change.....       (0.11)         --          --         --      (0.09)
 Net income.............        1.00        3.83        0.63       0.79       5.98
Diluted EPS
 Income before
  cumulative effect of
  accounting change.....        0.72        2.68        0.58       0.75       4.82
 Cumulative effect of
  accounting change.....       (0.06)         --          --         --      (0.07)
 Net income.............        0.66        2.68        0.58       0.75       4.75
2000
Revenues................  $2,087,685  $1,427,044  $1,542,463 $1,573,393 $6,630,585
Operating profit........      53,502      54,400      48,706     55,660    212,268
Income before
 extraordinary item and
 cumulative effect of
 accounting change......      21,268       8,992       7,026      8,638     45,924
Extraordinary item......      (1,365)     (3,623)         --         --     (4,988)
Cumulative effect of
 accounting change......        (121)         --          --         --       (121)
Net income..............      19,782       5,369       7,026      8,638     40,815
Basic EPS
 Income before
  extraordinary item and
  cumulative effect of
  accounting change.....        0.98        0.29        0.19       0.29       1.75
 Extraordinary item.....       (0.08)      (0.20)         --         --      (0.28)
 Cumulative effect of
  accounting change.....          --          --          --         --      (0.01)
 Net income.............        0.90        0.09        0.19       0.29       1.46
Diluted EPS
 Income before
  extraordinary item and
  cumulative effect of
  accounting change.....        0.72        0.28        0.18       0.27       1.56
 Extraordinary item.....       (0.05)      (0.19)         --         --      (0.17)
 Cumulative effect of
  accounting change.....          --          --          --         --         --
  Net income............        0.67        0.09        0.18       0.27       1.39
</TABLE>
--------
(1) For 2000, includes a $5.0 million charge to reserve for potentially
    uncollectible accounts receivable.

                                      F-37

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 21--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 crude oil and natural
gas and (2) Midstream Operations--engages in pipeline transportation,
purchases and resales of crude 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.

<TABLE>
<CAPTION>
                                             Upstream   Midstream      Total
                                             --------  -----------  -----------
                                                      (In thousands)
<S>                                          <C>       <C>          <C>
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

1999
Revenues:
  External customers.......................  $116,223  $10,796,998  $10,913,221
  Intersegment (a).........................        --       75,454       75,454
  Gain on sale of assets...................        --       16,457       16,457
  Interest and other income................       241       10,783       11,024
                                             --------  -----------  -----------
    Total revenues of reportable segments..  $116,464  $10,899,692  $11,016,156
                                             ========  ===========  ===========
Segment gross margin (b)...................  $ 60,578  $   (58,750) $     1,828
Segment gross profit (c)...................    52,775      (82,349)     (29,574)
Segment income (loss) before income taxes
 and extraordinary item....................     8,132      (93,601)     (85,469)
Interest expense...........................    25,298       21,080       46,378
Depreciation, depletion and amortization...    19,586       17,412       36,998
Income tax benefit.........................     1,635       18,844       20,479
Extraordinary item, net of tax and minority
 interest..................................        --         (544)        (544)
Capital expenditures.......................    77,899      189,286      267,185
Assets.....................................   445,921    1,243,639    1,689,560
</TABLE>
--------
(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.

                                     F-38

<PAGE>


                             PLAINS RESOURCES INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following table reconciles segment revenues to amounts reported in our
financial statements:

<TABLE>
<CAPTION>
                                                        For the Year Ended
                                                           December 31,
                                                      -----------------------
                                                         2000        1999
                                                      ----------  -----------
   <S>                                                <C>         <C>
   Revenues of reportable segments................... $6,846,128  $11,016,156
   Intersegment......................................   (215,543)     (75,454)
   Net gain recorded upon the formation of PAA not
    allocated to reportable segments.................         --           --
                                                      ----------  -----------
     Total company revenues.......................... $6,630,585  $10,940,702
                                                      ==========  ===========
</TABLE>

   PAA is the exclusive purchaser of all of our equity oil production. The
following table reflects for the years ended December 31, 2000 and 1999,
during which periods PAA was included in our consolidated financial
statements, customers accounting for more than 10% of consolidated sales
(excluding hedging effects):

<TABLE>
<CAPTION>
                                                            Percentage of
                                                         Consolidated Sales
                                                         ---------------------
                                                             Year Ended
                                                            December 31,
                                                         ---------------------
                                                           2000        1999
   Customer                                              ---------   ---------
   <S>                                                   <C>         <C>
   Marathon Ashland Petroleum (1).......................        12%         --
   Sempra Energy Trading Corporation (1)................        --          22%
   Koch Oil Company (1).................................        --          18%

<CAPTION>
                                                          Percentage of Oil
                                                          and Gas Sales(2)
                                                         ---------------------
   <S>                                                   <C>         <C>
   Chevron..............................................        43%         39%
   Equiva Trading Company...............................        23%         --
   Tosco Refining Company...............................        --          19%
   Conoco Inc...........................................        --          11%
   Marathon Ashland Petroleum...........................        13%         16%
</TABLE>
--------
(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 crude
    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.

Note 22--Consolidating Financial Statements

   The following financial information presents consolidating financial
statements, which include:

  .  the parent company only ("Parent");

  .  the guarantor subsidiaries on a combined basis ("Guarantor
     Subsidiaries");

  .  the nonguarantor subsidiaries on a combined basis ("Nonguarantor
     Subsidiaries");

  .  elimination entries necessary to consolidate the Parent, the Guarantor
     Subsidiaries and the Nonguarantor Subsidiaries; and

  .  Plains Resources Inc. on a consolidated basis.

   These statements are presented because the 10.25% Notes discussed in Note 4
are not guaranteed by all of our subsidiaries.

                                     F-39

<PAGE>

                     PLAINS RESOURCES INC. AND SUBSIDIARIES

              CONDENSED CONSOLIDATING BALANCE SHEET (in thousands)

                               DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                     Guarantor   Nonguarantor Intercompany
                          Parent    Subsidiaries Subsidiaries Eliminations Consolidated
        ASSETS           ---------  ------------ ------------ ------------ ------------
<S>                      <C>        <C>          <C>          <C>          <C>
Current Assets
  Cash and cash
   equivalents.........  $   1,013    $     13     $    153    $      --    $   1,179
  Accounts receivable
   and other...........     26,773      18,050           --           --       44,823
  Current intercompany
   advances............         --      13,662      (13,662)          --           --
  Inventory............         --       6,721           --           --        6,721
                         ---------    --------     --------    ---------    ---------
                            27,786      38,446      (13,509)          --       52,723
                         ---------    --------     --------    ---------    ---------
Property and Equipment,
 at cost...............    243,969     701,587           --         (149)     945,407
  Less allowance for
   depreciation,
   depletion and
   amortization........   (217,801)    164,795)          --      (55,386)    (437,982)
                         ---------    --------     --------    ---------    ---------
                            26,168     536,792           --      (55,535)     507,425
                         ---------    --------     --------    ---------    ---------
Investment in
 Subsidiaries and
 Intercompany
 Advances..............    467,837    (279,496)     178,202     (301,917)      64,626
                         ---------    --------     --------    ---------    ---------
Other Assets...........     10,313      13,769          383         (451)      24,014
                         ---------    --------     --------    ---------    ---------
                         $ 532,104    $309,511     $165,076    $(357,903)   $ 648,788
                         =========    ========     ========    =========    =========

<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S>                      <C>        <C>          <C>          <C>          <C>
Current Liabilities
  Accounts payable and
   other current
   liabilities.........  $ (68,896)   $ 42,581     $ 80,210    $      --    $  53,895
  Interest payable.....      8,286          --           --           --        8,286
  Notes payable........         --         511           --           --          511
                         ---------    --------     --------    ---------    ---------
                          (60,610)      43,092       80,210           --       62,692
                         ---------    --------     --------    ---------    ---------
Long-Term Debt
  Bank debt............     11,500          --           --           --       11,500
  Subordinated debt....    269,539          --           --           --      269,539
  Other................         --       1,022           --           --        1,022
                         ---------    --------     --------    ---------    ---------
                           281,039       1,022           --           --      282,061
                         ---------    --------     --------    ---------    ---------
Other Long-Term
 Liabilities...........      3,013       1,413          463           --        4,889
                         ---------    --------     --------    ---------    ---------
Deferred Income Taxes..     53,810       8,415      (17,931)          --       44,294
                         ---------    --------     --------    ---------    ---------
Non-redeemable
 Preferred Stock,
 Common Stock and Other
 Stockholders' Equity
  Series D Cumulative
   Convertible
   Preferred Stock.....     23,300          --           --           --       23,300
  Common Stock.........      2,768         837           --         (837)       2,768
  Additional paid-in
   capital.............    268,520       3,805       43,390      (47,195)     268,520
  Retained earnings
   (accumulated
   deficit)............     37,676     250,927       61,263     (312,190)      37,676
  Accumulated other
   comprehensive
   income..............     13,930          --       (2,319)       2,319       13,930
  Treasury stock, at
   cost................    (91,342)         --           --           --      (91,342)
                         ---------    --------     --------    ---------    ---------
                           254,852     255,569      102,334     (357,903)     254,852
                         ---------    --------     --------    ---------    ---------
                         $ 532,104    $309,511     $165,076    $(357,903)   $ 648,788
                         =========    ========     ========    =========    =========
</TABLE>

                                      F-40

<PAGE>

                     PLAINS RESOURCES INC. AND SUBSIDIARIES

              CONDENSED CONSOLIDATING BALANCE SHEET (in thousands)

                               DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                     Guarantor   Nonguarantor Intercompany
                          Parent    Subsidiaries Subsidiaries Eliminations Consolidated
        ASSETS           ---------  ------------ ------------ ------------ ------------
<S>                      <C>        <C>          <C>          <C>          <C>
Current Assets
  Cash and cash
   equivalents.........  $       4   $     597     $  4,479    $      --    $    5,080
  Accounts receivable
   and other...........     12,193      15,596      347,696           --       375,485
  Current intercompany
   advances............         --      17,605      (17,605)          --            --
  Inventory............         --       8,063       46,781           --        54,844
                         ---------   ---------     --------    ---------    ----------
                            12,197      41,861      381,351           --       435,409
                         ---------   ---------     --------    ---------    ----------
Property and Equipment,
 at cost...............    237,591     570,677      473,471           --     1,281,739
  Less allowance for
   depreciation,
   depletion and
   amortization........   (215,942)   (138,871)     (27,266)     (55,386)     (437,465)
                         ---------   ---------     --------    ---------    ----------
                            21,649     431,806      446,205      (55,386)      844,274
                         ---------   ---------     --------    ---------    ----------
Investment in
 Subsidiaries and
 Intercompany
 Advances..............    389,467    (254,891)      (6,372)    (128,204)           --
Other Assets...........      8,151      16,005       90,490           --       114,646
                         ---------   ---------     --------    ---------    ----------
                         $ 431,464   $ 234,781     $911,674    $(183,590)   $1,394,329
                         =========   =========     ========    =========    ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S>                      <C>        <C>          <C>          <C>          <C>
Current Liabilities
  Accounts payable and
   other current
   liabilities.........  $   7,105   $  46,368     $359,823    $      13    $  413,309
  Notes payable and
   other current
   obligations.........         --         511        1,300           --         1,811
                         ---------   ---------     --------    ---------    ----------
                             7,105      46,879      361,123           13       415,120
                         ---------   ---------     --------    ---------    ----------
Long-Term Debt
  Bank debt............     27,300          --           --           --        27,300
  Bank debt of a
   subsidiary..........         --          --      320,000           --       320,000
  Subordinated debt....    277,543          --           --           --       277,543
  Other................         --       1,533           --           --         1,533
                         ---------   ---------     --------    ---------    ----------
                           304,843       1,533      320,000           --       626,376
                         ---------   ---------     --------    ---------    ----------
Other Long-Term
 Liabilities...........      2,413          --        1,009           --         3,422
                         ---------   ---------     --------    ---------    ----------
Minority Interest in
 PAA...................    (70,037)         --      232,216           92       162,271
                         ---------   ---------     --------    ---------    ----------
Cumulative Convertible
 Preferred Stock,
 Stated at Liquidation
 Preference............     50,000          --           --           --        50,000
                         ---------   ---------     --------    ---------    ----------
Non-redeemable
 Preferred Stock,
 Common Stock and Other
 Stockholders' Equity
Series D Cumulative
 Convertible Preferred
 Stock.................     23,300          --           --           --        23,300
Series H Cumulative
 Convertible Preferred
 Stock.................     84,785          --           --           --        84,785
Common Stock...........      1,875          78           --          (78)        1,875
Additional paid-in
 capital...............    139,203       3,951       43,393      (47,344)      139,203
Retained earnings
 (accumulated
 deficit)..............    (88,410)    182,340      (46,067)    (136,273)      (88,410)
Treasury stock, at
 cost..................    (23,613)         --           --           --       (23,613)
                         ---------   ---------     --------    ---------    ----------
                           137,140     186,369       (2,674)    (183,695)      137,140
                         ---------   ---------     --------    ---------    ----------
                         $ 431,464   $ 234,781     $911,674    $(183,590)   $1,394,329
                         =========   =========     ========    =========    ==========
</TABLE>


                                      F-41

<PAGE>

                     PLAINS RESOURCES INC. AND SUBSIDIARIES

              CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)

                          YEAR ENDED DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                    Guarantor   Nonguarantor Intercompany
                          Parent   Subsidiaries Subsidiaries Eliminations Consolidated
                         --------  ------------ ------------ ------------ ------------
<S>                      <C>       <C>          <C>          <C>          <C>
Revenues
  Crude oil and
   liquids.............. $     --    $186,476     $     --    $      --     $186,476
  Natural gas...........       --      28,771           --           --       28,771
  Other operating
   revenues.............       --         473           --           --          473
                         --------    --------     --------    ---------     --------
                               --     215,720           --           --      215,720
                         --------    --------     --------    ---------     --------
Expenses
  Production expenses...       --      71,192           --           --       71,192
  General and
   administrative.......   10,023      11,260           10           --       21,293
  Depreciation,
   depletion and
   amortization.........    1,502      27,419           --           --       28,921
                         --------    --------     --------    ---------     --------
                           11,525     109,871           10           --      121,406
                         --------    --------     --------    ---------     --------
Income (Loss) from
 Operations.............  (11,525)    105,849          (10)          --       94,314
Other Income (Expense)
  Equity in earnings of
   subsidiary...........  176,527          --       18,540     (176,527)      18,540
  Gain on PAA unit
   transactions and
   public offerings.....       --          --      170,157           --      170,157
  Interest expense......   (2,805)    (23,580)          --           --      (26,385)
  Interest and other
   income...............     (312)        463           --           --          151
                         --------    --------     --------    ---------     --------
Income (Loss) Before
 Income Taxes and
 Cumulative Effect of
 Accounting Change......  161,885      82,732      188,687     (176,527)     256,777
  Income tax (expense)
   benefit:
    Current.............   44,749          --      (54,696)          --       (9,947)
    Deferred............  (51,175)    (13,532)     (26,806)          --      (91,513)
                         --------    --------     --------    ---------     --------
Income (Loss) Before
 Cumulative Effect of
 Accounting Change......  155,459      69,200      107,185     (176,527)     155,317
  Cumulative effect of
   accounting change,
   net of tax benefit...   (2,128)         --          142           --       (1,986)
                         --------    --------     --------    ---------     --------
Net Income (Loss).......  153,331      69,200      107,327     (176,527)     153,331
  Cumulative preferred
   dividends............  (27,245)         --           --           --      (27,245)
                         --------    --------     --------    ---------     --------
Income (Loss) Available
 to Common
 Stockholders........... $126,086    $ 69,200     $107,327    $(176,527)    $126,086
                         ========    ========     ========    =========     ========
</TABLE>

                                      F-42

<PAGE>

                     PLAINS RESOURCES INC. AND SUBSIDIARIES

              CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)

                          YEAR ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                    Guarantor   Nonguarantor Intercompany
                          Parent   Subsidiaries Subsidiaries Eliminations Consolidated
                          -------  ------------ ------------ ------------ ------------
<S>                       <C>      <C>          <C>          <C>          <C>
Revenues
  Crude oil and
   liquids..............  $     4    $131,667    $      --     $  1,654    $ 133,325
  Natural gas...........       --      16,017           --           --       16,017
  Marketing,
   transportation,
   storage and
   terminalling.........       --          --    6,641,187     (215,543)   6,425,644
  Gain on sale of
   assets...............       --          --       48,188           --       48,188
                          -------    --------    ---------     --------    ---------
                                4     147,684    6,689,375     (213,889)   6,623,174
                          -------    --------    ---------     --------    ---------
Expenses
  Production expenses...       --      62,140           --           --       62,140
  General and
   administrative.......    2,054       7,851       40,871           --       50,776
  Marketing,
   transportation,
   storage and
   terminalling.........       --          --    6,506,504     (213,889)   6,292,615
  Unauthorized trading
   losses and related
   expenses.............    1,000          --        6,963           --        7,963
  Depreciation,
   depletion and
   amortization.........    3,068      19,406       24,747           --       47,221
                          -------    --------    ---------     --------    ---------
                            6,122      89,397    6,579,085     (213,889)   6,460,715
                          -------    --------    ---------     --------    ---------
Income from Operations..   (6,118)     58,287      110,290           --      162,459
Other Income (Expense)
  Equity in earnings of
   subsidiary...........   64,115          --           --      (64,115)          --
  Interest expense......   (9,581)    (20,827)     (28,482)       3,062      (55,828)
  Interest and other
   income...............     (737)        331       10,879       (3,062)       7,411
                          -------    --------    ---------     --------    ---------
Income (Loss) Before
 Income Taxes, Minority
 Interest, Extraordinary
 Item and Cumulative
 Effect of Accounting
 Change.................   47,679      37,791       92,687      (64,115)     114,042
  Minority interest.....       --          --      (42,535)          --      (42,535)
  Income tax (expense)
   benefit:
    Current.............   24,094          --      (25,114)          --       (1,020)
    Deferred............  (30,958)        361        6,034           --      (24,563)
                          -------    --------    ---------     --------    ---------
Income (Loss) Before
 Extraordinary Item and
 Cumulative Effect of
 Accounting Change......   40,815      38,152       31,072      (64,115)      45,924
  Extraordinary item,
   net of tax benefit
   and minority
   interest.............       --          --       (4,988)          --       (4,988)
  Cumulative effect of
   accounting change,
   net of tax benefit...       --        (121)          --           --         (121)
                          -------    --------    ---------     --------    ---------
Net Income (Loss).......   40,815      38,031       26,084      (64,115)      40,815
  Cumulative preferred
   dividends............  (14,725)         --           --           --      (14,725)
                          -------    --------    ---------     --------    ---------
Income (Loss) Available
 to Common
 Stockholders...........  $26,090    $ 38,031    $  26,084     $(64,115)   $  26,090
                          =======    ========    =========     ========    =========
</TABLE>

                                      F-43

<PAGE>

                     PLAINS RESOURCES INC. AND SUBSIDIARIES

              CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)

                          YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                    Guarantor   Nonguarantor  Intercompany
                          Parent   Subsidiaries Subsidiaries  Eliminations Consolidated
                         --------  ------------ ------------  ------------ ------------
<S>                      <C>       <C>          <C>           <C>          <C>
Revenues
  Crude oil and
   liquids.............. $     --    $109,641   $        --     $  1,487   $   111,128
  Natural gas...........       --       5,095            --           --         5,095
  Marketing,
   transportation,
   storage and
   terminalling.........       --          --    10,872,452      (75,454)   10,796,998
  Gain on sale of
   assets...............       --          --        16,457           --        16,457
                         --------    --------   -----------     --------   -----------
                               --     114,736    10,888,909      (73,967)   10,929,678
                         --------    --------   -----------     --------   -----------
Expenses
  Production expenses...       --      55,645            --           --        55,645
  General and
   administrative.......    2,311       5,492        23,599           --        31,402
  Depreciation,
   depletion and
   amortization.........    2,096      17,490        17,412           --        36,998
  Marketing,
   transportation,
   storage and
   terminalling.........       --          --    10,763,275      (73,967)   10,689,308
  Unauthorized trading
   losses and related
   expenses.............       --          --       166,440           --       166,440
                         --------    --------   -----------     --------   -----------
                            4,407      78,627    10,970,726      (73,967)   10,979,793
                         --------    --------   -----------     --------   -----------
Income (Loss) from
 Operations.............   (4,407)     36,109       (81,817)          --       (50,115)
Other Income (Expense)
  Equity in earnings
   (loss) of
   subsidiary...........  (11,510)         --            --       11,510            --
  Gain on PAA unit
   offering.............       --          --         9,787           --         9,787
  Interest expense......   (6,994)    (18,851)      (21,080)         547       (46,378)
  Interest and other
   income...............      699          89           996         (547)        1,237
                         --------    --------   -----------     --------   -----------
Income (Loss) Before
 Income Taxes, Minority
 Interest and
 Extraordinary Item.....  (22,212)     17,347       (92,114)      11,510       (85,469)
  Minority interest in
   PAA..................       --          --        40,203           --        40,203
  Income tax (expense)
   benefit:
    Current.............      338          --          (331)          --             7
    Deferred............   (3,457)      4,754        19,175           --        20,472
                         --------    --------   -----------     --------   -----------
Income (Loss) Before
 Extraordinary Item.....  (25,331)     22,101       (33,067)      11,510       (24,787)
  Extraordinary item,
   net of tax benefit
   and minority
   interest.............       --          --          (544)          --          (544)
                         --------    --------   -----------     --------   -----------
Net Income (Loss).......  (25,331)     22,101       (33,611)      11,510       (25,331)
  Cumulative preferred
   dividends............  (10,026)         --            --           --       (10,026)
                         --------    --------   -----------     --------   -----------
Income (Loss) Available
 to Common
 Stockholders........... $(35,357)   $ 22,101   $   (33,611)    $ 11,510   $   (35,357)
                         ========    ========   ===========     ========   ===========
</TABLE>


                                      F-44

<PAGE>


                     PLAINS RESOURCES INC. AND SUBSIDIARIES

         CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (in thousands)

                          YEAR ENDED DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                      Guarantor   Nonguarantor Intercompany
                           Parent    Subsidiaries Subsidiaries Eliminations Consolidated
                          ---------  ------------ ------------ ------------ ------------
<S>                       <C>        <C>          <C>          <C>          <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES
Net income (loss).......  $ 153,331    $ 69,200     $107,327    $(176,527)   $ 153,331
Adjustments to reconcile
 net income to net cash
 provided by operating
 activities:
  Depreciation,
   depletion, and
   amortization.........      1,502      27,419           --           --       28,921
  Equity earnings in
   subsidiary...........   (176,527)         --      (18,540)     176,527      (18,540)
  Distributions from
   subsidiary...........         --          --       31,553           --       31,553
  Noncash gains.........         --          --     (170,157)          --     (170,157)
  Deferred income tax...     51,175      13,532       26,806           --       91,513
  Cumulative effect of
   adoption of SFAS
   123..................      2,128          --         (142)          --        1,986
  Change in derivative
   fair value...........      1,227          --           --           --        1,227
  Noncash compensation
   expense..............      4,514          --           --           --        4,514
  Other noncash items...      1,626          --           --           --        1,626
Change in assets and
 liabilities resulting
 from operating
 activities:............
  Accounts receivable
   and other............    (14,580)     (7,461)      43,064           --       21,023
  Inventory.............         --       1,342        1,133           --        2,475
  Accounts payable and
   other current
   liabilities..........    (76,001)     (3,787)      (1,486)          --      (81,274)
  Other long-term
   liabilities..........        600       1,413         (546)          --        1,467
  Advances from
   (payments to)
   affiliates...........    143,285      30,054     (122,876)          --       50,463
                          ---------    --------     --------    ---------    ---------
Net cash provided by
 (used in) operating
 activities.............     92,280     131,712     (103,864)          --      120,128
                          ---------    --------     --------    ---------    ---------
CASH FLOWS FROM
 INVESTING ACTIVITIES
Acquisition, exploration
 and development costs..         --    (131,785)          --           --     (131,785)
Additions to other
 property and assets....       (561)         --           --           --         (561)
Proceeds from the sale
 of PAA units...........         --          --      106,941           --      106,941
Investment in PAA.......         --          --       (3,978)          --       (3,978)
                          ---------    --------     --------    ---------    ---------
Net cash provided by
 (used in) investing
 activities.............       (561)   (131,785)     102,963           --      (29,383)
                          ---------    --------     --------    ---------    ---------
CASH FLOWS FROM
 FINANCING ACTIVITIES
Proceeds from long-term
 debt...................    204,900          --           --           --      204,900
Proceeds from sale of
 capital stock, options
 and warrants...........      9,169          --           --           --        9,169
Proceeds from issuance
 of preferred stock.....         --          --           --           --           --
Purchase of senior
 subordinated notes.....     (7,550)         --           --           --       (7,550)
Principal payments of
 long-term debt.........   (220,700)       (511)          --           --     (221,211)
Purchase of treasury
 stock..................    (67,729)         --           --           --      (67,729)
Preferred stock
 dividends..............     (8,698)         --           --           --       (8,698)
Other...................       (102)         --           --           --         (102)
                          ---------    --------     --------    ---------    ---------
Net cash used in
 financing activities...    (90,710)       (511)          --           --      (91,221)
                          ---------    --------     --------    ---------    ---------
Net decrease in cash and
 cash equivalents.......      1,009        (584)        (901)          --         (476)
Decrease in cash due to
 deconsolidation of
 PAA....................         --          --       (3,425)          --       (3,425)
Cash and cash
 equivalents, beginning
 of period..............  $       4    $    597     $  4,479    $      --        5,080
                          ---------    --------     --------    ---------    ---------
Cash and cash
 equivalents, end of
 period.................  $   1,013    $     13     $    153    $      --    $   1,179
                          =========    ========     ========    =========    =========
</TABLE>

                                      F-45

<PAGE>

                     PLAINS RESOURCES INC. AND SUBSIDIARIES

         CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (in thousands)

                          YEAR ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                     Guarantor   Nonguarantor Intercompany
                           Parent   Subsidiaries Subsidiaries Eliminations Consolidated
                          --------  ------------ ------------ ------------ ------------
<S>                       <C>       <C>          <C>          <C>          <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES
Net income (loss).......  $ 40,815    $38,031     $   26,084    $(64,115)   $   40,815
Adjustments to reconcile
 net income to net cash
 provided by operating
 activities:
  Depreciation,
   depletion, and
   amortization.........     3,068     19,406         24,747          --        47,221
  Gain on sale of assets
   (Note 6).............        --         --        (48,188)         --       (48,188)
  Minority interest in
   income of a
   subsidiary...........        --         --         35,566          --        35,566
  Equity earnings in
   subsidiary...........   (64,115)        --             --      64,115            --
  Deferred income tax...    30,958       (362)        (9,299)         --        21,297
  Noncash compensation
   expense..............      (407)        --          3,089          --         2,682
  Allowance for doubtful
   accounts.............        --         --          5,000          --         5,000
  Other noncash items...     6,351         --          4,574          --        10,925
Change in assets and
 liabilities resulting
 from operating
 activities:
  Accounts receivable
   and other............   (10,385)    (7,461)       120,497          --       102,651
  Inventory.............        --     (2,023)       (11,954)         --       (13,977)
  Pipeline linefill.....        --         --        (16,679)         --       (16,679)
  Accounts payable and
   other current
   liabilities..........   (16,595)    34,685       (161,543)         --      (143,453)
  Other long-term
   liabilities..........       591         --         (8,591)         --        (8,000)
  Advances from
   (payments to)
   affiliates...........   119,735     (9,889)      (109,846)         --            --
                          --------    -------     ----------    --------    ----------
Net cash provided by
 (used in) operating
 activities.............   110,016     72,387       (146,543)         --        35,860
                          --------    -------     ----------    --------    ----------
CASH FLOWS FROM
 INVESTING ACTIVITIES
Payments for crude oil
 pipeline, gathering and
 terminal assets........        --         --        (12,219)         --       (12,219)
Payments for
 acquisition,
 exploration, and
 development costs......    (3,894)   (74,448)          (384)         --       (78,726)
Payments for additions
 to other property and
 assets.................        --     (2,476)          (657)         --        (3,133)
Proceeds from asset
 sales (Note 6).........        --         --        224,261          --       224,261
                          --------    -------     ----------    --------    ----------
Net cash provided by
 (used in) investing
 activities.............    (3,894)   (76,924)       211,001          --       130,183
                          --------    -------     ----------    --------    ----------
CASH FLOWS FROM
 FINANCING ACTIVITIES
Proceeds from long-term
 debt...................   264,825         --      1,433,750          --     1,698,575
Proceeds from short-term
 debt...................        --         --         51,300          --        51,300
Proceeds from sale of
 capital stock, options
 and warrants...........     2,301         --             --          --         2,301
Principal payments of
 long-term debt.........  (375,336)        --     (1,423,850)         --    (1,799,186)
Principal payments of
 short-term debt........        --         --       (108,719)         --      (108,719)
Purchase of treasury
 stock..................   (23,613)        --             --          --       (23,613)
Costs incurred in
 connection with
 financing
 arrangements...........        --         --         (6,748)         --        (6,748)
Preferred stock
 dividends..............   (13,409)        --             --          --       (13,409)
Distribution to
 unitholders............    30,133         --        (59,565)         --       (29,432)
Other...................      (260)        --             --          --          (260)
                          --------    -------     ----------    --------    ----------
Net cash used in
 financing activities...  (115,359)        --       (113,832)         --      (229,191)
                          --------    -------     ----------    --------    ----------
Net decrease in cash and
 cash equivalents.......    (9,237)    (4,537)       (49,374)         --       (63,148)
Cash and cash
 equivalents, beginning
 of period..............  $  9,241    $ 5,134     $   53,853    $     --        68,228
                          --------    -------     ----------    --------    ----------
Cash and cash
 equivalents, end of
 period.................  $      4    $   597     $    4,479    $     --    $    5,080
                          ========    =======     ==========    ========    ==========
</TABLE>

                                      F-46

<PAGE>

                     PLAINS RESOURCES INC. AND SUBSIDIARIES

         CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (in thousands)

                          YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                      Guarantor   Nonguarantor Intercompany
                           Parent    Subsidiaries Subsidiaries Eliminations Consolidated
                          ---------  ------------ ------------ ------------ ------------
<S>                       <C>        <C>          <C>          <C>          <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES
Net income (loss).......  $ (25,331)   $ 22,101    $ (33,611)    $ 11,510    $ (25,331)
Adjustments to reconcile
 net income to net cash
 provided by operating
 activities:
  Depreciation,
   depletion, and
   amortization.........      2,096      17,490       17,412           --       36,998
  Noncash gains (Note 4
   and 6)...............         --          --      (26,244)          --      (26,244)
  Minority interest in
   income of a
   subsidiary...........         --          --      (40,203)          --      (40,203)
  Equity in earnings of
   subsidiary...........     11,510          --           --      (11,510)          --
  Deferred income tax...      3,457      (4,754)     (19,175)          --      (20,472)
  Noncash compensation
   expense..............         --          --        1,013           --        1,013
  Other noncash items...     (1,108)         --        1,047           --          (61)
Change in assets and
 liabilities resulting
 from operating
 activities:
  Accounts receivable
   and other............       (970)     (1,287)    (224,181)          --     (226,438)
  Inventory.............         --        (842)      34,772           --       33,930
  Pipeline linefill.....         --          --           (3)          --           (3)
  Accounts payable and
   other current
   liabilities..........      5,275       2,169      164,530           --      171,974
  Other long-term
   liabilities..........         --          --       18,873           --       18,873
                          ---------    --------    ---------     --------    ---------
Net cash provided by
 (used in) operating
 activities.............     (5,071)     34,877     (105,770)          --      (75,964)
                          ---------    --------    ---------     --------    ---------
CASH FLOWS FROM
 INVESTING ACTIVITIES
Payments for midstream
 acquisitions (See Note
 6).....................         --          --     (176,918)          --     (176,918)
Payments for crude oil
 pipeline, gathering and
 terminal assets........         --          --      (12,507)          --      (12,507)
Payments for
 acquisition,
 exploration, and
 development costs......     (3,793)    (74,106)          --           --      (77,899)
Payments for additions
 to other property and
 assets.................       (267)     (2,137)         (68)          --       (2,472)
Proceeds from sale of
 pipeline linefill......         --          --        3,400           --        3,400
                          ---------    --------    ---------     --------    ---------
Net cash provided by
 (used in) investing
 activities.............     (4,060)    (76,243)    (186,093)          --     (266,396)
                          ---------    --------    ---------     --------    ---------
CASH FLOWS FROM
 FINANCING ACTIVITIES
Advances/investments
 with affiliates........   (194,902)     46,306      148,396          200           --
Proceeds from long-term
 debt...................    341,250          --      403,721           --      744,971
Proceeds from short-term
 debt...................         --          --      131,119           --      131,119
Proceeds from sale of
 capital stock, options
 and warrants...........      5,542          --           --           --        5,542
Proceeds from issuance
 of preferred stock.....     50,000          --           --           --       50,000
Proceeds from issuance
 of common units (Note
 4).....................    (25,000)         --       75,759           --       50,759
Principal payments of
 long-term debt.........   (180,711)         --     (268,621)          --     (449,332)
Principal payments of
 short-term debt........         --          --      (82,150)          --      (82,150)
Costs incurred in
 connection with
 financing
 arrangements...........     (2,205)         --      (17,243)          --      (19,448)
Preferred stock
 dividends..............     (4,245)         --           --           --       (4,245)
Distribution to
 unitholders............     29,472          --      (51,673)          --      (22,201)
Other...................       (971)         --           --           --         (971)
                          ---------    --------    ---------     --------    ---------
Net cash provided by
 financing activities...     18,230      46,306      339,308          200      404,044
                          ---------    --------    ---------     --------    ---------
Net increase in cash and
 cash equivalents.......      9,099       4,940       47,445          200       61,684
Cash and cash
 equivalents, beginning
 of period..............        142         194        6,408         (200)       6,544
                          ---------    --------    ---------     --------    ---------
Cash and cash
 equivalents, end of
 period.................  $   9,241    $  5,134    $  53,853     $     --    $  68,228
                          =========    ========    =========     ========    =========
</TABLE>

                                      F-47

<PAGE>

                                   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/ CYNTHIA A. FEEBACK
                                                  ------------------------------
                                                  Cynthia A. Feeback, Senior
                                                  Vice President--Accounting
                                                  and Treasurer (Principal
                                                   Accounting Officer)


Date: March 28, 2002