##### Index to Financial Statements





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.
20549

FORM 10-Q



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

For the quarterly period ended March 31, 2008

OR



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

Commission file number: 001-31470

PLAINS EXPLORATION & PRODUCTION COMPANY

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0430755                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

700 Milam Street, Suite 3100

Houston, Texas 77002

(Address of principal executive offices)

(Zip Code)

(713) 579-6000

(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                                                                       |  |                             
|---------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer  x                                             |  | Accelerated filer   ̈        
|                                                                       | 
|Non-accelerated filer   ̈ (Do not check if a smaller
reporting company) |  | Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).

Yes   ̈    No  x

107.5 million shares of Common Stock, $0.01 par value, issued and outstanding at April 30, 2008.









---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                
|                                                                                             
|ITEM 1. Unaudited Consolidated Financial Statements:                                         
|                                                                                              | 
|Consolidated Balance SheetsMarch 31, 2008 and December 31, 2007                               |  | 1 
|                                                                                              | 
|Consolidated Statements of IncomeFor the three months ended March 31, 2008 and 2007           |  | 2 
|                                                                                              | 
|Consolidated Statements of Cash FlowsFor the three months ended March 31, 2008 and 2007       |  | 3 
|                                                                                              | 
|Consolidated Statement of Stockholders EquityFor the three months ended March 31, 2008       |  | 4 
|                                                                                              | 
|Notes to Consolidated Financial Statements                                                    |  | 5 
|                                                                                              | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21
|                                                                                              | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risks                           |  | 29
|                                                                                              | 
|ITEM 4. Controls and Procedures                                                               |  | 31
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  | 32



(i)



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)

|                                                            |  |               |            |   |                  |   |            |  
|----------------------------------------------------------- |  | ------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                            |  | March 31,2008 |            |   | December 31,2007 |  
|ASSETS                                                      |  |               |            |   |                  |   |            |  
|Current Assets                                              |  |               |            |   |                  |   |            |  
|Cash and cash equivalents                                   |  | $             | 8,309      |   |                  | $ | 25,446     |  
|Restricted cash                                             |  |               | 59,617     |   |                  |   | 59,092     |  
|Accounts receivable                                         |  |               | 280,716    |   |                  |   | 304,972    |  
|Inventories                                                 |  |               | 21,474     |   |                  |   | 18,394     |  
|Deferred income taxes                                       |  |               | 170,896    |   |                  |   | 229,893    |  
|Other current assets                                        |  |               | 19,047     |   |                  |   | 37,123     |  
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  |               | 560,059    |   |                  |   | 674,920    |  
|                                                            |  |               |            |   |                  |   |            |  
|Property and Equipment, at cost                             |  |               |            |   |                  |   |            |  
|Oil and natural gas properties - full cost method           |  |               |            |   |                  |   |            |  
|Subject to amortization                                     |  |               | 6,550,559  |   |                  |   | 7,340,238  |  
|Not subject to amortization                                 |  |               | 1,309,790  |   |                  |   | 1,951,783  |  
|Other property and equipment                                |  |               | 108,617    |   |                  |   | 85,928     |  
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  |               | 7,968,966  |   |                  |   | 9,377,949  |  
|Less allowance for depreciation, depletion and amortization |  |               | (1,141,114 | ) |                  |   | (1,000,722 | )
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  |               | 6,827,852  |   |                  |   | 8,377,227  |  
|                                                            |  |               |            |   |                  |   |            |  
|Goodwill                                                    |  |               | 533,412    |   |                  |   | 536,822    |  
|                                                            |  |               |            |   |                  |   |            |  
|Cash Held in Escrow                                         |  |               | 280,357    |   |                  |   |           |  
|                                                            |  |               |            |   |                  |   |            |  
|Other Assets                                                |  |               | 95,342     |   |                  |   | 104,382    |  
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  | $             | 8,297,022  |   |                  | $ | 9,693,351  |  
|                                                            |  |               |            |   |                  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |               |            |   |                  |   |            |  
|Current Liabilities                                         |  |               |            |   |                  |   |            |  
|Accounts payable                                            |  | $             | 233,833    |   |                  | $ | 319,583    |  
|Commodity derivative contracts                              |  |               | 73,737     |   |                  |   | 79,938     |  
|Royalties and revenues payable                              |  |               | 132,035    |   |                  |   | 132,919    |  
|Stock appreciation rights                                   |  |               | 15,177     |   |                  |   | 63,106     |  
|Interest payable                                            |  |               | 20,031     |   |                  |   | 25,330     |  
|Income taxes payable                                        |  |               | 29,594     |   |                  |   | 3,492      |  
|Accrued merger expenses                                     |  |               | 65,761     |   |                  |   | 77,980     |  
|Other current liabilities                                   |  |               | 85,376     |   |                  |   | 115,698    |  
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  |               | 655,544    |   |                  |   | 818,046    |  
|                                                            |  |               |            |   |                  |   |            |  
|Long-Term Debt                                              |  |               |            |   |                  |   |            |  
|Revolving credit facility                                   |  |               | 1,060,000  |   |                  |   | 2,205,000  |  
|73/4% Senior Notes                                          |  |               | 600,000    |   |                  |   | 600,000    |  
|7% Senior Notes                                             |  |               | 500,000    |   |                  |   | 500,000    |  
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  |               | 2,160,000  |   |                  |   | 3,305,000  |  
|                                                            |  |               |            |   |                  |   |            |  
|Other Long-Term Liabilities                                 |  |               |            |   |                  |   |            |  
|Asset retirement obligation                                 |  |               | 173,824    |   |                  |   | 184,080    |  
|Commodity derivative contracts                              |  |               | 24,749     |   |                  |   | 33,821     |  
|Other                                                       |  |               | 77,328     |   |                  |   | 54,726     |  
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  |               | 275,901    |   |                  |   | 272,627    |  
|                                                            |  |               |            |   |                  |   |            |  
|Deferred Income Taxes                                       |  |               | 1,959,811  |   |                  |   | 1,959,431  |  
|                                                            |  |               |            |   |                  |   |            |  
|Commitments and Contingencies (Note 9)                      |  |               |            |   |                  |   |            |  
|Stockholders Equity                                        |  |               |            |   |                  |   |            |  
|Common stock                                                |  |               | 1,128      |   |                  |   | 1,128      |  
|Additional paid-in capital                                  |  |               | 2,704,951  |   |                  |   | 2,711,617  |  
|Retained earnings                                           |  |               | 787,494    |   |                  |   | 623,993    |  
|Accumulated other comprehensive income                      |  |               | 1,542      |   |                  |   | 1,566      |  
|Treasury stock                                              |  |               | (249,349   | ) |                  |   | (57        | )
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  |               | 3,245,766  |   |                  |   | 3,338,247  |  
|                                                            |  |               |            |   |                  |   |            |  
|                                                            |  | $             | 8,297,022  |   |                  | $ | 9,693,351  |  
|                                                            |  |               |            |   |                  |   |            |  

See notes to consolidated financial statements.



1



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

|                                            |  |                             |         |   |      |   |         |  
|------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                            |  | Three Months EndedMarch 31, |        
|                                            |  | 2008                        |         |   | 2007 |  
|Revenues                                    |  |                             |         |   |      |   |         |  
|Oil sales                                   |  | $                           | 456,584 |   |      | $ | 205,518 |  
|Gas sales                                   |  |                             | 164,069 |   |      |   | 17,535  |  
|Other operating revenues                    |  |                             | 2,424   |   |      |   | 1,640   |  
|                                            |  |                             |         |   |      |   |         |  
|                                            |  |                             | 623,077 |   |      |   | 224,693 |  
|                                            |  |                             |         |   |      |   |         |  
|Costs and Expenses                          |  |                             |         |   |      |   |         |  
|Production costs                            |  |                             |         |   |      |   |         |  
|Lease operating expenses                    |  |                             | 74,508  |   |      |   | 44,663  |  
|Steam gas costs                             |  |                             | 32,158  |   |      |   | 26,357  |  
|Electricity                                 |  |                             | 11,637  |   |      |   | 8,767   |  
|Production and ad valorem taxes             |  |                             | 26,228  |   |      |   | 5,259   |  
|Gathering and transportation expenses       |  |                             | 8,489   |   |      |   | 186     |  
|General and administrative                  |  |                             | 39,928  |   |      |   | 22,497  |  
|Depreciation, depletion and amortization    |  |                             | 140,853 |   |      |   | 52,678  |  
|Accretion                                   |  |                             | 3,387   |   |      |   | 2,262   |  
|                                            |  |                             |         |   |      |   |         |  
|                                            |  |                             | 337,188 |   |      |   | 162,669 |  
|                                            |  |                             |         |   |      |   |         |  
|Income from Operations                      |  |                             | 285,889 |   |      |   | 62,024  |  
|Other Income (Expense)                      |  |                             |         |   |      |   |         |  
|Gain on sale of assets                      |  |                             | 34,658  |   |      |   |        |  
|Interest expense                            |  |                             | (30,609 | ) |      |   | (5,360  | )
|Debt extinguishment costs                   |  |                             | (10,263 | ) |      |   |        |  
|Loss on mark-to-market derivative contracts |  |                             | (9,481  | ) |      |   | (20,590 | )
|Interest and other income (expense)         |  |                             | (25     | ) |      |   | 577     |  
|                                            |  |                             |         |   |      |   |         |  
|Income Before Income Taxes                  |  |                             | 270,169 |   |      |   | 36,651  |  
|Income tax expense                          |  |                             |         |   |      |   |         |  
|Current                                     |  |                             | (40,537 | ) |      |   |        |  
|Deferred                                    |  |                             | (66,131 | ) |      |   | (16,081 | )
|                                            |  |                             |         |   |      |   |         |  
|Net Income                                  |  | $                           | 163,501 |   |      | $ | 20,570  |  
|                                            |  |                             |         |   |      |   |         |  
|Earnings per Share                          |  |                             |         |   |      |   |         |  
|Basic                                       |  | $                           | 1.46    |   |      | $ | 0.28    |  
|Diluted                                     |  | $                           | 1.43    |   |      | $ | 0.28    |  
|Weighted Average Shares Outstanding         |  |                             |         |   |      |   |         |  
|Basic                                       |  |                             | 112,171 |   |      |   | 72,463  |  
|                                            |  |                             |         |   |      |   |         |  
|Diluted                                     |  |                             | 114,156 |   |      |   | 73,490  |  
|                                            |  |                             |         |   |      |   |         |  

See notes to consolidated financial statements.



2



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of dollars)

|                                                           |  |                             |            |   |      |   |          |  
|---------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | -------- | -
|                                                           |  | Three Months EndedMarch 31, |           
|                                                           |  | 2008                        |            |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |                             |            |   |      |   |          |  
|Net income                                                 |  | $                           | 163,501    |   |      | $ | 20,570   |  
|Items not affecting cash flows from operating activities   |  |                             |            |   |      |   |          |  
|Gain on sale of assets                                     |  |                             | (34,658    | ) |      |   |         |  
|Depreciation, depletion, amortization and accretion        |  |                             | 144,240    |   |      |   | 54,940   |  
|Deferred income taxes                                      |  |                             | 66,131     |   |      |   | 16,081   |  
|Debt extinguishment costs                                  |  |                             | 10,263     |   |      |   |         |  
|Commodity derivative contracts                             |  |                             | 9,481      |   |      |   | 20,590   |  
|Noncash compensation                                       |  |                             | 12,073     |   |      |   | 5,904    |  
|Other noncash items                                        |  |                             | 950        |   |      |   | (7       | )
|Change in assets and liabilities from operating activities |  |                             |            |   |      |   |          |  
|Accounts receivable and other assets                       |  |                             | 14,520     |   |      |   | 1,126    |  
|Accounts payable and other liabilities                     |  |                             | (93,330    | ) |      |   | (1,879   | )
|Stock appreciation rights                                  |  |                             | (49,358    | ) |      |   | (3,099   | )
|Income tax receivable/payable                              |  |                             | 40,941     |   |      |   | (94,272  | )
|                                                           |  |                             |            |   |      |   |          |  
|Net cash provided by operating activities                  |  |                             | 284,754    |   |      |   | 19,954   |  
|                                                           |  |                             |            |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |                             |            |   |      |   |          |  
|Additions to oil and gas properties                        |  |                             | (274,568   | ) |      |   | (144,901 | )
|Derivative settlements                                     |  |                             | (16,647    | ) |      |   | (23,528  | )
|Proceeds from property sales, net of costs and expenses    |  |                             | 1,709,880  |   |      |   |         |  
|Increase in restricted cash and cash held in escrow        |  |                             | (280,882   | ) |      |   |         |  
|Additions to other property and equipment                  |  |                             | (22,689    | ) |      |   | (4,390   | )
|Other                                                      |  |                             | (14,242    | ) |      |   |         |  
|                                                           |  |                             |            |   |      |   |          |  
|Net cash provided by (used in) investing activities        |  |                             | 1,100,852  |   |      |   | (172,819 | )
|                                                           |  |                             |            |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |                             |            |   |      |   |          |  
|Revolving credit facilities                                |  |                             |            |   |      |   |          |  
|Borrowings                                                 |  |                             | 3,154,441  |   |      |   | 336,775  |  
|Repayments                                                 |  |                             | (4,299,441 | ) |      |   | (572,275 | )
|Proceeds from issuance of long-term debt                   |  |                             |           |   |      |   | 500,000  |  
|Cost incurred in connection with financing arrangements    |  |                             | (137       | ) |      |   | (7,945   | )
|Derivative settlements                                     |  |                             | (5,190     | ) |      |   |         |  
|Purchase of treasury stock                                 |  |                             | (271,807   | ) |      |   | (32,292  | )
|Other                                                      |  |                             | 19,391     |   |      |   | 1,879    |  
|                                                           |  |                             |            |   |      |   |          |  
|Net cash (used in) provided by financing activities        |  |                             | (1,402,743 | ) |      |   | 226,142  |  
|                                                           |  |                             |            |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents       |  |                             | (17,137    | ) |      |   | 73,277   |  
|Cash and cash equivalents, beginning of period             |  |                             | 25,446     |   |      |   | 899      |  
|                                                           |  |                             |            |   |      |   |          |  
|Cash and cash equivalents, end of period                   |  | $                           | 8,309      |   |      | $ | 74,176   |  
|                                                           |  |                             |            |   |      |   |          |  

See notes to consolidated financial statements.



3



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##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)

(share and dollar amounts in thousands)



|                                                       |  |              |  |                          |       |  |                  |           |                                     |  |   |                |  |   |       |   |  |        |   |  |   |          |   |  |   |           |  
|------------------------------------------------------ |  | ------------ |  | ------------------------ | ----- |  | ---------------- | --------- | ----------------------------------- |  | - | -------------- |  | - | ----- | - |  | ------ | - |  | - | -------- | - |  | - | --------- | -
|                                                       |  | Common Stock |  | AdditionalPaid-inCapital |       |  | RetainedEarnings |           | AccumulatedOtherComprehensiveIncome |  |   | Treasury Stock |  |   | Total |  
|                                                       |  | Shares       |  | Amount                   |       |  |                  |           | Shares                              |  |   | Amount         |  |  
|Balance at December 31, 2007                           |  | 112,841      |  | $                        | 1,128 |  | $                | 2,711,617 |                                     |  | $ | 623,993        |  | $ | 1,566 |   |  | (1     | ) |  | $ | (57      | ) |  | $ | 3,338,247 |  
|Net income                                             |  |             |  |                          |      |  |                  |          |                                     |  |   | 163,501        |  |   |      |   |  |       |   |  |   |         |   |  |   | 163,501   |  
|Restricted stock awards                                |  |             |  |                          |      |  |                  | 15,622    |                                     |  |   |               |  |   |      |   |  |       |   |  |   |         |   |  |   | 15,622    |  
|Treasury stock purchases                               |  |             |  |                          |      |  |                  |          |                                     |  |   |               |  |   |      |   |  | (5,161 | ) |  |   | (271,807 | ) |  |   | (271,807  | )
|Issuance of treasury stock for restricted stock awards |  |             |  |                          |      |  |                  | (22,515   | )                                   |  |   |               |  |   |      |   |  | 414    |   |  |   | 22,515   |   |  |   |          |  
|Other comprehensive income                             |  |             |  |                          |      |  |                  |          |                                     |  |   |               |  |   | (24   | ) |  |       |   |  |   |         |   |  |   | (24       | )
|Exercise of stock options                              |  | 13           |  |                          |      |  |                  | 227       |                                     |  |   |               |  |   |      |   |  |       |   |  |   |         |   |  |   | 227       |  
|                                                       |  |              |  |                          |       |  |                  |           |                                     |  |   |                |  |   |       |   |  |        |   |  |   |          |   |  |   |           |  
|Balance at March 31, 2008                              |  | 112,854      |  | $                        | 1,128 |  | $                | 2,704,951 |                                     |  | $ | 787,494        |  | $ | 1,542 |   |  | (4,748 | ) |  | $ | (249,349 | ) |  | $ | 3,245,766 |  
|                                                       |  |              |  |                          |       |  |                  |           |                                     |  |   |                |  |   |       |   |  |        |   |  |   |          |   |  |   |           |  

See notes to consolidated financial statements.



4



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##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1Organization and Significant Accounting Policies

The consolidated financial statements of Plains Exploration & Production Company, a Delaware corporation (PXP, us, our, or we), include the accounts
of all its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. Certain reclassifications have been made to prior year statements to conform to the current year presentation.

We are an independent energy company that is engaged in the upstream oil and gas business. The upstream business acquires, develops, explores for and
produces oil and gas. Our upstream activities are primarily located in the United States. We also have interests in exploration prospects offshore New Zealand and Vietnam.

These consolidated financial statements and related notes present our consolidated financial position as of March 31, 2008 and December 31, 2007, the results of our operations, cash
flows and comprehensive income for the three months ended March 31, 2008 and 2007 and the changes in stockholders equity for the three months ended March 31, 2008. All adjustments, consisting only of normal recurring
adjustments that in the opinion of management were necessary for a fair statement of the results for the interim periods, have been reflected. The results of our operations for the three months ended March 31, 2008 are not necessarily
indicative of the results of our operations to be expected for the full year.

These financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United
States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Asset Retirement Obligations. The following table reflects the changes in our asset retirement obligation during the three months ended
March 31, 2008 (in thousands):



|                                                         |  |   |         |  
|-------------------------------------------------------- |  | - | ------- | -
|Asset retirement obligation - December 31, 2007          |  | $ | 195,408 |  
|Property dispositions                                    |  |   | (14,113 | )
|Settlements                                              |  |   | (1,105  | )
|Accretion expense                                        |  |   | 3,387   |  
|Asset retirement additions                               |  |   | 811     |  
|                                                         |  |   |         |  
|Asset retirement obligation - March 31, 2008 (1)         |  | $ | 184,388 |  
|                                                         |  |   |         |  
|(1) $10.6 million included in other current liabilities. |  |   |         |  

Earnings Per Share. For the three months ended March 31, 2008 and 2007 the weighted
average shares outstanding for computing basic and diluted earnings per share (EPS) were (in thousands):



|                                                                    |  |                             |  |       
|------------------------------------------------------------------- |  | --------------------------- |  | ------
|                                                                    |  | Three MonthsEnded March 31,
|                                                                    |  | 2008                        |  | 2007  
|Weighted average shares outstanding - basic                         |  | 112,171                     |  | 72,463
|Unvested restricted stock, restricted stock units and stock options |  | 1,985                       |  | 1,027 
|                                                                    |  |                             |  |       
|Weighted average shares outstanding - diluted                       |  | 114,156                     |  | 73,490
|                                                                    |  |                             |  |       

In the first quarter of 2008, 1.0 million restricted stock units were excluded in computing diluted
earnings per share because they were antidilutive. In computing earnings per share, no adjustments were made to reported net income.



5



---

##### Index to Financial Statements

Restricted Cash. The restricted cash classified as current assets at March 31, 2008 represents the cash
held in a rabbi trust to be paid to former Pogo Producing Company executives in May 2008. At March 31, 2008, the balance in the rabbi trust was invested in a money market account that is a direct liability of the financial institution, which is
highly rated by the major credit rating agencies. In addition, the account is collateralized on a dollar for dollar basis. Acceptable collateral is generally U.S. Treasury, Government and agency securities and other highly rated investments (See
Note 2AcquisitionsPogo Producing Company).

Cash Held in Escrow. The cash classified as noncurrent assets at March 31, 2008
is cash held in escrow accounts for the acquisition of oil and gas properties through the use of a tax deferred like-kind exchange, which was completed on April 17, 2008 (See Note 2AcquisitionsSubsequent Event).

Inventories. Oil inventories are carried at the lower of the cost to produce or market value and materials and supplies inventories are stated at the
lower of cost or market with cost determined on an average cost method. Our inventories consist of (in thousands):



|                       |  |               |        |                  |   |       
|---------------------- |  | ------------- | ------ | ---------------- | - | ------
|                       |  | March 31,2008 |        | December 31,2007
|Oil                    |  | $             | 8,261  |                  | $ | 6,066 
|Materials and supplies |  |               | 13,213 |                  |   | 12,328
|                       |  |               |        |                  |   |       
|                       |  | $             | 21,474 |                  | $ | 18,394
|                       |  |               |        |                  |   |       

Stockholders Equity. Our Board of Directors has authorized the repurchase of up to $1.0
billion of our common stock. The shares will be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors. In the three months ended
March 31, 2008, we repurchased approximately 5.2 million common shares at a cost of approximately $271.8 million. Subsequent to March 31, 2008, we completed the purchase of an additional 0.6 million common shares for a total
cost of $32.4 million. We may expend an additional $696 million under the program.

Comprehensive Income. Other comprehensive income consisted of (in
thousands):



|                                                                            |  |                             |         |   |      |   |       
|--------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------
|                                                                            |  | Three Months EndedMarch 31,
|                                                                            |  | 2008                        |         |   | 2007
|Net Income                                                                  |  | $                           | 163,501 |   |      | $ | 20,570
|Other Comprehensive Income Pension liability adjustment, net of tax benefit |  |                             | (24     | ) |      |   |      
|                                                                            |  |                             |         |   |      |   |       
|Comprehensive Income                                                        |  | $                           | 163,477 |   |      | $ | 20,570
|                                                                            |  |                             |         |   |      |   |       

Recent Accounting Pronouncements. In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160
requires companies with noncontrolling interests to disclose such interests clearly as a portion of equity but separate from the parents equity. The noncontrolling interests portion of net income must also be clearly presented on the
income statement. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and we do not expect this pronouncement to have a significant impact on our consolidated financial position, results of
operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS
141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets
acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS 141R expands on the required disclosures to improve the financial statement users ability to evaluate the nature and financial effects of
business combinations. SFAS 141R is effective for business combinations for which the acquisition date is on or after January 1, 2009, except for certain income tax effects of prior acquisitions for which SFAS 141R is now effective. We are
currently evaluating the potential impact of this statement.



6



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##### Index to Financial Statements

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early application encouraged. We
do not expect this pronouncement to have a significant impact on our consolidated financial position, results of operations or cash flows.

Note
2Acquisitions

Pogo Producing Company

On November 6, 2007, we acquired Pogo in a stock and cash transaction. We paid cash consideration of approximately $1.5 billion and issued approximately 40 million common shares valued at approximately $2.0 billion. In addition,
we paid cash consideration of $35.4 million to redeem outstanding stock options. The total purchase price included $154.2 million of merger costs. We accounted for the Pogo acquisition as a purchase effective November 6, 2007, and the assets
and liabilities were recorded at their fair value. The purchase price allocation is preliminary subject to our determination of Pogos final tax basis and fair value of certain liabilities that have not been completed as of March 31, 2008.
We expect to finalize the purchase price allocation in the second quarter of 2008.

Unaudited Pro Forma Information

The following unaudited pro forma information shows the pro forma effect on our results for the three months
ended March 31, 2007 of the Pogo acquisition and certain other material acquisition and financing transactions, including: (1) the acquisition of certain properties located in the Piceance Basin for $975 million in cash and one million
shares of common stock, (2) the issuance by PXP of $500 million of 7% Senior Notes due 2017, (3) the issuance by PXP of $600 million of 73/4% Senior Notes due 2015, (4) $2.0 billion of borrowings under the senior revolving credit facility, and (5) the retirement of Pogos $450 million 7.875% Senior Notes
due 2013, $300 million 6.625% Senior Notes due 2015, and $500 million 6.875% Senior Notes due 2017. We believe the assumptions used provide a reasonable basis for presenting the pro forma significant effects directly attributable to the Pogo and
Piceance Basin acquisitions. This unaudited pro forma information assumes such transactions occurred on January 1, 2007. This pro forma financial information does not purport to represent what our results of operations would have been if such
transactions had occurred on that date.



|                                     |  |                                      |        
|------------------------------------ |  | ------------------------------------ | -------
|                                     |  | Three Months EndedMarch 31, 2007    
|                                     |  | (in thousands except per share data)
|                                     |  | (unaudited)                         
|Revenues                             |  | $                                    | 456,115
|Income from continuing operations    |  |                                      | 6,470  
|Net income                           |  |                                      | 6,470  
|Basic and diluted earnings per share |  |                                      |        
|Basic and Diluted                    |  |                                      |        
|Income from continuing operations    |  | $                                    | 0.06   
|Net income                           |  | $                                    | 0.06   
|Weighted average shares outstanding  |  |                                      |        
|Basic                                |  |                                      | 113,463
|Diluted                              |  |                                      | 114,490

Subsequent Event

On April 17, 2008, we completed the acquisition of oil and gas producing properties in South Texas from a private company. After the exercise of third party preferential rights, we paid $288 million in cash, which included
preliminary closing adjustments of approximately $10 million. We funded the acquisition primarily with proceeds from recently completed divestments through the use of a tax deferred like-kind exchange (See Note 3Divestitures). We estimate that
proved reserves were approximately 93 billion cubic feet of natural gas equivalent as of December 31, 2007. The effective date of the transaction is January 1, 2008.



7



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##### Index to Financial Statements

Note 3Divestitures

On February 15, 2008, we closed the sale to XTO Energy Inc. (XTO) of our interests in certain oil and gas properties located in the San Juan Basin in New Mexico and in the Barnett Shale in Texas. This
transaction had an effective date of January 1, 2008, and we received $199 million in cash proceeds. On February 29, 2008 we completed the acquisition of XTOs 50% working interest in the Big Mac prospect located on the Texas Gulf
Coast for approximately $20.2 million.

On February 29, 2008, we closed the sale of certain oil and gas properties to a subsidiary of Occidental
Petroleum Corporation (Oxy) and certain other companies with contractual preferential rights to purchase, with an effective date of January 1, 2008, and received approximately $1.53 billion in cash proceeds. We sold 50% of our
working interests in oil and gas properties located in the Permian Basin, West Texas and New Mexico. We retained 50% of our working interest in these properties, and Oxy will be the operator of all the assets previously operated by us. We acquired
the above referenced properties in the Pogo acquisition on November 6, 2007 and the property revenues and expenses are included in our historical consolidated statement of income beginning on that date through the closing date of the sale,
February 29, 2008. We also sold 50% of our working interests in oil and gas properties located in the Piceance Basin in Colorado, including a 50% interest in the entity that holds our interest in Collbran Valley Gas Gathering LLC
(CVGG), and we retained 50% of our working interest in these oil and gas properties. We will remain the operator of these properties. We acquired these properties on May 31, 2007 and the property revenues and expenses are included
in our historical consolidated statement of income beginning on that date through the closing date of February 29, 2008. We recorded a $34.7 million pretax gain on the sale of the 50% interest in the entity that holds our interest in CVGG.

Our aggregate working interest in the properties sold in February 2008 generated total sales volumes of approximately 11 thousand barrels of
oil equivalent per day (MBOEPD) during the first quarter of 2008 and had 105 million barrels of oil equivalent (BOE) of estimated proved reserves as of December 31, 2007.

We follow the full cost method of accounting under which proceeds from the sale of oil and gas properties are accounted for as reductions to capitalized costs
unless such sales involve a significant change in the relationship between capitalized costs and proved reserves, in which case a gain or loss is recognized. A gain or loss was not recognized on our sales of oil and gas properties during the first
quarter of 2008, as the sales did not cause a significant change in the relationship between capitalized costs and the estimated proved reserves. The proceeds from the sales of oil and gas properties were recorded as reductions to capitalized costs.

Note 4Long-Term Debt

At
March 31, 2008, and December 31, 2007, long-term debt consisted of (in thousands):



|                                 |  |               |           |                  |   |          
|-------------------------------- |  | ------------- | --------- | ---------------- | - | ---------
|                                 |  | March 31,2008 |           | December 31,2007
|Senior revolving credit facility |  | $             | 1,060,000 |                  | $ | 2,205,000
|7 3/4% senior
notes              |  |               | 600,000   |                  |   | 600,000  
|7% senior notes                  |  |               | 500,000   |                  |   | 500,000  
|                                 |  |               |           |                  |   |          
|                                 |  | $             | 2,160,000 |                  | $ | 3,305,000
|                                 |  |               |           |                  |   |          

On February 13, 2008, we entered into an amendment to our senior revolving credit facility. The
amendment reduced the borrowing base and commitments to $2.8 billion from $2.9 billion upon the closing of the sale of certain properties to XTO. Pursuant to the amendment, the borrowing base and commitments were further reduced to $2.5 billion and
$1.9 billion, respectively, upon the closing of the sale to Oxy. The commitments may be increased up to $2.3 billion if certain conditions are met. In addition, the amendment allows us to repurchase up to $1.0 billion of our common stock subject to
certain conditions being met. We recognized $10.3 million of debt extinguishment costs in connection with the reduction in our borrowing base.



8



---

##### Index to Financial Statements

The senior revolving credit facility, as amended, contains negative covenants that limit our ability, as well as
the ability of our restricted subsidiaries, among other things, to incur additional debt, pay dividends on stock, make distributions of cash or property, change the nature of our business or operations, redeem stock or redeem subordinated debt, make
investments, create liens, enter into leases, sell assets, sell capital stock of subsidiaries, guarantee other indebtedness, enter into agreements that restrict dividends from subsidiaries, enter into certain types of swap agreements, enter into
take-or-pay or other prepayment arrangements, merge or consolidate and enter into transactions with affiliates. In addition, we are required to maintain a ratio of debt to EBITDAX (as defined) of no greater than 4.25 to 1.

At March 31, 2008, we had $7.7 million in letters of credit outstanding under our senior revolving credit facility. The effective interest rate on our
borrowings under our senior revolving credit facility was 3.85% at March 31, 2008.

Note 5Derivative Instruments

We use various derivative instruments to manage our exposure to commodity price risk on sales of oil and gas production. All derivative instruments are recorded on
the balance sheet at fair value. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized, are recognized currently in our income statement as a gain or loss on
mark-to-market derivative contracts. Cash flows are only impacted to the extent the actual settlements under the contracts result in making a payment to or receiving a payment from the counterparty. We do not currently use hedge accounting for our
derivative instruments.

Under SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities,
certain of our derivatives assumed in the Pogo acquisition were deemed to contain a significant financing element, and cash settlements with respect to such derivatives are required to be reflected as financing activities in the Statement of Cash
Flows. Cash settlements with respect to derivatives that are not accounted for under hedge accounting and do not have a significant financing element are reflected as investing activities in the Statement of Cash Flows.

We present the fair value of our derivatives for which a master netting agreement exists on a net basis in accordance with FASB Interpretation No. 39
Offsetting of Amounts Related to Certain Contracts an interpretation of APB Opinion No. 10 and FASB Statement No. 105 (FIN 39).

At March 31, 2008, we had the following open commodity derivative positions, none of which were designated as hedging instruments:



|                                |  |                 |  |               |  |                              |  |          
|------------------------------- |  | --------------- |  | ------------- |  | ---------------------------- |  | ---------
|Period                          |  | Instrument Type |  | Daily Volumes |  | Average Price                |  | Index    
|Sales of Crude Oil Production  
|2008                            |  |                 |  |               |  |                              |  |          
|Apr - Dec                       |  | Put options     |  | 42,000 Bbls   |  | $55.00 Strike price          |  | WTI      
|Apr - Dec                       |  | Collar          |  | 2,500 Bbls    |  | $60.00 Floor -$80.13 Ceiling |  | WTI      
|2009                            |  |                 |  |               |  |                              |  |          
|Jan - Dec                       |  | Put options     |  | 32,500 Bbls   |  | $55.00 Strike price          |  | WTI      
|Sales of Natural Gas Production |  |                 |  |               |  |                              |  |          
|2008                            |  |                 |  |               |  |                              |  |          
|Apr - Dec                       |  | Collar          |  | 15,000 MMBtu  |  | $8.00 Floor - $12.11 Ceiling |  | Henry Hub

The average strike price for the put options does not reflect the cost to purchase such options. The only
cash settlements we are required to make on the purchased put options are option premiums and interest. Commodity derivative liabilities at March 31, 2008 include approximately $80.6 million for the deferred premiums and associated accrued
interest on our crude oil put options.



9



---

##### Index to Financial Statements

Note 6Stock Based Compensation

We account for stock based compensation in accordance with the provisions of SFAS No.123R Share-Based Payment (SFAS 123R) that requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements.

Stock based compensation for the three months ended March 31, 2008, was
$15.0 million, of which $11.7 million is included in general and administrative expense (G&A), $0.3 million is included in lease operating expense and $3.0 million is included in oil and natural gas properties.
Stock based compensation for the three months ended March 31, 2007 was $7.3 million, of which $5.6 million is included in G&A, $0.3 million is included in lease operating expense and $1.4 million is included in oil and
natural gas properties.

Stock Appreciation Rights (SARs)

The following table summarizes the status of our SARs at March 31, 2008 and the changes during the quarter then ended:



|                               |  |                        |   |  |                              |       |                                      |   |                                                  |  |    
|------------------------------ |  | ---------------------- | - |  | ---------------------------- | ----- | ------------------------------------ | - | ------------------------------------------------ |  | ---
|                               |  | Outstanding(thousands) |   |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue($ thousands) |   | WeightedAverageRemainingContracturalLife (Years)
|Outstanding at January 1, 2008 |  | 2,767                  |   |  | $                            | 28.90 |                                      |   |                                                  |  |    
|Granted                        |  | 689                    |   |  |                              | 50.08 |                                      |   |                                                  |  |    
|Exercised                      |  | (1,110                 | ) |  |                              | 10.37 |                                      |   |                                                  |  |    
|Forfeited or expired           |  | (65                    | ) |  |                              | 49.97 |                                      |   |                                                  |  |    
|                               |  |                        |   |  |                              |       |                                      |   |                                                  |  |    
|Outstanding at March 31, 2008  |  | 2,281                  |   |  |                              | 43.71 |                                      | $ | 21,523                                           |  | 3.6
|                               |  |                        |   |  |                              |       |                                      |   |                                                  |  |    
|Exercisable at March 31, 2008  |  | 529                    |   |  |                              | 31.57 |                                      | $ | 11,409                                           |  | 2.1
|                               |  |                        |   |  |                              |       |                                      |   |                                                  |  |    

We paid $49.4 million for SARs exercises during the quarter ended March 31, 2008 and our liability
associated with SARs decreased from $68.4 million at December 31, 2007 to $19.0 million at March 31, 2008.

Restricted Stock and
Restricted Stock Units (RSUs)

The following table summarized the status of our restricted stock and RSUs at March 31, 2008 and
the changes during the quarter then ended:



|                             |  |                              |     |  |                          |       |                                      |   |                                                  |  |    
|---------------------------- |  | ---------------------------- | --- |  | ------------------------ | ----- | ------------------------------------ | - | ------------------------------------------------ |  | ---
|                             |  | EquityInstruments(thousands) |     |  | WeightedAverageFairValue |       | AggregateIntrinsicValue($ thousands) |   | WeightedAverageRemainingContracturalLife (Years)
|Nonvested at January 1, 2008 |  | 4,936                        |     |  | $                        | 43.26 |                                      |   |                                                  |  |    
|Granted                      |  | 2,096                        | (1) |  |                          | 51.72 |                                      |   |                                                  |  |    
|Vested                       |  | (603                         | )   |  |                          | 41.73 |                                      |   |                                                  |  |    
|Forfeited                    |  | (20                          | )   |  |                          | 49.29 |                                      |   |                                                  |  |    
|                             |  |                              |     |  |                          |       |                                      |   |                                                  |  |    
|Nonvested at March 31, 2008  |  | 6,409                        |     |  | $                        | 47.17 |                                      | $ | 340,574                                          |  | 3.8
|                             |  |                              |     |  |                          |       |                                      |   |                                                  |  |    



|(1) | The amount granted includes five annual grants of 200,000 RSUs commencing on
September 30, 2015. The first three annual grants will each vest in full in 2020, and the fourth and fifth annual grants will each vest ratably over a three-year period from the date of grant. Under the provisions of SFAS 123R, the grant date
for accounting purposes for all 1.0 million RSUs to be granted in the future is March 12, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, at March
31, 2008, we estimated that 0.4 million restricted stock units would be granted as a result of achieving the common stock price based targets under the terms of our Long-Term Retention and Deferred Compensation Plan. Such units had a weighted
average fair value of $46.61 per unit, an aggregate fair value of $18.7 million and a weighed average remaining contractual life of 6 years.



10



---

##### Index to Financial Statements

Note 7Fair Value Measurements of Assets and Liabilities

Effective January 1, 2008, we adopted SFAS No. 157 Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands the related disclosure requirements. SFAS 157 does not require any new fair value measurements but may require some entities to change their measurement practices. The adoption of SFAS 157 did not have
a significant effect on our consolidated financial position, results of operations or cash flows.

As defined in SFAS 157, fair value is the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. SFAS 157 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of fair value under SFAS 157 are as follows:



| |  |  | Level 1  Quoted, unadjusted prices for assets or liabilities in active markets for identical assets or liabilities as of the reporting date.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Market-based inputs that are directly or indirectly observable but not considered Level 1 quoted prices, including quoted prices for similar instruments in
active markets; quoted prices for identical or similar instruments in markets that are not active; or valuation techniques whose inputs are observable. Where observable inputs are available, directly or indirectly, for substantially the full term of
the asset or liability, the instrument is categorized in Level 2.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuation techniques whose significant inputs are unobservable.
| | - |  | -------------------------------------------------------------------------

A financial instruments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

We value our derivative instruments, including crude oil put options, crude oil collars and natural gas collars using an option-pricing model. The model uses
various inputs including NYMEX price quotations, volatilities, interest rates and time to expiry.

The following table presents, for each fair value
hierarchy level, our assets and liabilities related to continuing operations which are measured at fair value on a recurring basis as of March 31, 2008 (in thousands):



|                               |  |                                                             |        |                                                  |   |                                        |  |   |        |  |   |  
|------------------------------ |  | ----------------------------------------------------------- | ------ | ------------------------------------------------ | - | -------------------------------------- |  | - | ------ |  | - | -
|                               |  | Fair Value atMarch 31, 2008(1)                              |        | Fair Value Measurements at Reporting Date Using:
|                               |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |        | SignificantOtherObservableInputs(Level 2)        |   | SignificantUnobservableInputs(Level 3)
|Assets:                        |  |                                                             |        |                                                  |   |                                        |  |   |        |  |   |  
|Commodity derivative contracts |  | $                                                           | 4,221  |                                                  | $ |                                       |  | $ | 4,221  |  | $ | 
|                               |  |                                                             |        |                                                 
|Liabilities:                   |  |                                                             |        |                                                  |   |                                        |  |   |        |  |   |  
|Commodity derivative contracts |  |                                                             | 15,223 |                                                  |   |                                       |  |   | 15,223 |  |   | 



|(1) | Option premium and interest are not included in the fair value of derivatives.
|--- | ------------------------------------------------------------------------------

In November 2007, the FASB agreed to a one-year deferral of SFAS 157 fair value measurement requirements for nonfinancial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis. In February 2008, the FASB issued Financial Staff Position (FSP) SFAS 157-2 Effective date of SFAS 157. This FSP defers the effective date of SFAS 157
to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for nonfinancial asset and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on
a recurring basis (at least annually). We have elected to utilize this deferral and have only partially applied SFAS 157 (to financial assets and liabilities measured at fair value on a



11



---

##### Index to Financial Statements

recurring basis, as described above). Accordingly, we will apply SFAS 157 to our nonfinancial assets and liabilities for which we disclose or recognize at fair value
on a nonrecurring basis, such as asset retirement obligations,goodwill impairment and other assets and liabilities in the first quarter of 2009.

We adopted SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115 (SFAS 159) on January 1, 2008. SFAS 159 permits companies to choose
to measure financial instruments and certain other items at fair value that were not previously required to be measured at fair value. We have not elected to present assets and liabilities at fair value that were not required to be measured at fair
value prior to the adoption of SFAS 159.

Note 8Income Taxes

Income tax expense during interim periods is based on the estimated annual effective income tax rate plus any significant unusual or infrequently occurring items which are recorded in the period that the
specific item occurs. For the first quarter of 2008, income tax expense was approximately 39% of pretax income. Variances in our estimated annual effective tax rate from the 35% federal statutory rate primarily result from the effect of state income
taxes and estimated permanent differences, which include (1) the special deduction for domestic production and (2) expenses that are not deductible because of Internal Revenue Service limitations. Specific items which affected income tax
expense for the first quarter of 2008 included state tax rate changes due to recent asset divestitures and changes to our balance of unrecognized tax positions.

We file income tax returns in the U. S. and various state and foreign jurisdictions. With respect to the previously filed PXP, Nuevo Energy Company and 3TEC Energy Corporation tax returns, we are no longer subject to U. S.
federal and state income tax examinations by authorities for years before 1996. For the previously filed Pogo tax returns, we are no longer subject to U. S. federal and state income tax returns prior to 2004. The IRS reviewed Pogos federal
income tax return for 2004 and indicated they do not intend to perform an examination of that return.

The IRS is currently examining the PXP and
Nuevo federal income returns for 2003 and 2004, the fieldwork for which is anticipated to be completed in the third quarter of 2008. As this IRS audit remains ongoing, it is possible that changes will occur to the balance of our unrecognized tax
benefits during the next 12 months as the IRS finalizes its examination. The financial impact of such future changes cannot be determined at this time.

At March 31, 2008, we had approximately $32.8 million of gross unrecognized tax benefits. If all unrecognized tax benefits were recognized, approximately $27.0 million would impact our effective tax rate in future periods (including
all indirect tax effects in other jurisdictions). Both of these amounts have increased over the corresponding amounts that existed at December 31, 2007 as a result of new information obtained in the first quarter of 2008.

Note 9Commitments and Contingencies

Environmental matters. As an owner or lessee and operator of oil and gas properties, we are subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the
environment. Often these regulations are more burdensome on older properties that were operated before the regulations came into effect such as some of our properties in California that have operated for over 90 years. We have established policies
for continuing compliance with environmental laws and regulations. We also maintain insurance coverage for environmental matters, which we believe is customary in the industry, but we are not fully insured against all environmental risks. There can
be no assurance that current or future local, state or federal rules and regulations will not require us to spend material amounts to comply with such rules and regulations.

On April 10, 2008, a coalition of California environmental organizations announced the signing of an agreement with us and the coalitions support of our Tranquillon Ridge Project offshore
California. We believe the organizations support will improve our chance of receiving a new state oil and gas lease and attendant operating permits. In return for the coalitions support and upon completion of certain permitting and
operational objectives, the agreement provides certain benefits to the communities in Santa Barbara County and to the state of California, including a firm end date prohibiting the extension of life of existing oil and gas operations, donation of
3,900 acres of lands and full mitigation of greenhouse gases from the project if Tranquillon Ridge is permitted and proves to be a commercial success. We also agreed to donate $1.5 million to further reduce greenhouse gas emissions in the
county and withdraw permits for the approximately 800 acre Purisma Hills residential project if permitting, which is subject to approval by certain California agencies, is successful. We anticipate the permitting process to take place over the next
several months.



12



---

##### Index to Financial Statements

Plugging, Abandonment and Remediation Obligations.Consistent with normal industry practices, substantially
all of our oil and gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove tanks, production equipment and flow lines and restore the wellsite. Typically, when
producing oil and gas assets are purchased the purchaser assumes the obligation to plug and abandon wells that are part of such assets. However, in some instances, we receive an indemnity with respect to those costs. We cannot assure you that we
will be able to collect on these indemnities.

In connection with the sale of certain properties offshore California in December 2004 we retained the
responsibility for certain abandonment costs, including removing, dismantling and disposing of the existing offshore platforms. The present value of such abandonment costs, $42 million ($81 million undiscounted), is included in our asset
retirement obligation as reflected on our Consolidated Balance Sheet. In addition, we agreed to guarantee the performance of the purchaser with respect to the remaining abandonment obligations related to the properties (approximately
$46 million). To secure its abandonment obligations, the purchaser of the properties is required to periodically deposit funds into an escrow account. At March 31, 2008, the escrow account had a balance of $9.5 million. The fair
value of our guarantee at March 31, 2008 was $0.3 million and is included in Other Long-Term Liabilities in the Consolidated Balance Sheet.

Operating risks and insurance coverage. Our operations are subject to all of the risks normally incident to the exploration for and the production of oil and gas, including well blowouts, cratering, explosions, oil spills,
releases of gas or well fluids, fires, pollution and releases of toxic gas, each of which could result in damage to or destruction of oil and gas wells, production facilities or other property, or injury to persons. Our operations in California,
including transportation of oil by pipelines within the city and county of Los Angeles, are especially susceptible to damage from earthquakes and involve increased risks of personal injury, property damage and marketing interruptions because of the
population density of southern California. Although we maintain insurance coverage considered to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of high premium costs. We
maintain coverage for earthquake damages in California but this coverage may not provide for the full effect of damages that could occur and we may be subject to additional liabilities. The occurrence of a significant event that is not fully insured
against could have a material adverse effect on our financial position. Our insurance does not cover every potential risk associated with operating our pipelines, including the potential loss of significant revenues. Consistent with insurance
coverage generally available to the industry, our insurance policies provide limited coverage for losses or liabilities relating to pollution, with broader coverage for sudden and accidental occurrences.

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

On November 15, 2005, the United States Court of Federal Claims issued a ruling
granting the plaintiffs motion for summary judgment as to liability and partial summary judgment as to damages in the breach of contract lawsuit Amber Resources Company et al. v. United States, Case No. 02-30c. The Courts ruling
also denied the United States motion to dismiss and motion for summary judgment. The United States Court of Federal Claims ruled that the federal governments imposition of new and onerous requirements that stood as a significant obstacle
to oil and gas development breached agreements that it made when it sold 36 federal leases offshore California. The Court further ruled that the Government must give back to the current lessees the more than $1.1 billion in lease bonuses it had
received at the time of sale. On October 31, 2006, the Court issued an unfavorable decision on the plaintiffs motion for partial summary judgment concerning plaintiffs additional claims regarding the hundreds of millions of dollars
that have been spent in the successful efforts to find oil and gas in the disputed lease area, and other matters. Plaintiffs filed a motion for final judgment on November 29, 2006 and the court granted such motion on January 11, 2007.
Judgment on the $1.1 billion was filed January 12, 2007. The United States has filed an appeal and Plaintiffs have filed a cross-appeal concerning the Courts October 31, 2006 decision. No payments will be made until all appeals
have either been waived or exhausted. We are among the current lessees of the 36 leases. Our share of the $1.1 billion award is in excess of $80 million if the plaintiffs are successful.

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



13



---

##### Index to Financial Statements

Note 10Consolidating Financial Statements

We are the issuer of $600 million of 73/4% Senior Notes and $500 million of 7% Senior Notes, which are jointly and severally guaranteed on a full and unconditional basis by certain of our existing domestic subsidiaries (referred to as
Guarantor Subsidiaries). Certain of our subsidiaries do not guarantee the Senior Notes (referred to as Non-Guarantor Subsidiaries).

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



| |  |  | PXP (the Issuer);
| | - |  | -------------------



| |  |  | the Guarantor Subsidiaries on a combined basis;
| | - |  | -----------------------------------------------



| |  |  | the Non-Guarantor Subsidiaries on a combined basis;
| | - |  | ---------------------------------------------------



| |  |  | elimination entries necessary to consolidate the Issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | PXP on a consolidated basis.
| | - |  | ----------------------------



14



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

MARCH 31, 2008

(in thousands)



|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|----------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | --------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                            |  | Issuer |           |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |           
|ASSETS                                                      |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Assets                                              |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Cash and cash equivalents                                   |  | $      | 419       |   |                       | $ | 1,296     |                           |  | $ | 6,594                    |   |  | $            |           |   |  | $ | 8,309      |  
|Accounts receivable and other current assets                |  |        | 142,613   |   |                       |   | 404,743   |                           |  |   | 4,394                    |   |  |              |           |   |  |   | 551,750    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 143,032   |   |                       |   | 406,039   |                           |  |   | 10,988                   |   |  |              |           |   |  |   | 560,059    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Property and Equipment, at cost                             |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Subject to amortization                                     |  |        | 2,687,427 |   |                       |   | 3,863,132 |                           |  |   |                         |   |  |              |           |   |  |   | 6,550,559  |  
|Not subject to amortization                                 |  |        | 192,654   |   |                       |   | 1,100,050 |                           |  |   | 17,086                   |   |  |              |           |   |  |   | 1,309,790  |  
|Other property and equipment                                |  |        | 41,612    |   |                       |   | 46,027    |                           |  |   | 20,978                   |   |  |              |           |   |  |   | 108,617    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 2,921,693 |   |                       |   | 5,009,209 |                           |  |   | 38,064                   |   |  |              |           |   |  |   | 7,968,966  |  
|Less allowance for depreciation, depletion and amortization |  |        | (575,029  | ) |                       |   | (886,074  | )                         |  |   | (20                      | ) |  |              | 320,009    |   |  |   | (1,141,114 | )
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 2,346,664 |   |                       |   | 4,123,135 |                           |  |   | 38,044                   |   |  |              | 320,009    |   |  |   | 6,827,852  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Investment in and Advances to Subsidiaries                  |  |        | 3,668,517 |   |                       |   | 863,494   |                           |  |   | (39,480                  | ) |  |              | (4,492,531 | ) |  |   |           |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Other Assets                                                |  |        | 293,751   |   |                       |   | 566,062   |                           |  |   | 49,298                   |   |  |              |           |   |  |   | 909,111    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  | $      | 6,451,964 |   |                       | $ | 5,958,730 |                           |  | $ | 58,850                   |   |  | $            | (4,172,522 | ) |  | $ | 8,297,022  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Liabilities                                         |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Accounts payable and other current liabilities              |  | $      | 253,418   |   |                       | $ | 325,105   |                           |  | $ | 3,284                    |   |  | $            |           |   |  | $ | 581,807    |  
|Commodity derivative contracts                              |  |        | 58,514    |   |                       |   | 15,223    |                           |  |   |                         |   |  |              |           |   |  |   | 73,737     |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 311,932   |   |                       |   | 340,328   |                           |  |   | 3,284                    |   |  |              |           |   |  |   | 655,544    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Long-Term Debt                                              |  |        | 2,160,000 |   |                       |   |          |                           |  |   |                         |   |  |              |           |   |  |   | 2,160,000  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Other Long-Term Liabilities                                 |  |        | 165,349   |   |                       |   | 109,735   |                           |  |   | 817                      |   |  |              |           |   |  |   | 275,901    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Deferred Income Taxes                                       |  |        | 568,917   |   |                       |   | 1,251,385 |                           |  |   | 2,265                    |   |  |              | 137,244    |   |  |   | 1,959,811  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Stockholders Equity                                        |  |        | 3,245,766 |   |                       |   | 4,257,282 |                           |  |   | 52,484                   |   |  |              | (4,309,766 | ) |  |   | 3,245,766  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  | $      | 6,451,964 |   |                       | $ | 5,958,730 |                           |  | $ | 58,850                   |   |  | $            | (4,172,522 | ) |  | $ | 8,297,022  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  



15



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2007

(in thousands)



|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|----------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | --------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                            |  | Issuer |           |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |           
|ASSETS                                                      |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Assets                                              |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Cash and cash equivalents                                   |  | $      | 15,897    |   |                       | $ | 2,261     |                           |  | $ | 7,288                    |   |  | $            |           |   |  | $ | 25,446     |  
|Accounts receivable and other current assets                |  |        | 255,049   |   |                       |   | 385,720   |                           |  |   | 8,705                    |   |  |              |           |   |  |   | 649,474    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 270,946   |   |                       |   | 387,981   |                           |  |   | 15,993                   |   |  |              |           |   |  |   | 674,920    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Property and Equipment, at cost                             |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Oil and natural gas properties - full cost method           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Subject to amortization                                     |  |        | 2,632,802 |   |                       |   | 4,707,436 |                           |  |   |                         |   |  |              |           |   |  |   | 7,340,238  |  
|Not subject to amortization                                 |  |        | 174,837   |   |                       |   | 1,761,489 |                           |  |   | 15,457                   |   |  |              |           |   |  |   | 1,951,783  |  
|Other property and equipment                                |  |        | 57,384    |   |                       |   | 11,903    |                           |  |   | 16,641                   |   |  |              |           |   |  |   | 85,928     |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 2,865,023 |   |                       |   | 6,480,828 |                           |  |   | 32,098                   |   |  |              |           |   |  |   | 9,377,949  |  
|Less allowance for depreciation, depletion and amortization |  |        | (529,426  | ) |                       |   | (788,164  | )                         |  |   | (21                      | ) |  |              | 316,889    |   |  |   | (1,000,722 | )
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 2,335,597 |   |                       |   | 5,692,664 |                           |  |   | 32,077                   |   |  |              | 316,889    |   |  |   | 8,377,227  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Investment in and Advances to Subsidiaries                  |  |        | 5,120,045 |   |                       |   | (682,139  | )                         |  |   | (26,292                  | ) |  |              | (4,411,614 | ) |  |   |           |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Other Assets                                                |  |        | 24,504    |   |                       |   | 613,264   |                           |  |   | 3,436                    |   |  |              |           |   |  |   | 641,204    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  | $      | 7,751,092 |   |                       | $ | 6,011,770 |                           |  | $ | 25,214                   |   |  | $            | (4,094,725 | ) |  | $ | 9,693,351  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Current Liabilities                                         |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Accounts payable and other current liabilities              |  | $      | 322,438   |   |                       | $ | 404,413   |                           |  | $ | 11,257                   |   |  | $            |           |   |  | $ | 738,108    |  
|Commodity derivative contracts                              |  |        | 68,580    |   |                       |   | 11,358    |                           |  |   |                         |   |  |              |           |   |  |   | 79,938     |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  |        | 391,018   |   |                       |   | 415,771   |                           |  |   | 11,257                   |   |  |              |           |   |  |   | 818,046    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Long-Term Debt                                              |  |        | 3,305,000 |   |                       |   |          |                           |  |   |                         |   |  |              |           |   |  |   | 3,305,000  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Other Long-Term Liabilities                                 |  |        | 170,401   |   |                       |   | 102,226   |                           |  |   |                         |   |  |              |           |   |  |   | 272,627    |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Deferred Income Taxes                                       |  |        | 546,426   |   |                       |   | 1,286,567 |                           |  |   | 2,262                    |   |  |              | 124,176    |   |  |   | 1,959,431  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|Stockholders Equity                                        |  |        | 3,338,247 |   |                       |   | 4,207,206 |                           |  |   | 11,695                   |   |  |              | (4,218,901 | ) |  |   | 3,338,247  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  
|                                                            |  | $      | 7,751,092 |   |                       | $ | 6,011,770 |                           |  | $ | 25,214                   |   |  | $            | (4,094,725 | ) |  | $ | 9,693,351  |  
|                                                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |            |   |  |   |            |  



16



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED MARCH 31, 2008

(in thousands)



|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |        
|Revenues                                            |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Oil sales                                           |  | $      | 302,249 |   |                       | $ | 154,335 |                           |  | $ |                         |   |  | $            |        |   |  | $ | 456,584  |  
|Gas sales                                           |  |        | 5,205   |   |                       |   | 158,864 |                           |  |   |                         |   |  |              |        |   |  |   | 164,069  |  
|Other operating revenues                            |  |        | 643     |   |                       |   | 1,781   |                           |  |   |                         |   |  |              |        |   |  |   | 2,424    |  
|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|                                                    |  |        | 308,097 |   |                       |   | 314,980 |                           |  |   |                         |   |  |              |        |   |  |   | 623,077  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Costs and Expenses                                  |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Production costs                                    |  |        | 82,402  |   |                       |   | 70,618  |                           |  |   |                         |   |  |              |        |   |  |   | 153,020  |  
|General and administrative                          |  |        | 23,133  |   |                       |   | 16,795  |                           |  |   |                         |   |  |              |        |   |  |   | 39,928   |  
|Depreciation, depletion, amortization and accretion |  |        | 48,476  |   |                       |   | 98,885  |                           |  |   |                         |   |  |              | (3,121  | ) |  |   | 144,240  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|                                                    |  |        | 154,011 |   |                       |   | 186,298 |                           |  |   |                         |   |  |              | (3,121  | ) |  |   | 337,188  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Income from Operations                              |  |        | 154,086 |   |                       |   | 128,682 |                           |  |   |                         |   |  |              | 3,121   |   |  |   | 285,889  |  
|Other Income (Expense)                              |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 81,088  |   |                       |   | (78     | )                         |  |   |                         |   |  |              | (81,010 | ) |  |   |         |  
|Interest expense                                    |  |        | (11,033 | ) |                       |   | (34,117 | )                         |  |   |                         |   |  |              | 14,541  |   |  |   | (30,609  | )
|Debt extinguishment costs                           |  |        | (10,263 | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (10,263  | )
|Loss on mark-to-market derivative contracts         |  |        | 434     |   |                       |   | (9,915  | )                         |  |   |                         |   |  |              |        |   |  |   | (9,481   | )
|Interest and other income (expense)                 |  |        | 14,898  |   |                       |   | 34,352  |                           |  |   | (76                      | ) |  |              | (14,541 | ) |  |   | 34,633   |  
|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Income (Loss) Before Income Taxes                   |  |        | 229,210 |   |                       |   | 118,924 |                           |  |   | (76                      | ) |  |              | (77,889 | ) |  |   | 270,169  |  
|Income tax benefit (expense)                        |  |        | (65,709 | ) |                       |   | (41,623 | )                         |  |   | (4                       | ) |  |              | 668     |   |  |   | (106,668 | )
|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net Income (Loss)                                   |  | $      | 163,501 |   |                       | $ | 77,301  |                           |  | $ | (80                      | ) |  | $            | (77,221 | ) |  | $ | 163,501  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  



17



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED MARCH 31, 2007

(in thousands)



|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------- |  | ------------------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |   |  | Consolidated |        
|Revenues                                            |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Oil sales                                           |  | $      | 180,387 |   |                       | $ | 25,131  |                           |  | $                        |  |  | $            |        |   |  | $ | 205,518 |  
|Gas sales                                           |  |        | 7,312   |   |                       |   | 10,223  |                           |  |                          |  |  |              |        |   |  |   | 17,535  |  
|Other operating revenues                            |  |        | 1,491   |   |                       |   | 149     |                           |  |                          |  |  |              |        |   |  |   | 1,640   |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|                                                    |  |        | 189,190 |   |                       |   | 35,503  |                           |  |                          |  |  |              |        |   |  |   | 224,693 |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Costs and Expenses                                  |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Production costs                                    |  |        | 71,795  |   |                       |   | 13,437  |                           |  |                          |  |  |              |        |   |  |   | 85,232  |  
|General and administrative                          |  |        | 20,193  |   |                       |   | 2,304   |                           |  |                          |  |  |              |        |   |  |   | 22,497  |  
|Depreciation, depletion, amortization and accretion |  |        | 28,699  |   |                       |   | 26,241  |                           |  |                          |  |  |              |        |   |  |   | 54,940  |  
|Full cost ceiling test writedown                    |  |        |        |   |                       |   | 55,889  |                           |  |                          |  |  |              | (55,889 | ) |  |   |        |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|                                                    |  |        | 120,687 |   |                       |   | 97,871  |                           |  |                          |  |  |              | (55,889 | ) |  |   | 162,669 |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Income (Loss) from Operations                       |  |        | 68,503  |   |                       |   | (62,368 | )                         |  |                          |  |  |              | 55,889  |   |  |   | 62,024  |  
|Other Income (Expense)                              |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Equity in earnings of subsidiaries                  |  |        | (6,093  | ) |                       |   |        |                           |  |                          |  |  |              | 6,093   |   |  |   |        |  
|Interest expense                                    |  |        | (832    | ) |                       |   | (4,528  | )                         |  |                          |  |  |              |        |   |  |   | (5,360  | )
|Loss on mark-to-market derivative contracts         |  |        | (20,590 | ) |                       |   |        |                           |  |                          |  |  |              |        |   |  |   | (20,590 | )
|Interest and other income                           |  |        | 577     |   |                       |   |        |                           |  |                          |  |  |              |        |   |  |   | 577     |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Income (Loss) Before Income Taxes                   |  |        | 41,565  |   |                       |   | (66,896 | )                         |  |                          |  |  |              | 61,982  |   |  |   | 36,651  |  
|Income tax benefit (expense)                        |  |        | (20,995 | ) |                       |   | 28,354  |                           |  |                          |  |  |              | (23,440 | ) |  |   | (16,081 | )
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  
|Net Income (Loss)                                   |  | $      | 20,570  |   |                       | $ | (38,542 | )                         |  | $                        |  |  | $            | 38,542  |   |  | $ | 20,570  |  
|                                                    |  |        |         |   |                       |   |         |                           |  |                          |   |  |              |         |   |  |   |         |  



18



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2008

(in thousands of dollars)



|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|---------------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ------- | - |  | - | ---------- | -
|                                                           |  | Issuer |            |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |        
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net income (loss)                                          |  | $      | 163,501    |   |                       | $ | 77,301   |                           |  | $ | (80                      | ) |  | $            | (77,221 | ) |  | $ | 163,501    |  
|Items not affecting cash flows from operating activities   |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Gain on sale of assets                                     |  |        |           |   |                       |   | (34,658  | )                         |  |   |                         |   |  |              |        |   |  |   | (34,658    | )
|Depreciation, depletion, amortization and accretion        |  |        | 48,476     |   |                       |   | 98,885   |                           |  |   |                         |   |  |              | (3,121  | ) |  |   | 144,240    |  
|Equity in earnings of subsidiaries                         |  |        | (81,088    | ) |                       |   | 78       |                           |  |   |                         |   |  |              | 81,010  |   |  |   |           |  
|Deferred income taxes                                      |  |        | 63,339     |   |                       |   | (10,279  | )                         |  |   | 3                        |   |  |              | 13,068  |   |  |   | 66,131     |  
|Debt extinguishment costs                                  |  |        | 10,263     |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 10,263     |  
|Commodity derivative contracts                             |  |        | (434       | ) |                       |   | 9,915    |                           |  |   |                         |   |  |              |        |   |  |   | 9,481      |  
|Noncash compensation                                       |  |        | 8,399      |   |                       |   | 3,674    |                           |  |   |                         |   |  |              |        |   |  |   | 12,073     |  
|Other noncash items                                        |  |        | 899        |   |                       |   | 39       |                           |  |   | 12                       |   |  |              |        |   |  |   | 950        |  
|Change in assets and liabilities from operating activities |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Accounts receivable and other assets                       |  |        | 62,783     |   |                       |   | (48,768  | )                         |  |   | 505                      |   |  |              |        |   |  |   | 14,520     |  
|Accounts payable and other liabilities                     |  |        | (59,021    | ) |                       |   | (34,643  | )                         |  |   | 334                      |   |  |              |        |   |  |   | (93,330    | )
|Stock appreciation rights                                  |  |        | (49,358    | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (49,358    | )
|Income tax receivable/payable                              |  |        | 40,941     |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 40,941     |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net cash provided by operating activities                  |  |        | 208,700    |   |                       |   | 61,544   |                           |  |   | 774                      |   |  |              | 13,736  |   |  |   | 284,754    |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Additions to oil and gas properties                        |  |        | (83,308    | ) |                       |   | (189,707 | )                         |  |   | (1,553                   | ) |  |              |        |   |  |   | (274,568   | )
|Increase in restricted cash and cash held in escrow        |  |        | (280,882   | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (280,882   | )
|Proceeds from property sales, net of costs and expenses    |  |        | 1,709,880  |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 1,709,880  |  
|Derivative settlements                                     |  |        | (16,647    | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (16,647    | )
|Other                                                      |  |        | (18,240    | ) |                       |   | (12,329  | )                         |  |   | (6,362                   | ) |  |              |        |   |  |   | (36,931    | )
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net cash (used in) provided by investing activities        |  |        | 1,310,803  |   |                       |   | (202,036 | )                         |  |   | (7,915                   | ) |  |              |        |   |  |   | 1,100,852  |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Revolving credit facilities                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Borrowings                                                 |  |        | 3,154,441  |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 3,154,441  |  
|Repayments                                                 |  |        | (4,299,441 | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (4,299,441 | )
|Derivative settlements                                     |  |        | (5,190     | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (5,190     | )
|Purchase of treasury stock                                 |  |        | (271,807   | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (271,807   | )
|Investment in and advances to affiliates                   |  |        | (135,293   | ) |                       |   | 142,582  |                           |  |   | 6,447                    |   |  |              | (13,736 | ) |  |   |           |  
|Other                                                      |  |        | 22,309     |   |                       |   | (3,055   | )                         |  |   |                         |   |  |              |        |   |  |   | 19,254     |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net cash provided by (used in) financing activities        |  |        | (1,534,981 | ) |                       |   | 139,527  |                           |  |   | 6,447                    |   |  |              | (13,736 | ) |  |   | (1,402,743 | )
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net increase (decrease) in cash and cash equivalents       |  |        | (15,478    | ) |                       |   | (965     | )                         |  |   | (694                     | ) |  |              |        |   |  |   | (17,137    | )
|Cash and cash equivalents, beginning of period             |  |        | 15,897     |   |                       |   | 2,261    |                           |  |   | 7,288                    |   |  |              |        |   |  |   | 25,446     |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Cash and cash equivalents, end of period                   |  | $      | 419        |   |                       | $ | 1,296    |                           |  | $ | 6,594                    |   |  | $            |        |   |  | $ | 8,309      |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  



19



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2007

(in thousands of dollars)



|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|---------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                           |  | Issuer |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |        
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net income (loss)                                          |  | $      | 20,570   |   |                       | $ | (38,542 | )                         |  | $ |                         |   |  | $            | 38,542  |   |  | $ | 20,570   |  
|Items not affecting cash flows from operating activities   |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Depreciation, depletion, amortization and accretion        |  |        | 28,699   |   |                       |   | 82,130  |                           |  |   |                         |   |  |              | (55,889 | ) |  |   | 54,940   |  
|Equity in earnings of subsidiaries                         |  |        | 6,093    |   |                       |   |        |                           |  |   |                         |   |  |              | (6,093  | ) |  |   |         |  
|Deferred income taxes                                      |  |        | 21,231   |   |                       |   | (28,590 | )                         |  |   |                         |   |  |              | 23,440  |   |  |   | 16,081   |  
|Commodity derivative contracts                             |  |        | 20,590   |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 20,590   |  
|Noncash compensation                                       |  |        | 5,904    |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 5,904    |  
|Other noncash items                                        |  |        | (7       | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (7       | )
|Change in assets and liabilities from operating activities |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Accounts receivable and other assets                       |  |        | 3,140    |   |                       |   | (2,014  | )                         |  |   |                         |   |  |              |        |   |  |   | 1,126    |  
|Accounts payable and other liabilities                     |  |        | (4,503   | ) |                       |   | (475    | )                         |  |   |                         |   |  |              |        |   |  |   | (4,978   | )
|Income tax payable                                         |  |        | (94,272  | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (94,272  | )
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net cash provided by operating activities                  |  |        | 7,445    |   |                       |   | 12,509  |                           |  |   |                         |   |  |              |        |   |  |   | 19,954   |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Additions to oil and gas properties                        |  |        | (117,530 | ) |                       |   | (27,371 | )                         |  |   |                         |   |  |              |        |   |  |   | (144,901 | )
|Derivative settlements                                     |  |        | (23,528  | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (23,528  | )
|Additions to other property and equipment                  |  |        | (1,576   | ) |                       |   | (373    | )                         |  |   | (2,441                   | ) |  |              |        |   |  |   | (4,390   | )
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net cash used in investing activities                      |  |        | (142,634 | ) |                       |   | (27,744 | )                         |  |   | (2,441                   | ) |  |              |        |   |  |   | (172,819 | )
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Revolving credit facilities                                |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Borrowings                                                 |  |        | 336,775  |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 336,775  |  
|Repayments                                                 |  |        | (572,275 | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (572,275 | )
|Proceeds for issuance of debt                              |  |        | 500,000  |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 500,000  |  
|Cost incurred in connection with financing arrangements    |  |        | (7,945   | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (7,945   | )
|Investment in and advances to affiliates                   |  |        | (17,674  | ) |                       |   | 15,233  |                           |  |   | 2,441                    |   |  |              |        |   |  |   |         |  
|Purchase of treasury stock                                 |  |        | (32,292  | ) |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | (32,292  | )
|Other                                                      |  |        | 1,879    |   |                       |   |        |                           |  |   |                         |   |  |              |        |   |  |   | 1,879    |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net cash provided by financing activities                  |  |        | 208,468  |   |                       |   | 15,233  |                           |  |   | 2,441                    |   |  |              |        |   |  |   | 226,142  |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 73,279   |   |                       |   | (2      | )                         |  |   |                         |   |  |              |        |   |  |   | 73,277   |  
|Cash and cash equivalents, beginning of period             |  |        | 896      |   |                       |   | 3       |                           |  |   |                         |   |  |              |        |   |  |   | 899      |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  
|Cash and cash equivalents, end of period                   |  | $      | 74,175   |   |                       | $ | 1       |                           |  | $ |                         |   |  | $            |        |   |  | $ | 74,176   |  
|                                                           |  |        |          |   |                       |   |         |                           |  |   |                          |   |  |              |         |   |  |   |          |  



20



---

##### Index to Financial Statements

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

The
following information should be read in connection with the information contained in the consolidated financial statements and notes thereto included elsewhere in this report and our Form 10-K for the year ended December 31, 2007.

Company Overview

We are an independent
oil and gas company primarily engaged in the activities of acquiring, developing, exploring and producing oil and gas properties in the United States. Our core areas of operations are:



| |  |  | the Los Angeles and San Joaquin Basins onshore California;
| | - |  | ----------------------------------------------------------



| |  |  | the Santa Maria Basin offshore California;
| | - |  | ------------------------------------------



| |  |  | the Piceance and Wind River Basins in the Rocky Mountains;
| | - |  | ----------------------------------------------------------



| |  |  | the Permian Basin in West Texas and New Mexico;
| | - |  | -----------------------------------------------



| |  |  | the Anadarko Basin in the Texas Panhandle; and
| | - |  | ----------------------------------------------



| |  |  | the South Texas and Gulf Coast regions, including the Gulf of Mexico.
| | - |  | ---------------------------------------------------------------------

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We use derivative instruments to
manage our commodity price risk. This practice may prevent us from receiving the full advantage of increases in oil and gas prices above the maximum fixed amount specified in the derivative agreement and subjects us to the credit risk of the
counterparties to such agreements. See Item 3Quantitative and Qualitative Disclosures About Market Risks.

Assets in our principal focus
areas include mature properties with long-lived reserves and significant development opportunities as well as newer properties with development, and exploration potential. Our primary sources of liquidity are cash generated from our operations and
our senior revolving credit facility. At March 31, 2008, we had approximately $832 million available under our senior revolving credit facility. We believe that we have sufficient liquidity through our cash from operations and borrowing
capacity under our senior revolving credit facility to meet our short-term and long-term normal recurring operating needs, derivative obligations, debt service obligations, contingencies, anticipated capital expenditures and expenditures under our
stock repurchase program. In addition, the majority of our capital expenditures and expenditures under our stock repurchase program are discretionary and could be curtailed if our cash flows declined from expected levels.

Property Acquisition

On April 17, 2008, we
completed the acquisition of oil and gas producing properties in South Texas from a private company. After the exercise of third party preferential rights, we paid $288 million in cash, which included preliminary closing adjustments of approximately
$10 million. We funded the acquisition primarily with proceeds from recently completed divestments through the use of a tax deferred like-kind exchange. We estimate that proved reserves were approximately 93 billion cubic feet of natural gas
equivalent as of December 31, 2007. The effective date of the transaction is January 1, 2008.

General

We follow the full cost method of accounting whereby all costs associated with property acquisition, exploration, and development activities are capitalized. Our
revenues are derived from the sale of oil, gas and natural gas liquids. We recognize revenues when our production is sold and title is transferred. Our revenues are highly dependent upon the prices of, and demand for, oil and gas. Historically, the
markets for oil and gas have been volatile and are likely to continue to be volatile in the future. The prices we receive for our oil and gas and our levels of production are subject to wide fluctuations and depend on numerous factors beyond our
control, including supply and demand, economic conditions, foreign imports, the actions of OPEC, political conditions in other oil-producing countries, and governmental regulation, legislation and policies. Under the SECs full cost accounting
rules, we review the carrying value of our proved oil and gas properties each quarter. These rules generally require that we price our future oil and gas production at the oil and gas prices in effect at the end of each fiscal quarter to determine a
ceiling value of our properties. The rules require a write-down if our capitalized costs exceed the allowed ceiling. Given the volatility of



21



---

##### Index to Financial Statements

oil and gas prices, it is likely that our estimate of discounted future net revenues from proved oil and gas reserves will fluctuate in the near term. If oil and gas
prices decline significantly in the future, write-downs of our oil and gas properties could occur. Write-downs required by these rules do not directly impact our cash flows from operating activities. Decreases in oil and gas prices have had, and
will likely have in the future, an adverse effect on the carrying value of our estimated proved reserves, our reserve volumes and our revenues, profitability and cash flow.

Our oil and gas production expenses include salaries and benefits of personnel involved in production activities (including stock based compensation), steam gas costs, electricity costs, maintenance costs,
production, ad valorem and severance taxes, and other costs necessary to operate our producing properties. Depletion of capitalized costs of producing oil and gas properties is provided using the units of production method based upon estimated
proved reserves. For the purposes of computing depletion, estimated proved reserves are redetermined as of the end of each year and on an interim basis when deemed necessary.

General and administrative expenses (G&A) consist primarily of salaries and related benefits of administrative personnel (including stock based compensation), office rent, systems costs and
other administrative costs.

Results Overview

In the first quarter of 2008, we reported net income of $163.5 million, or $1.43 per diluted share compared to net income of $20.6 million, or $0.28 per diluted share in the first quarter of 2007.

On May 31, 2007, we acquired interests in oil and gas producing properties in the Piceance Basin in Colorado, plus associated midstream assets, and on
November 6, 2007, we acquired Pogo, which was engaged in oil and gas exploration, development, acquisition and production activities on its properties primarily located in the onshore United States.

On February 29, 2008, we closed the sale of certain oil and gas properties to a subsidiary of Oxy and certain other companies with contractual preferential
rights to purchase, with an effective date of January 1, 2008, and received approximately $1.53 billion in cash proceeds. We sold 50% of our working interests in oil and gas properties located in the Permian Basin, West Texas and New Mexico. We
retained 50% of our working interest in these properties, and Oxy will be the operator of all the assets previously operated by us. We acquired the above referenced properties in the Pogo acquisition on November 6, 2007, and the property
revenues and expenses are included in our historical consolidated statement of income beginning on that date through the closing date of the sale, February 29, 2008. We also sold 50% of our working interests in oil and gas properties located in
the Piceance Basin in Colorado, including a 50% interest in the entity that holds our interest in CVGG, and we retained 50% of our working interest in these oil and gas properties. We will remain the operator of these properties. We acquired these
properties on May 31, 2007, and the property revenues and expenses are included in our historical consolidated statement of income beginning on that date through the closing date of February 29, 2008. We recorded a $34.7 million pretax
gain on the sale of the 50% interest in the entity that holds our interest in CVGG.

On February 15, 2008, we closed the sale to XTO of our
interests in certain oil and gas properties located in the San Juan Basin in New Mexico and in the Barnett Shale in Texas. This transaction had an effective date of January 1, 2008, and we received $199 million in cash proceeds. On
February 29, 2008 we completed the acquisition of XTOs 50% working interest in the Big Mac prospect located on the Texas Gulf Coast for approximately $20.2 million.

Our aggregate working interest in the properties sold in February 2008 generated total sales volumes of approximately 11 MBOEPD during the first quarter of 2008. As further discussed below the acquisitions
have a significant impact on the comparison of operating results for the first quarter of 2008 as compared to 2007.



22



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##### Index to Financial Statements

Results of Operations

The following table reflects the components of our oil and gas production and sales prices and sets forth our operating revenues and costs and expenses on a BOE basis:



|                                    |  |                             |         |      |   |       
|----------------------------------- |  | --------------------------- | ------- | ---- | - | ------
|                                    |  | Three Months EndedMarch 31,
|                                    |  | 2008                        |         | 2007
|Sales Volumes                       |  |                             |         |      |   |       
|Oil and liquids sales (MBbls)       |  |                             | 5,246   |      |   | 4,262 
|Gas (MMcf)                          |  |                             |         |      |   |       
|Production                          |  |                             | 21,366  |      |   | 3,055 
|Used as fuel                        |  |                             | 588     |      |   | 579   
|Sales                               |  |                             | 20,778  |      |   | 2,476 
|MBOE                                |  |                             |         |      |   |       
|Production                          |  |                             | 8,807   |      |   | 4,771 
|Sales                               |  |                             | 8,709   |      |   | 4,674 
|Daily Average Volumes               |  |                             |         |      |   |       
|Oil and liquids sales (Bbls)        |  |                             | 57,646  |      |   | 47,350
|Gas (Mcf)                           |  |                             |         |      |   |       
|Production                          |  |                             | 234,788 |      |   | 33,943
|Used as fuel                        |  |                             | 6,457   |      |   | 6,432 
|Sales                               |  |                             | 228,331 |      |   | 27,511
|BOE                                 |  |                             |         |      |   |       
|Production                          |  |                             | 96,777  |      |   | 53,008
|Sales                               |  |                             | 95,701  |      |   | 51,936
|Unit Economics (in dollars)         |  |                             |         |      |   |       
|Average NYMEX Prices                |  |                             |         |      |   |       
|Oil                                 |  | $                           | 97.82   |      | $ | 58.27 
|Gas                                 |  |                             | 8.02    |      |   | 6.78  
|Average Realized Sales Price Before |  |                             |         |      |   |       
|Derivative Transactions             |  |                             |         |      |   |       
|Oil (per Bbl)                       |  | $                           | 87.03   |      | $ | 48.22 
|Gas (per Mcf)                       |  |                             | 7.90    |      |   | 7.08  
|Per BOE                             |  |                             | 71.27   |      |   | 47.72 
|Costs and Expenses per BOE          |  |                             |         |      |   |       
|Production costs                    |  |                             |         |      |   |       
|Lease operating expenses            |  | $                           | 8.56    |      | $ | 9.56  
|Steam gas costs                     |  |                             | 3.69    |      |   | 5.64  
|Electricity                         |  |                             | 1.34    |      |   | 1.88  
|Production and ad valorem taxes     |  |                             | 3.01    |      |   | 1.13  
|Gathering and transportation        |  |                             | 0.97    |      |   | 0.04  

The following table reflects cash (payments)/receipts made with respect to derivative contracts that settled
during the periods presented (in thousands):



|                                  |  |                             |         |   |      |   |         |  
|--------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                  |  | Three Months EndedMarch 31, |        
|                                  |  | 2008                        |         |   | 2007 |  
|Mark-to-market contracts          |  |                             |         |   |      |   |         |  
|Crude oil put options and collars |  | $                           | (22,264 | ) |      | $ | (23,528 | )
|Natural gas collars               |  |                             | 427     |   |      |   |        |  



23



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##### Index to Financial Statements

Comparison of Three Months Ended March 31, 2008 to Three Months Ended March 31, 2007

Oil and gas revenues. Oil and gas revenues increased $397.6 million, to $620.7 million for 2008 from $223.1 million for
2007 primarily due to the Pogo and Piceance Basin acquisitions and an increase in realized prices of $23.55 per BOE.

Oil revenues increased
$251.1 million to $456.6 million for 2008 from $205.5 million for 2007 reflecting higher realized prices ($165.4 million) and higher sales volumes ($85.7 million). Our average realized price for oil increased $38.81 to $87.03 per Bbl
for 2008 from $48.22 per Bbl for 2007. The increase is primarily attributable to an improvement in the NYMEX oil price, which averaged $97.82 per Bbl in 2008 versus $58.27 per Bbl in 2007, and an increase in the percentage of the NYMEX index price
we receive on a portion of our heavy crude oil sold under a contract with ConocoPhillips in California. Oil sales volumes increased 10.2 MBbls per day to 57.6 MBbls per day in 2008 from 47.4 MBbls per day in 2007, primarily
reflecting production from the properties acquired in the Pogo acquisition which had sales of 12.4 MBbls per day in the first quarter of 2008.

Gas
revenues increased $146.6 million to $164.1 million in 2008 from $17.5 million in 2007 due to increased sales volumes ($144.6 million) and an increase in realized prices ($2.0 million). Our average realized price for gas was
$7.90 per Mcf in 2008 compared to $7.08 per Mcf in 2007. The increase is primarily attributable to an improvement in the NYMEX gas price, which averaged $8.02 per Mcf in 2008 versus $6.78 per Mcf in 2007, partially offset by higher
differentials for the Piceance Basin properties. Gas sales volumes increased from 27.5 MMcf per day in 2007 to 228.3 MMcf per day in 2008, primarily reflecting production from the properties acquired in the Pogo and Piceance
Basin acquisitions which had sales of 199.6 MMcf per day in the first quarter of 2008.

Lease operating expenses. Lease operating
expenses increased $29.8 million, to $74.5 million in 2008 from $44.7 million in 2007. Lease operating expenses for 2008 included $24.6 million attributable to the Pogo and Piceance Basin properties acquired in November and May of
2007, respectively. Excluding such incremental costs lease operating expenses increased $5.2 million due primarily to increased repairs and maintenance and workover expenses. On a per unit basis lease operating expenses decreased to $8.56 per
BOE in 2008 versus $9.56 per BOE in 2007 due to the acquisition of the Pogo and Piceance Basin properties, which have lower per unit costs than our California properties.

Steam gas costs. Steam gas costs increased $5.8 million, to $32.2 million in 2008 from $26.4 million in 2007, primarily reflecting higher cost of gas used in steam generation. In
2008, we burned approximately 4.2 billion cubic feet (Bcf) of natural gas at a cost of approximately $7.71 per Mcf compared to 4.2 Bcf at a cost of approximately $6.34 per Mcf in 2007.

Electricity. Electricity increased $2.8 million, to $11.6 million in 2008 from $8.8 million in 2007, primarily reflecting the Pogo and
Piceance Basin acquisitions. On a per unit basis electricity decreased to $1.34 per BOE in 2008 versus $1.88 per BOE in 2007.

Production and ad valorem taxes. Production and ad valorem taxes increased $20.9 million, to $26.2 million in 2007 from $5.3 million in 2007 primarily reflecting increased volumes from the Pogo and Piceance Basin
acquisitions.

General and administrative expense. G&A expense increased $17.4 million, to $39.9 million in 2008 from
$22.5 million in 2007. The net increase is due to increased personnel costs primarily as a result of the Pogo and Piceance Basin acquisitions (approximately $7.2 million), stock based compensation (approximately $6.1 million) and transition and
other expenses related to the Pogo acquisition (approximately $4.5 million). These expenses were partially offset by increased capitalized G&A as part of our acquisition, exploration and development activities. We capitalized $14.3 million
and $8.3 million of G&A costs in 2008 and 2007, respectively. The increase in capitalized G&A is attributable to increased acquisition, exploration and development costs.

Depreciation, depletion and amortization, or DD&A. DD&A expense increased $88.2 million, to $140.9 million in 2008 from $52.7 million in 2007. The increase was
attributable to our oil and gas DD&A, primarily due to increased production ($63.6 million) and a higher per unit rate ($24.3 million). Our oil and gas unit of production rate increased to $15.76 per BOE in 2008 compared to $10.67 per BOE
in 2007. The increase primarily reflects the acquisition of the Pogo and Piceance Basin properties increased future development costs and exploration costs.

Accretion expense. Accretion expense increased $1.1 million, to $3.4 million in 2008 from $2.3 million in 2007. Accretion expense for 2008 included $1.0 million attributable to the Pogo and Piceance Basin
properties acquired in May and November of 2007, respectively.



24



---

##### Index to Financial Statements

Gain on sale of assets.In February 2008, we completed the sale to Oxy of 50% of the entity which holds our
investment in CVGG and recorded a gain on the sale of $34.7 million.

Interest expense. Interest expense increased $25.2 million, to
$30.6 million in 2008 from $5.4 million in 2007 due to higher outstanding debt associated with the Pogo and Piceance Basin acquisitions. Interest expense does not include interest capitalized on oil and gas properties not subject to
amortization. We capitalized $17.3 million and $2.1 million of interest in the first quarter of 2008 and 2007, respectively. The increase in capitalized interest is due to a higher unevaluated property balance associated with the Pogo and
Piceance Basin acquisitions.

Debt extinguishment costs.In connection with a reduction of the borrowing base on our senior revolving credit
facility in February 2008, we recorded $10.3 million of debt extinguishment costs.

Loss on mark-to-market derivative contracts. We do not
currently use hedge accounting for our derivative instruments. Consequently, these derivative contracts are marked-to-market each quarter with fair value gains and losses, both realized and unrealized, recognized currently as a gain or loss on
mark-to-market derivative contracts on the income statement. Cash flow is only impacted to the extent the actual settlements under the contracts result in making a payment to or receiving a payment from the counterparty.

We recognized a $9.5 million loss related to mark-to-market derivative contracts in the first quarter of 2008, and cash payments related to contracts that
settled in the first quarter of 2008 totaled $21.8 million. In the first quarter of 2007 we recognized a $20.6 million loss related to mark-to-market derivative contracts, and cash payments related to contracts that settled totaled
$23.5 million.

Income taxes. During interim periods income tax expense is based on the estimated effective income tax rate that is
expected for the entire year plus any significant unusual or infrequently occurring items which are recorded in the period that the specific item occurs. As pretax book income changes in future quarters, our effective tax rate may increase or
decrease. Variances in our estimated annual effective tax rate from the 35% federal statutory rate primarily result from the effect of state income taxes and estimated permanent differences, which include (1) the special deduction for domestic
production and (2) expenses that are not deductible because of Internal Revenue Service limitations.

For the first quarter of 2008, income tax
expense was approximately 39% of pretax income. Specific items affecting income tax expense for the first quarter included state tax rate changes due to recent asset divestitures plus changes to our balance of unrecognized tax positions. For the
first quarter 2007, income tax expense was approximately 44% of pretax income.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from our operations and our senior revolving credit facility. In February 2008, we entered into an amendment to
our senior revolving credit facility under which the aggregate borrowing base and commitments of the lenders is $2.5 billion and $1.9 billion, respectively (see  Financing Activities). At March 31, 2008, we had
approximately $832 million available under our senior revolving credit facility. We believe that we have sufficient liquidity through our cash from operations and borrowing capacity under our senior revolving credit facility to meet our short-term
and long-term normal recurring operating needs, derivative obligations, debt service obligations, contingencies, anticipated capital expenditures and expenditures under our stock repurchase program. In February 2008, we completed the divestiture of
oil and gas properties and received approximately $1.7 billion of proceeds, of which $300 million was placed in escrow for acquisition of oil and gas properties through the use of a tax deferred like-kind exchange which was completed on
April 17, 2008. See Company OverviewProperty Acquisition. In addition, the majority of our capital expenditures and expenditures under our stock repurchase program are discretionary and could be curtailed if our cash flows declined from
expected levels. We have no current debt maturities and our senior revolving credit facility matures on November 12, 2012.

Our cash flows
depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This
practice may prevent us from receiving the full advantage of increases in oil or natural gas prices above the maximum fixed amount specified in the derivative agreement and subjects us to the credit risk of the counterparties to such agreements. The
level of derivative activity depends on our view of market conditions, available derivative prices and our operating strategy.



25



---

##### Index to Financial Statements

Our ability to raise capital is dependent on the current state of the financial markets, which are subject to
general economic and industry conditions. Therefore, the availability of and cost of capital in the financial markets could negatively affect our liquidity position.

Working Capital

At March 31, 2008, we had a working capital deficit of approximately $95.5 million. Our
working capital deficit is affected by fluctuations in the fair value of our commodity derivative instruments and SARs. At March 31, 2008, we had net short-term liabilities of $50.2 million and $9.4 million for derivatives and SARs,
respectively. Excluding such items our working capital deficit was approximately $35.9 million. We generally have a working capital deficit because we use excess cash to pay down borrowings under our senior revolving credit facility.

Financing Activities

Amended Credit
Agreement.On February 13, 2008, we entered into an amendment to our senior revolving credit facility. The amendment reduced the borrowing base and commitments to $2.8 billion from $2.9 billion upon the closing of the sale of certain
properties to XTO. Pursuant to the amendment, the borrowing base and commitments were further reduced to $2.5 billion and $1.9 billion, respectively, upon the closing of the sale to Oxy. The commitments may be increased up to $2.3 billion if certain
conditions are met. In addition, the amendment allows us to repurchase up to $1.0 billion of our common stock subject to certain conditions being met. The effective interest rate on our borrowings under the senior revolving credit facility was 3.85%
at March 31, 2008.

The senior revolving credit facility, as amended, contains negative covenants that limit our ability, as well as the ability
of our restricted subsidiaries, among other things, to incur additional debt, pay dividends on stock, make distributions of cash or property, change the nature of our business or operations, redeem stock or redeem subordinated debt, make
investments, create liens, enter into leases, sell assets, sell capital stock of subsidiaries, guarantee other indebtedness, enter into agreements that restrict dividends from subsidiaries, enter into certain types of swap agreements, enter into
take-or-pay or other prepayment arrangements, merge or consolidate and enter into transactions with affiliates. In addition, we are required to maintain a ratio of debt to EBITDAX (as defined) of no greater than 4.25 to 1.

Short-term Credit Facility. We have an uncommitted short-term unsecured credit facility under the terms of which we may make borrowings from time to time
until June 1, 2009, not to exceed at any time the maximum principal amount of $75.0 million. No advance under the short-term facility may have a term exceeding fourteen days and all amounts outstanding are due and payable no later than
June 1, 2009. Each advance under the short-term facility shall bear interest at a rate per annum mutually agreed on by the bank and the Company.

Cash Flows



|                            |  |                             |          |   |      |   |        |  
|--------------------------- |  | --------------------------- | -------- | - | ---- | - | ------ | -
|                            |  | Three Months EndedMarch 31, |         
|                            |  | 2008                        |          |   | 2007 |  
|                            |  | (in millions)               |         
|Cash provided by (used in): |  |                             |          |   |      |   |        |  
|Operating activities        |  | $                           | 284.8    |   |      | $ | 20.0   |  
|Investing activities        |  |                             | 1,100.8  |   |      |   | (172.8 | )
|Financing activities        |  |                             | (1,402.7 | ) |      |   | 226.1  |  

Net cash provided by operating activities was $284.8 million in 2008 compared to $20.0 million in
2007. The increase in net cash provided by operating activities in 2008 reflects higher operating income primarily related to the 2007 Pogo and Piceance Basin acquisitions and higher commodity prices, partially offset by increased interest expense
and cash payments for SARs exercises. As discussed below, certain of our derivative cash payments are classified as either financing or investing activities.



26



---

##### Index to Financial Statements

Net cash provided by investing activities of $1.1 billion in 2008 primarily reflects net proceeds from
property sales of $1.7 billion partially offset by $280.4 million deposited into escrow for property acquisitions through a tax deferred like-kind exchange and additions to oil and gas properties of $274.6 million. Net cash used in investing
activities was $172.8 million in 2007 primarily reflecting additions to oil and gas properties of $144.9 million and derivative settlements of $23.5 million. Derivative settlements related to derivatives that have not been qualified
for hedge accounting and did not contain a significant financing element were reflected as investing activities.

Net cash used in financing
activities of $1.4 billion in 2008 primarily reflects the $1.1 billion net reduction in borrowings under our senior revolving credit facility and the purchase of $271.8 million of treasury stock. Net cash provided by financing activities of
$226.1 million in 2007 primarily reflects the $492.1 million net proceeds from the sale of the $500 million of 7% Senior Notes due 2017 partially offset by the $235.5 million net reduction in borrowings under our senior revolving
credit facility and the purchase of $32.3 million of treasury stock. In 2008, certain of our derivatives were deemed to contain a significant financing element and cash settlements of $5.2 million with respect to such derivatives were required
to be reflected as financing activities.

Stock Repurchase Program

Our Board of Directors has authorized the repurchase of up to $1.0 billion of our common stock. The shares will be repurchased from time to time in open market transactions or privately negotiated
transactions at our discretion, subject to market conditions and other factors. In the three months ended March 31, 2008, we repurchased approximately 5.2 million common shares at a cost of approximately $271.8 million. Subsequent to
March 31, 2008, we completed the purchase of 0.6 million common shares for a total of $32.4 million. We may expend an additional $696 million under the program.

Critical Accounting Policies and Factors that May Affect Future Results

We adopted SFAS 157 and SFAS 159 effective
January 1, 2008, each of which address the fair value measurement of assets and liabilities. We have elected to partially adopt SFAS 157 as provided by FSP SFAS 157-2, which deferred the effective date of SFAS 157 for nonfinancial assets and
liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. We have provided additional disclosure concerning our crude oil and natural gas derivative contracts (See Note 7Fair Value
Measurements of Assets and Liabilities). Pursuant to SFAS 157, we have revised our fair value calculation to consider our credit rating and the credit rating of our counterparties.

Based on the accounting policies that we have in place, certain factors may impact our future financial results. Critical accounting policies related to commodity pricing and risk management activities,
write-downs under full cost ceiling test rules, oil and gas reserves, future development and abandonment costs, DD&A, stock based compensation and goodwill are discussed in our Annual Report on Form 10-K for the year ended December 31,
2007.

Recent Accounting Pronouncements

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 requires companies with noncontrolling interests to
disclose such interests clearly as a portion of equity but separate from the parents equity. The noncontrolling interests portion of net income must also be clearly presented on the Income Statement. SFAS 160 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and we do not expect this pronouncement to have a significant impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R broadens the guidance of SFAS 141,
extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests
transferred as a result of business combinations. SFAS 141R expands on the required disclosures to improve the financial statement users ability to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for
business combinations for which the acquisition date is on or after January 1, 2009, except for certain income tax effects of prior acquisitions for which SFAS 141R is now effective. We are currently evaluating the potential impact of this
statement.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an
amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and



27



---

##### Index to Financial Statements

losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years
beginning after November 15, 2008, with early application encouraged. We do not expect this pronouncement to have a significant impact on our consolidated financial position, results of operations or cash flows.

Statement Regarding Forward-Looking Statements

This
Quarterly Report on Form 10-Q includes forward-looking information regarding Plains Exploration & Production Company that is intended to be covered by the safe harbor for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as will, would, should, plans,
likely, expects, anticipates, intends, believes, estimates, thinks, may, and similar expressions, are forward-looking statements. Although we believe
that our expectations are based on reasonable assumptions, there are risks, uncertainties and other factors that could cause actual results to be materially different from those in the forward-looking statements. These factors include, among other
things:



| |  |  | uncertainties inherent in the development and production of oil and gas and in estimating reserves;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | unexpected difficulties in integrating our operations as a result of any significant acquisitions;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | unexpected future capital expenditures (including the amount and nature thereof);
| | - |  | ---------------------------------------------------------------------------------



| |  |  | impact of oil and gas price fluctuations, including the impact on our reserve volumes and values and our earnings as a result of our derivative positions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of our indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could
place us at a competitive disadvantage compared to our competitors that have less debt, and could have other adverse consequences;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the success of our derivative activities;
| | - |  | -----------------------------------------



| |  |  | the success of our risk management activities;
| | - |  | ----------------------------------------------



| |  |  | the effects of competition;
| | - |  | ---------------------------



| |  |  | the availability (or lack thereof) of acquisition or combination opportunities;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the availability (or lack thereof) of capital to fund our business strategy and/or operations;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the impact of current and future laws and governmental regulations;
| | - |  | -------------------------------------------------------------------



| |  |  | environmental liabilities that are not covered by an effective indemnity or insurance; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | general economic, market, industry or business conditions.
| | - |  | ----------------------------------------------------------

All forward-looking statements in this report are made as of the date hereof, and you should not place undue reliance on these statements without also considering the risks and uncertainties associated with these statements and
our business that are discussed in this report and our other filings with the SEC. Moreover, although we believe the expectations reflected in the forward-looking statements are based upon reasonable assumptions, we can give no assurance that we
will attain these expectations or that any deviations will not be material. Except for any obligation to disclose material information under the Federal securities laws, we do not intend to update these forward-looking statements and information.
See Item 1A  Risk Factors and Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies and Factors That May Affect Future Results in our Annual Report on
Form 10-K for the year ended December 31, 2007 for additional discussions of risks and uncertainties.



28



---

##### Index to Financial Statements

ITEM 3  Quantitative and Qualitative Disclosures About Market Risks

Commodity Price Risk

Our primary market risk is oil and gas commodity prices. Historically the markets for oil and gas have been volatile and are likely to continue to be volatile in
the future. We use various derivative instruments to manage our exposure to commodity price risk on sales of oil and gas production. All derivative instruments are recorded on the balance sheet at fair value. If a derivative does not qualify as a
hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized, are recognized currently in our income statement as a gain or loss on mark-to-market derivative contracts. Cash flows are only impacted to the extent the
actual settlements under the contracts result in making a payment to or receiving a payment from the counterparty. We do not currently use hedge accounting for our derivative instruments.

See Note 5 to the Consolidated Financial Statements  Derivative Instruments for a discussion of our derivative activities.

During 2007 and 2006, we acquired downside crude oil price protection for a substantial amount of our production with $55.00 put option contracts. We assumed, through the Pogo acquisition, 2008 crude oil
collars with an average floor of $60.00 and an average ceiling of $80.13 as well as 2008 gas collars with an average floor of $8.00 and an average ceiling of $12.11. At March 31, 2008, we had the following open commodity derivative
positions, none of which were designated as hedging instruments:



|                                |  |                 |  |               |  |                               |  |          
|------------------------------- |  | --------------- |  | ------------- |  | ----------------------------- |  | ---------
|Period                          |  | Instrument Type |  | Daily Volumes |  | Average Price                 |  | Index    
|Sales of Crude Oil Production  
|2008                            |  |                 |  |               |  |                               |  |          
|Apr - Dec                       |  | Put options     |  | 42,000 Bbls   |  | $55.00 Strike price           |  | WTI      
|Apr - Dec                       |  | Collar          |  | 2,500 Bbls    |  | $60.00 Floor - $80.13 Ceiling |  | WTI      
|2009                            |  |                 |  |               |  |                               |  |          
|Jan - Dec                       |  | Put options     |  | 32,500 Bbls   |  | $55.00 Strike price           |  | WTI      
|Sales of Natural Gas Production |  |                 |  |               |  |                               |  |          
|2008                            |  |                 |  |               |  |                               |  |          
|Apr - Dec                       |  | Collar          |  | 15,000 MMBtu  |  | $8.00 Floor - $12.11 Ceiling  |  | Henry Hub

The only cash settlements we are required to make on the put options are option premiums and interest, which
are expected to total approximately $44 million in the last nine months of 2008 and $40 million in 2009. Such amounts are not included in the fair value of derivatives in the table below. In a typical collar transaction, we have the right
to receive from the counterparty the excess of the floor price specified in the derivative agreement over a floating price based on a market index, multiplied by the specified quantity. If the floating price exceeds the floor price and is less than
the ceiling price, no payment is required of either party. If the floating price exceeds the ceiling price, we must pay the counterparty this difference multiplied by the specified quantity. If we have less production than we have specified under
the collars when the floating price exceeds the fixed price, we must make payments against which there is not offsetting production.

The fair value
of outstanding crude oil and natural gas commodity derivative instruments at March 31, 2008 and the change in fair value that would be expected from a 10% price increase/decrease is shown below (in millions):



|                    |               |   |       |                   |               |   |                   |   |  |   |     
|------------------- | ------------- | - | ----- | ----------------- | ------------- | - | ----------------- | - |  | - | ----
|                    |               |   |       |                   | Effect of 10%
|                    | Fair    Value |   |       | Price    Increase |               |   | Price    Decrease
|Put options         |               | $ | 4.2   |                   |               | $ | (2.2              | ) |  | $ | 4.8 
|Crude oil collars   |               |   | (14.2 | )                 |               |   | (6.2              | ) |  |   | 5.7 
|Natural gas collars |               |   | (1.0  | )                 |               |   | (1.6              | ) |  |   | 1.3 
|                    |               |   |       |                   |               |   |                   |   |  |   |     
|                    |               | $ | (11.0 | )                 |               | $ | (10.0             | ) |  | $ | 11.8
|                    |               |   |       |                   |               |   |                   |   |  |   |     



29



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##### Index to Financial Statements

We estimate the fair values of our derivatives using an option-pricing model. The option-pricing model utilizes
various factors including NYMEX price quotations, volatilities and the time value of options. All positions offset physical positions exposed to the cash market. None of these offsetting physical positions is included in the above table. Price risk
sensitivities were calculated by assuming an across-the-board 10% increase or decrease in price regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price.

The nine financial institutions that are contract counterparties for our derivative commodity contracts all have Standard & Poors ratings of A+ or
better and all but one of the financial institutions are participating lenders in our senior revolving credit facility. At March 31, 2008, we were in a net derivative liability position with all of the counterparties. Our management
intends to continue to maintain derivative arrangements for a portion of our production. These contracts may expose us to the risk of financial loss in certain circumstances. Our derivative arrangements provide us protection on the volumes if prices
decline below the prices at which these derivatives are set, but ceiling prices in our derivative may cause us to receive less revenue on the volumes than we would receive in the absence of derivatives.



30



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##### Index to Financial Statements

ITEM 4  Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial
Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934, as amended (the Exchange Act)).
Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer believe that the disclosure controls and procedures as of March 31, 2008 were effective to ensure that information we are required to disclose in the
reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management,
including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, our internal control over financial reporting can provide only reasonable assurance with respect to our financial reporting and
financial statement preparation.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2008 that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



31



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##### Index to Financial Statements

PART II. OTHER INFORMATION

ITEM 2  Unregistered Sales of Equity Securities and Use of Proceeds

On December 17, 2007, we announced that our Board of Directors had authorized the repurchase of up to $1.0 billion of PXP common stock. The
shares are repurchased from time to time in open market transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors. The following is a summary of our repurchases of common stock during the
three-month period ended March 31, 2008 under this plan:

Issuer Purchases of Equity Securities



|                          |  |                               |  |                           |       |                                                                          |           |                                                                                                               |   |            
|------------------------- |  | ----------------------------- |  | ------------------------- | ----- | ------------------------------------------------------------------------ | --------- | ------------------------------------------------------------------------------------------------------------- | - | -----------
|Period                    |  | TotalNumber ofSharesPurchased |  | AveragePricePaid
perShare |       | TotalNumber ofSharesPurchasedAs Part ofPubliclyAnnouncedPlans orPrograms |           | MaximumNumber (orApproximate DollarValue) of Shares thatMay Yet
Be    Purchased Under    the Plans orPrograms
|March 1 to March 31, 2008 |  | 5,160,858                     |  | $                         | 52.64 |                                                                          | 5,160,858 |                                                                                                               | $ | 728,309,000

ITEM 6  Exhibits



|            |   |  |                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                   
|4.1         |   |  | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of February 13, 2008, among Plains Exploration & Production Company, as borrower, each of the lenders
that is a signatory thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed February 20, 2008, File No. 1-31470).
|            |  
|10.1        |   |  | Amendment to Plains Exploration & Production Company Amended and Restated Employment Agreement, effective March 12, 2008, by and between Plains Exploration & Production Company
and James C. Flores (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed March 12, 2008, File No. 1-31470).                                                          
|            |  
|31.1        | * |  | Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               
|            |  
|31.2        | * |  | Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               
|            |  
|32.1        | * |  | Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                
|            |  
|32.2        | * |  | Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                



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

Items 1, 1A, 3, 4 and 5 are not
applicable and have been omitted.



32



---

##### Index to Financial Statements

SIGNATURES

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



|                  |  |                                         |  |                                                     
|----------------- |  | --------------------------------------- |  | ----------------------------------------------------
|                  |  | PLAINS EXPLORATION & PRODUCTION COMPANY
|                  |  |                                         |  |                                                     
|                  |  |                                        
|Date: May 8, 2008 |  | By:                                     |  | /s/ Winston M. Talbert                              
|                  |  |                                         |  | Winston M. Talbert                                  
|                  |  |                                         |  | Executive Vice President and Chief Financial Officer
|                  |  |                                         |  | (Principal Financial Officer)                       



33



---

##### Index to Financial Statements

EXHIBIT INDEX



|            |   |  |                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                   
|4.1         |   |  | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of February 13, 2008, among Plains Exploration & Production Company, as borrower, each of the lenders that is a
signatory thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed February 20, 2008, File No. 1-31470).
|            |  
|10.1        |   |  | Amendment to Plains Exploration & Production Company Amended and Restated Employment Agreement, effective March 12, 2008, by and between Plains Exploration & Production Company
and James C. Flores (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed March 12, 2008, File No. 1-31470).                                                          
|            |  
|31.1        | * |  | Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               
|            |  
|31.2        | * |  | Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               
|            |  
|32.1        | * |  | Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                
|            |  
|32.2        | * |  | Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                



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



34