##### 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 September 30, 2007

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. EmployerIdentification 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, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer  x                Accelerated
filer   ̈                Non-accelerated filer   ̈

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ̈    No  x

72.8 million shares of Common Stock, $0.01 par value, issued and outstanding at October 29, 2007.



---



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                         |  |     
|------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                         |  | Page
|PART I. FINANCIAL INFORMATION                                                                                            |  |     
|                                                                                                                         | 
|ITEM 1. Unaudited Condensed Consolidated Financial Statements:                                                           |  |     
|                                                                                                                         | 
|Condensed Consolidated Balance SheetsSeptember 30, 2007 and December 31, 2006                                            |  | 1   
|                                                                                                                         | 
|Condensed Consolidated Statements of IncomeFor the three and nine months ended September 30, 2007 and 2006               |  | 2   
|                                                                                                                         | 
|Condensed Consolidated Statements of Cash FlowsFor the nine months ended September 30, 2007 and 2006                     |  | 3   
|                                                                                                                         | 
|Condensed Consolidated Statements of Comprehensive IncomeFor the three and nine months ended September 30, 2007 and 2006 |  | 4   
|                                                                                                                         | 
|Condensed Consolidated Statement of Stockholders EquityFor the nine months ended September 30, 2007                     |  | 5   
|                                                                                                                         | 
|Notes to Condensed Consolidated Financial Statements                                                                     |  | 6   
|                                                                                                                         | 
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 22  
|                                                                                                                         | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risks                                                      |  | 34  
|                                                                                                                         | 
|ITEM 4. Controls and Procedures                                                                                          |  | 35  
|                                                                                                                         | 
|PART II. OTHER INFORMATION                                                                                               |  | 36  



(i)



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands of dollars)



|                                                            |  |                   |           |   |                  |   |           |  
|----------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                            |  | September 30,2007 |           |   | December 31,2006 |  
|ASSETS                                                      |  |                   |           |   |                  |   |           |  
|Current Assets                                              |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                   |  | $                 | 4,597     |   |                  | $ | 899       |  
|Accounts receivable                                         |  |                   | 148,560   |   |                  |   | 113,193   |  
|Inventories                                                 |  |                   | 12,254    |   |                  |   | 12,394    |  
|Deferred income taxes                                       |  |                   | 51,637    |   |                  |   | 51,084    |  
|Other current assets                                        |  |                   | 7,986     |   |                  |   | 7,226     |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 225,034   |   |                  |   | 184,796   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Property and Equipment, at cost                             |  |                   |           |   |                  |   |           |  
|Oil and natural gas properties - full cost method           |  |                   |           |   |                  |   |           |  
|Subject to amortization                                     |  |                   | 3,607,209 |   |                  |   | 2,624,277 |  
|Not subject to amortization                                 |  |                   | 697,675   |   |                  |   | 142,096   |  
|Other property and equipment                                |  |                   | 80,084    |   |                  |   | 41,392    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 4,384,968 |   |                  |   | 2,807,765 |  
|Less allowance for depreciation, depletion and amortization |  |                   | (878,779  | ) |                  |   | (700,241  | )
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 3,506,189 |   |                  |   | 2,107,524 |  
|                                                            |  |                   |           |   |                  |   |           |  
|Goodwill                                                    |  |                   | 153,093   |   |                  |   | 158,515   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Other Assets                                                |  |                   | 75,259    |   |                  |   | 12,393    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  | $                 | 3,959,575 |   |                  | $ | 2,463,228 |  
|                                                            |  |                   |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |                   |           |   |                  |   |           |  
|Current Liabilities                                         |  |                   |           |   |                  |   |           |  
|Accounts payable                                            |  | $                 | 207,878   |   |                  | $ | 131,639   |  
|Commodity derivative contracts                              |  |                   | 76,550    |   |                  |   | 95,162    |  
|Royalties and revenues payable                              |  |                   | 42,349    |   |                  |   | 38,159    |  
|Stock appreciation rights                                   |  |                   | 49,687    |   |                  |   | 57,429    |  
|Interest payable                                            |  |                   | 17,087    |   |                  |   | 1,143     |  
|Income taxes payable                                        |  |                   |          |   |                  |   | 94,272    |  
|Other current liabilities                                   |  |                   | 40,262    |   |                  |   | 42,388    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 433,813   |   |                  |   | 460,192   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Long-Term Debt                                              |  |                   |           |   |                  |   |           |  
|Revolving credit facility                                   |  |                   | 480,000   |   |                  |   | 235,500   |  
|73/4%
Senior Notes                                          |  |                   | 600,000   |   |                  |   |          |  
|7% Senior Notes                                             |  |                   | 500,000   |   |                  |   |          |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 1,580,000 |   |                  |   | 235,500   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Other Long-Term Liabilities                                 |  |                   |           |   |                  |   |           |  
|Asset retirement obligation                                 |  |                   | 144,024   |   |                  |   | 133,420   |  
|Commodity derivative contracts                              |  |                   | 35,842    |   |                  |   | 18,114    |  
|Other                                                       |  |                   | 17,183    |   |                  |   | 19,040    |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 197,049   |   |                  |   | 170,574   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Deferred Income Taxes                                       |  |                   | 500,012   |   |                  |   | 466,279   |  
|                                                            |  |                   |           |   |                  |   |           |  
|Commitments and Contingencies (Note 6)                      |  |                   |           |   |                  |   |           |  
|Stockholders Equity                                        |  |                   |           |   |                  |   |           |  
|Common stock                                                |  |                   | 805       |   |                  |   | 792       |  
|Additional paid-in capital                                  |  |                   | 1,049,836 |   |                  |   | 964,472   |  
|Retained earnings                                           |  |                   | 543,990   |   |                  |   | 463,864   |  
|Treasury stock                                              |  |                   | (345,930  | ) |                  |   | (298,445  | )
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  |                   | 1,248,701 |   |                  |   | 1,130,683 |  
|                                                            |  |                   |           |   |                  |   |           |  
|                                                            |  | $                 | 3,959,575 |   |                  | $ | 2,463,228 |  
|                                                            |  |                   |           |   |                  |   |           |  

See notes to consolidated financial statements.



1



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)



|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|-------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                                     |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                     |  | 2007                            |         |   | 2006                           |   |          | 2007 |  |   | 2006    |  
|Revenues                                                             |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Oil sales                                                            |  | $                               | 276,096 |   |                                | $ | 290,389  |      |  | $ | 713,197 |   |  | $ | 828,473  |  
|Oil hedging                                                          |  |                                 |        |   |                                |   | (36,545  | )    |  |   |        |   |  |   | (109,632 | )
|Gas sales                                                            |  |                                 | 22,696  |   |                                |   | 26,724   |      |  |   | 63,441  |   |  |   | 89,879   |  
|Other operating revenues                                             |  |                                 | 177     |   |                                |   | 339      |      |  |   | 2,571   |   |  |   | 2,192    |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|                                                                     |  |                                 | 298,969 |   |                                |   | 280,907  |      |  |   | 779,209 |   |  |   | 810,912  |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Costs and Expenses                                                   |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Production costs                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Lease operating expenses                                             |  |                                 | 52,696  |   |                                |   | 50,355   |      |  |   | 147,471 |   |  |   | 137,258  |  
|Steam gas costs                                                      |  |                                 | 22,349  |   |                                |   | 15,707   |      |  |   | 76,630  |   |  |   | 41,327   |  
|Electricity                                                          |  |                                 | 11,197  |   |                                |   | 9,991    |      |  |   | 29,464  |   |  |   | 28,777   |  
|Production and ad valorem taxes                                      |  |                                 | 5,118   |   |                                |   | 6,991    |      |  |   | 15,419  |   |  |   | 19,795   |  
|Gathering and transportation expenses                                |  |                                 | 3,026   |   |                                |   | 2,291    |      |  |   | 4,432   |   |  |   | 5,947    |  
|General and administrative                                           |  |                                 | 22,007  |   |                                |   | 31,493   |      |  |   | 74,417  |   |  |   | 92,530   |  
|Depreciation, depletion and amortization                             |  |                                 | 69,731  |   |                                |   | 50,844   |      |  |   | 180,932 |   |  |   | 151,528  |  
|Accretion                                                            |  |                                 | 2,297   |   |                                |   | 2,564    |      |  |   | 6,832   |   |  |   | 7,506    |  
|Gain on sale of oil and gas properties                               |  |                                 |        |   |                                |   | (345,480 | )    |  |   |        |   |  |   | (345,480 | )
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|                                                                     |  |                                 | 188,421 |   |                                |   | (175,244 | )    |  |   | 535,597 |   |  |   | 139,188  |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Income from Operations                                               |  |                                 | 110,548 |   |                                |   | 456,151  |      |  |   | 243,612 |   |  |   | 671,724  |  
|Other Income (Expense)                                               |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Interest expense                                                     |  |                                 | (18,165 | ) |                                |   | (22,178  | )    |  |   | (35,223 | ) |  |   | (57,182  | )
|Gain (loss) on mark-to-market derivative contracts                   |  |                                 | (39,155 | ) |                                |   | 12,340   |      |  |   | (75,582 | ) |  |   | (299,902 | )
|Gain on termination of merger agreement                              |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   | 37,902   |  
|Other                                                                |  |                                 | (372    | ) |                                |   | 500      |      |  |   | 952     |   |  |   | 2,120    |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Income Before Income Taxes and Cumulative Effectof Accounting Change |  |                                 | 52,856  |   |                                |   | 446,813  |      |  |   | 133,759 |   |  |   | 354,662  |  
|Income tax (expense) benefit                                         |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Current                                                              |  |                                 | 2,183   |   |                                |   | (47,490  | )    |  |   | 2,183   |   |  |   | (56,247  | )
|Deferred                                                             |  |                                 | (22,179 | ) |                                |   | (126,630 | )    |  |   | (57,194 | ) |  |   | (82,319  | )
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Income Before Cumulative Effect of Accounting Change                 |  |                                 | 32,860  |   |                                |   | 272,693  |      |  |   | 78,748  |   |  |   | 216,096  |  
|Cumulative effect of accounting change, net of tax benefit           |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   | (2,182   | )
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Net Income                                                           |  | $                               | 32,860  |   |                                | $ | 272,693  |      |  | $ | 78,748  |   |  | $ | 213,914  |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Earnings Per Share                                                   |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Basic                                                                |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Income before cumulative effect of accounting change                 |  | $                               | 0.45    |   |                                | $ | 3.56     |      |  | $ | 1.09    |   |  | $ | 2.77     |  
|Cumulative effect of accounting change                               |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   | (0.03    | )
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Net income                                                           |  | $                               | 0.45    |   |                                | $ | 3.56     |      |  | $ | 1.09    |   |  | $ | 2.74     |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Diluted                                                              |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Income before cumulative effect of accounting change                 |  | $                               | 0.45    |   |                                | $ | 3.50     |      |  | $ | 1.07    |   |  | $ | 2.74     |  
|Cumulative effect of accounting change                               |  |                                 |        |   |                                |   |         |      |  |   |        |   |  |   | (0.03    | )
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Net income                                                           |  | $                               | 0.45    |   |                                | $ | 3.50     |      |  | $ | 1.07    |   |  | $ | 2.71     |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Weighted Average Shares Outstanding                                  |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Basic                                                                |  |                                 | 72,859  |   |                                |   | 76,622   |      |  |   | 72,499  |   |  |   | 77,911   |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  
|Diluted                                                              |  |                                 | 73,811  |   |                                |   | 77,802   |      |  |   | 73,526  |   |  |   | 78,802   |  
|                                                                     |  |                                 |         |   |                                |   |          |      |  |   |         |   |  |   |          |  

See notes to consolidated financial statements.



2



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands of dollars)



|                                                           |  |                                |            |   |      |   |            |  
|---------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                           |  | Nine Months EndedSeptember 30, |           
|                                                           |  | 2007                           |            |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |                                |            |   |      |   |            |  
|Net income                                                 |  | $                              | 78,748     |   |      | $ | 213,914    |  
|Items not affecting cash flows from operating activities   |  |                                |            |   |      |   |            |  
|Gain on sale of oil and gas properties                     |  |                                |           |   |      |   | (345,480   | )
|Depreciation, depletion, amortization and accretion        |  |                                | 187,764    |   |      |   | 159,034    |  
|Deferred income taxes                                      |  |                                | 57,194     |   |      |   | 82,319     |  
|Cumulative effect of adoption of accounting change         |  |                                |           |   |      |   | 2,182      |  
|Commodity derivative contracts                             |  |                                | 75,582     |   |      |   | 409,534    |  
|Noncash compensation                                       |  |                                | 20,150     |   |      |   | 32,594     |  
|Other noncash items                                        |  |                                | 220        |   |      |   | (64        | )
|Change in assets and liabilities from operating activities |  |                                |            |   |      |   |            |  
|Accounts receivable and other assets                       |  |                                | (31,770    | ) |      |   | 5,960      |  
|Income taxes payable                                       |  |                                | (94,272    | ) |      |   | 49,395     |  
|Accounts payable and other liabilities                     |  |                                | (7,855     | ) |      |   | 10,764     |  
|                                                           |  |                                |            |   |      |   |            |  
|Net cash provided by operating activities                  |  |                                | 285,761    |   |      |   | 620,152    |  
|                                                           |  |                                |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |                                |            |   |      |   |            |  
|Additions to oil and gas properties                        |  |                                | (476,314   | ) |      |   | (456,796   | )
|Acquisition of Piceance Basin properties                   |  |                                | (975,407   | ) |      |   |           |  
|Proceeds from property sales, net                          |  |                                |           |   |      |   | 850,427    |  
|Derivative settlements                                     |  |                                | (74,759    | ) |      |   | (68,194    | )
|Additions to other property and equipment                  |  |                                | (28,588    | ) |      |   | (7,467     | )
|Other                                                      |  |                                | (10,869    | ) |      |   |           |  
|                                                           |  |                                |            |   |      |   |            |  
|Net cash (used in) provided by investing activities        |  |                                | (1,565,937 | ) |      |   | 317,970    |  
|                                                           |  |                                |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |                                |            |   |      |   |            |  
|Revolving credit facilities                                |  |                                |            |   |      |   |            |  
|Borrowings                                                 |  |                                | 1,989,565  |   |      |   | 1,182,700  |  
|Repayments                                                 |  |                                | (1,745,065 | ) |      |   | (1,454,700 | )
|Proceeds from 7% Senior Notes                              |  |                                | 500,000    |   |      |   |           |  
|Proceeds from 73/4% Senior Notes                           |  |                                | 600,000    |   |      |   |           |  
|Cost incurred in connection with financing arrangements    |  |                                | (18,182    | ) |      |   |           |  
|Derivative settlements                                     |  |                                |           |   |      |   | (28,579    | )
|Purchase of treasury stock                                 |  |                                | (47,485    | ) |      |   | (100,817   | )
|Other                                                      |  |                                | 5,041      |   |      |   | 3,971      |  
|                                                           |  |                                |            |   |      |   |            |  
|Net cash provided by (used in) financing activities        |  |                                | 1,283,874  |   |      |   | (397,425   | )
|                                                           |  |                                |            |   |      |   |            |  
|Net increase in cash and cash equivalents                  |  |                                | 3,698      |   |      |   | 540,697    |  
|Cash and cash equivalents, beginning of period             |  |                                | 899        |   |      |   | 1,552      |  
|                                                           |  |                                |            |   |      |   |            |  
|Cash and cash equivalents, end of period                   |  | $                              | 4,597      |   |      | $ | 542,249    |  
|                                                           |  |                                |            |   |      |   |            |  

See notes to consolidated financial statements.



3



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands of dollars)



|                                                     |  |                                 |        |      |                                |         |      |  |      |        |  |   |         |  
|---------------------------------------------------- |  | ------------------------------- | ------ | ---- | ------------------------------ | ------- | ---- |  | ---- | ------ |  | - | ------- | -
|                                                     |  | Three Months EndedSeptember 30, |        |      | Nine Months EndedSeptember 30, |        
|                                                     |  | 2007                            |        | 2006 |                                |         | 2007 |  | 2006 |       
|Net Income                                           |  | $                               | 32,860 |      | $                              | 272,693 |      |  | $    | 78,748 |  | $ | 213,914 |  
|Other Comprehensive Income                           |  |                                 |        |      |                                |         |      |  |      |        |  |   |         |  
|Commodity hedging contracts                          |  |                                 |        |      |                                |         |      |  |      |        |  |   |         |  
|Reclassification adjustment for terminated contracts |  |                                 |       |      |                                | 36,545  |      |  |      |       |  |   | 109,632 |  
|Related income taxes                                 |  |                                 |       |      |                                | (14,140 | )    |  |      |       |  |   | (42,235 | )
|                                                     |  |                                 |        |      |                                |         |      |  |      |        |  |   |         |  
|                                                     |  |                                 |       |      |                                | 22,405  |      |  |      |       |  |   | 67,397  |  
|                                                     |  |                                 |        |      |                                |         |      |  |      |        |  |   |         |  
|Comprehensive Income                                 |  | $                               | 32,860 |      | $                              | 295,098 |      |  | $    | 78,748 |  | $ | 281,311 |  
|                                                     |  |                                 |        |      |                                |         |      |  |      |        |  |   |         |  

See notes to consolidated financial statements.



4



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)

(share and dollar amounts in thousands)



|                                                |  |              |  |        |                   |                            |                |           |  |   |         |  |        |       |  |   |          |   |  |   |           |  
|----------------------------------------------- |  | ------------ |  | ------ | ----------------- | -------------------------- | -------------- | --------- |  | - | ------- |  | ------ | ----- |  | - | -------- | - |  | - | --------- | -
|                                                |  |              |  |        |                   | Additional Paid-in Capital |                |           |  |   |         |  |        |      
|                                                |  | Common Stock |  |        | Retained Earnings |                            | Treasury Stock |           |  |   |        
|                                                |  | Shares       |  | Amount |                   |                            |                | Shares    |  |   | Amount  |  |        | Total | 
|Balance, December 31, 2006                      |  | 79,172       |  | $      | 792               |                            | $              | 964,472   |  | $ | 463,864 |  | (6,730 | )     |  | $ | (298,445 | ) |  | $ | 1,130,683 |  
|Cumulative effect of accounting change (Note 5) |  |             |  |        |                  |                            |                |          |  |   | 1,378   |  |       |       |  |   |         |   |  |   | 1,378     |  
|Net income                                      |  |             |  |        |                  |                            |                |          |  |   | 78,748  |  |       |       |  |   |         |   |  |   | 78,748    |  
|Issuance of common stock                        |  | 1,000        |  |        | 10                |                            |                | 44,530    |  |   |        |  |       |       |  |   |         |   |  |   | 44,540    |  
|Restricted stock awards                         |  | 347          |  |        | 3                 |                            |                | 40,773    |  |   |        |  |       |       |  |   |         |   |  |   | 40,776    |  
|Treasury stock transactions                     |  |             |  |        |                  |                            |                |          |  |   |        |  | (1,026 | )     |  |   | (47,485  | ) |  |   | (47,485   | )
|Exercise of stock options and other             |  | 6            |  |        |                  |                            |                | 61        |  |   |        |  |       |       |  |   |         |   |  |   | 61        |  
|                                                |  |              |  |        |                   |                            |                |           |  |   |         |  |        |       |  |   |          |   |  |   |           |  
|Balance, September 30, 2007                     |  | 80,525       |  | $      | 805               |                            | $              | 1,049,836 |  | $ | 543,990 |  | (7,756 | )     |  | $ | (345,930 | ) |  | $ | 1,248,701 |  
|                                                |  |              |  |        |                   |                            |                |           |  |   |         |  |        |       |  |   |          |   |  |   |           |  

See notes to consolidated financial statements.



5



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1Organization and Significant Accounting Policies

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

We are an independent energy company engaged in the upstream oil and gas business. The upstream business acquires, exploits, develops, explores for and
produces oil and gas. Our activities are all located in the United States.

These condensed consolidated financial statements and related notes
present our consolidated financial position as of September 30, 2007 and December 31, 2006, the results of our operations and our comprehensive income for the three months and nine months ended September 30, 2007 and
2006, our cash flows for the nine months ended September 30, 2007 and 2006 and the changes in our stockholders equity for the nine months ended September 30, 2007. 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 nine months ended September 30, 2007 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, 2006.

Asset Retirement Obligations. The following table reflects the changes in our asset retirement obligation during the nine months ended
September 30, 2007 (in thousands):



|                                                  |  |                                    |         |  
|------------------------------------------------- |  | ---------------------------------- | ------- | -
|                                                  |  | Nine MonthsEndedSeptember 30, 2007 |        
|Asset retirement obligation - December 31, 2006   |  | $                                  | 137,311 |  
|Settlements                                       |  |                                    | (2,189  | )
|                                                  |  |                                    | 6,832   |  
|Acquisitions                                      |  |                                    | 2,591   |  
|Asset retirement additions                        |  |                                    | 2,168   |  
|                                                  |  |                                    |         |  
|Asset retirement obligation - September 30, 2007  |  | $                                  | 146,713 |  
|                                                  |  |                                    |         |  
|                                                  | 
|(1) $2.7 million included in current liabilities. |  |                                    |         |  

Earnings Per Share. For the three months and nine months ended September 30, 2007 and
2006, the weighted average shares outstanding for computing basic and diluted earnings per share (EPS) are as follows (in thousands):



|                                                                    |  |                                 |  |                                |  |        |  |       
|------------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ------ |  | ------
|                                                                    |  | Three MonthsEnded September 30, |  | Nine MonthsEnded September 30,
|                                                                    |  | 2007                            |  | 2006                           |  | 2007   |  | 2006  
|Weighted average shares outstanding - basic                         |  | 72,859                          |  | 76,622                         |  | 72,499 |  | 77,911
|Unvested restricted stock, restricted stock units and stock options |  | 952                             |  | 1,180                          |  | 1,027  |  | 891   
|                                                                    |  |                                 |  |                                |  |        |  |       
|Weighted average shares outstanding - diluted                       |  | 73,811                          |  | 77,802                         |  | 73,526 |  | 78,802
|                                                                    |  |                                 |  |                                |  |        |  |       

In computing earnings per share, no adjustments were made to reported net income.



6



---

##### Index to Financial Statements

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):



|                       |  |                   |        |                  |   |       
|---------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                       |  | September 30,2007 |        | December 31,2006
|Oil                    |  | $                 | 3,695  |                  | $ | 4,954 
|Materials and supplies |  |                   | 8,559  |                  |   | 7,440 
|                       |  |                   |        |                  |   |       
|                       |  | $                 | 12,254 |                  | $ | 12,394
|                       |  |                   |        |                  |   |       

Stockholders Equity. Our Board of Directors has authorized the repurchase of up to $500
million 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 nine months ended
September 30, 2007 we repurchased approximately 1.0 million common shares at a cost of approximately $47 million. Since the inception of the repurchase program we have repurchased a total of approximately 7.7 million common shares at
a cost of approximately $342 million and we may expend an additional $158 million under the program.

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

Stock based compensation expense for the three months ended
September 30, 2007 was $6.7 million of which $5.3 million is included in general and administrative expense (G&A), $1.5 million is included in oil and natural gas properties and a reduction in expense of $0.1 million is
reflected in lease operating expense. Stock based compensation expense for the three months ended September 30, 2006 was $15.3 million of which $13.2 million is included in G&A, $0.6 million is included in lease operating expense and $1.3
million is included in oil and natural gas properties. For the nine months ended September 30, 2007, stock based compensation expense was $32.9 million of which $25.3 million is included in G&A, $1.5 million is included in lease operating
expense and $6.1 million is included in oil and natural gas properties, and for the same period ended September 30, 2006, stock based compensation expense was $47.0 million of which $42.2 million is included in G&A, $0.6 million is included
in lease operating expense and $4.0 million is included in oil and natural gas properties.

Certain of our restricted stock units (RSUs)
were classified as liability awards at December 31, 2006 because we did not have sufficient shares available for issuance under the 2004 Stock Incentive Plan. On May 3, 2007, we received stockholder approval for an amendment to the 2004
Stock Incentive Plan, which increased the number of available shares. As a result, these RSUs were revalued to their fair value on that date and are now classified as equity awards (as defined in SFAS 123R) in our Consolidated Balance Sheet. These
RSUs will no longer be revalued each period.

During the nine months ended September 30, 2007, 0.8 million stock appreciation rights
(SARs) were granted. At September 30, 2007, there were 2.7 million SARs outstanding with a weighted average exercise price of $27.81, and 1.4 million of such SARs were exercisable with a weighted average exercise price of
$13.17. During the nine months ended September 30, 2007, 1.1 million RSUs were granted. At September 30, 2007, 5.3 million RSUs were outstanding, all of which are classified as equity awards.

Income Taxes. Effective January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 Accounting
for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109) (FIN 48). This interpretation clarified the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a
recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. See Note 5.

Recent Accounting
Pronouncements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement
defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We do not expect this pronouncement to have a significant impact on our consolidated financial position, results of operations or
cash flows.



7



---

##### Index to Financial Statements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities  Including an Amendment of FASB Statement No. 115, which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain
other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We do not expect this pronouncement to have a significant impact on
our consolidated financial position, results of operations or cash flows.

Note 2Long-Term Debt

At September 30, 2007 and December 31, 2006 long-term debt consisted of (in thousands):



|                                 |  |                   |           |                  |   |        
|-------------------------------- |  | ----------------- | --------- | ---------------- | - | -------
|                                 |  | September 30,2007 |           | December 31,2006
|Senior revolving credit facility |  | $                 | 480,000   |                  | $ | 235,500
|73/4%
senior notes               |  |                   | 600,000   |                  |   |       
|7% senior notes                  |  |                   | 500,000   |                  |   |       
|                                 |  |                   |           |                  |   |        
|                                 |  | $                 | 1,580,000 |                  | $ | 235,500
|                                 |  |                   |           |                  |   |        

In June 2007, we issued $600 million of 73/4% Senior Notes due 2015 (the 73/4% Senior Notes) at par. The net proceeds were used to repay borrowings under our senior revolving credit facility. We may redeem all or part of the 73/4% Senior Notes on or after June 15, 2011 at specified redemption prices and prior to such date at a make-whole redemption price.
In addition, prior to June 15, 2010 we may, at our option, redeem up to 35% of the 73/4% Senior Notes with the
proceeds from certain equity offerings. In the event of a change of control, as defined in the indenture, we will be required to make an offer to repurchase the 73/4% Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.

In March 2007, we issued $500 million of 7% Senior Notes due 2017 (the 7% Senior Notes) at par. The net proceeds were used to repay borrowings under
our senior revolving credit facility and for general corporate purposes. We may redeem all or part of the 7% Senior Notes on or after March 15, 2012 at specified redemption prices and prior to such date at a make-whole
redemption price. In addition, prior to March 15, 2010 we may, at our option, redeem up to 35% of the 7% Senior Notes with the proceeds from certain equity offerings. In the event of a change of control, as defined in the indenture, we
will be required to make an offer to repurchase the 7% Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.

The 7% Senior Notes and 73/4% Senior Notes are our general unsecured, senior obligations. The 7% Senior Notes and 73/4% Senior Notes are jointly and severally guaranteed on a senior unsecured basis by certain of our existing domestic subsidiaries. In the future, the guarantees may be released or terminated under certain circumstances. The
7% Senior Notes and 73/4% Senior Notes rank senior in right of payment to all of our existing and future subordinated
indebtedness; pari passu in right of payment with any of our existing and future unsecured indebtedness that is not by its terms subordinated to the 7% Senior Notes and 73/4% Senior Notes; effectively junior to our existing and future secured indebtedness, including indebtedness under our senior revolving credit facility, to the extent of our assets
constituting collateral securing that indebtedness; and effectively subordinate to all existing and future indebtedness and other liabilities (other than indebtedness and liabilities owed to us) of our non-guarantor subsidiaries.

The indentures governing the 7% Senior Notes and 73/4% Senior Notes contain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries
to incur additional debt; make certain investments or pay dividends or distributions on our capital stock or purchase or redeem or retire capital stock; sell assets, including capital stock of our restricted subsidiaries; restrict dividends or other
payments by restricted subsidiaries; create liens that secure debt; enter into transactions with affiliates; and merge or consolidate with another company.

On May 31, 2007, we entered into an Amended and Restated Credit Agreement (the Amended Credit Agreement). The Amended Credit Agreement currently has a borrowing base and commitments of $970 million, each
of which will be redetermined on an annual basis, with PXP and the lenders each having the right to one annual interim unscheduled redetermination, and may be adjusted based on PXPs oil and gas properties, reserves, other indebtedness and
other relevant factors. The Amended Credit Agreement also contains a $150 million sub-limit on letters of credit. The Amended Credit Agreement matures on April 23, 2012. Collateral consists of 100% of the equity interests of our
domestic subsidiaries, 65% of the equity interests of our foreign subsidiaries, and mortgages covering at least 75% of the total present value of our domestic oil and gas properties.



8



---

##### Index to Financial Statements

The Amended Credit Agreement contains negative covenants that limit our ability, as well as the ability of our
restricted subsidiaries to, among other things, 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 gas imbalance or
take-or-pay 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 1.00.

At September 30, 2007, we had $7.7 million in letters of credit outstanding under the Amended Credit Agreement. At that date we were in compliance with the
covenants contained in the Amended Credit Agreement and could have borrowed the full amount available under the Amended Credit Agreement. The effective interest rate on our borrowings under the Amended Credit Agreement was 6.7% at September 30,
2007.

In connection with the proposed merger of Plains and Pogo Producing Company, Plains has received commitments from several financial
institutions to underwrite a new credit facility that will amend and restate its existing credit facility and will be used in part to fund the merger consideration and to provide additional liquidity. The aggregate commitment of the lenders is $2.9
billion. The new credit facility will provide for an initial borrowing base of $2.9 billion that will be adjusted on an interim basis thereafter based on our oil and gas properties, reserves, other indebtedness and other relevant factors. The new
credit facility will also include a $250 million sub-limit on letters of credit. We will secure borrowings under the new credit facility, with the equity of certain of our domestic and foreign subsidiaries, and give mortgages covering at least 75%
of the total present value of certain of our domestic oil and gas properties. The new credit facility will be subject to substantially all the same terms as are provided for in our existing credit facility.

Note 3Derivative Instruments and Hedging Activities

General

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. If a derivative is designated as a cash flow hedge and qualifies for hedge accounting, any unrealized gain or loss is deferred in Accumulated Other Comprehensive Income (OCI), a
component of Stockholders Equity, until the hedged oil and gas production is sold. Realized gains and losses on derivative instruments that are designated as a hedge and qualify for hedge accounting are generally included in oil and gas
revenues in the period the hedged volumes are sold. Gains and losses deferred in OCI related to cash flow hedges for which hedge accounting has been discontinued remain in OCI until the related product has been delivered.

In 2006, under SFAS No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities, certain of our derivatives were deemed to
contain a significant financing element because they included off-market terms, 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 for which we use hedge accounting and do not have a significant financing element are reflected as operating activities in the Statement of Cash Flows. Cash settlements with respect to derivatives that are not accounted for as hedges
and do not have a significant financing element are reflected as investing activities in the Statement of Cash Flows.



9



---

##### Index to Financial Statements

At September 30, 2007 we had the following open commodity derivative positions, none of which were designated
as hedging instruments:



|                              |  |                |  |              |  |                     |  |      
|----------------------------- |  | -------------- |  | ------------ |  | ------------------- |  | -----
|Period                        |  | InstrumentType |  | DailyVolumes |  | AveragePrice        |  | Index
|Sales of Crude Oil Production |  |                |  |              |  |                     |  |      
|2007                          |  |                |  |              |  |                     |  |      
|Oct - Dec                     |  | Put options    |  | 50,000 Bbls  |  | $55.00 Strike price |  | WTI  
|2008                          |  |                |  |              |  |                     |  |      
|Jan - Dec                     |  | Put options    |  | 42,000 Bbls  |  | $55.00 Strike price |  | WTI  
|2009                          |  |                |  |              |  |                     |  |      
|Jan - Dec                     |  | Put options    |  | 32,500 Bbls  |  | $55.00 Strike price |  | WTI  

The average strike prices for the put options do not reflect the cost to purchase such options. The only
cash settlements we are required to make on these purchased put contracts are option premiums of $28 million for the last three months of 2007, $58 million for 2008 and $40 million for 2009, including interest.

Income Statement, Cash Payments and Other Comprehensive Income

During the three months and nine months ended September 30, 2007 and 2006, pre-tax gains and losses recognized in our income statement were as follows (in thousands):



|                                                          |  |                                 |        |      |                                |         |      |  |      |        |  |   |        
|--------------------------------------------------------- |  | ------------------------------- | ------ | ---- | ------------------------------ | ------- | ---- |  | ---- | ------ |  | - | -------
|                                                          |  | Three Months EndedSeptember 30, |        |      | Nine Months EndedSeptember 30,
|                                                          |  | 2007                            |        | 2006 |                                |         | 2007 |  | 2006
|Loss (gain) on mark-to-market derivative contracts        |  | $                               | 39,155 |      | $                              | (12,340 | )    |  | $    | 75,582 |  | $ | 299,902
|Loss reclassified from OCI and recognized in oil revenues |  |                                 |       |      |                                | 36,545  |      |  |      |       |  |   | 109,632

At December 31, 2006 there were no amounts in OCI. The 2006 amounts that were reclassified from
OCI and recognized in oil revenues represent deferred losses attributable to 2006 swaps that were cancelled in 2005.

During the three and nine
months ended September 30, 2007 and 2006, cash (payments)/receipts for derivatives were as follows (in thousands):



|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                               |  | 2007                            |         |   | 2006                           |   |         | 2007 |  |   | 2006    |  
|Mark-to-market contracts                       |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Crude oil options                              |  | $                               | (25,615 | ) |                                | $ | (22,583 | )    |  | $ | (74,759 | ) |  | $ | (89,559 | )
|Natural gas call options                       |  |                                 |        |   |                                |   | (2,880  | )    |  |   |        |   |  |   | (8,545  | )
|Contracts accounted for using hedge accounting |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Natural gas purchases                          |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   | 1,331   |  

Note 4Acquisition

On May 31, 2007, we acquired certain Piceance Basin properties for $975 million in cash, including $10 million in related acquisition costs and $65 million for net cash outflows from the effective date to the closing date
(primarily related to capital expenditures for drilling and acreage acquisitions) and issued one million shares of common stock with a fair value of approximately $45 million to the seller, Laramie Energy, LLC. The Piceance Basin properties include
interests in oil and gas producing properties in the Mesaverde geologic section of the Piceance Basin in Colorado, plus associated midstream assets, including a 25% interest in the Collbran Valley Gas Gathering, LLC. We allocated the purchase price
as follows: $511 million to oil and gas properties subject to amortization, $448 million to oil and gas properties not subject to amortization, $40 million to our investment in the Collbran Valley Gas Gathering, LLC and the remainder to inventory
and other properties and equipment. We financed $946 million of the acquisition using our senior revolving credit facility.



10



---

##### Index to Financial Statements

Note 5Income Taxes

Effective January 1, 2007 we adopted FIN 48. This interpretation clarified the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. At January 1, 2007, we recorded the cumulative effect of the change in accounting principle as a
$1.4 million increase in the opening balance of retained earnings, a $0.8 million decrease in goodwill and a $2.2 million reduction in our existing reserves for uncertain tax positions. The adjustment to goodwill relates to tax
positions taken with respect to Nuevo Energy Company (Nuevo) and 3TEC Energy Corporation in periods prior to our mergers in 2004 and 2003, respectively.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 1996. The Internal
Revenue Service (IRS) commenced an examination of our U.S. income tax returns for 2003 and 2004 that is anticipated to be completed by the end of the first quarter 2008. In addition, the IRS has commenced an examination of Nuevos
U.S. income tax returns for 2003 and 2004 that is anticipated to be completed by the end of the first quarter 2008. As of September 30, 2007, the IRS had not proposed any significant adjustments that would result in a material change to our
financial position.

We recognize interest and penalties related to unrecognized tax positions in income tax expense. At January 1, 2007 and
September 30, 2007, we had approximately $18.4 million of unrecognized tax benefits. Of these amounts approximately $5.5 million at January 1, 2007 and approximately $4.5 million at September 30, 2007 would affect our
effective tax rate if recognized. Included in such amounts are interest and penalties of an immaterial amount.

Note 6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.

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, $40 million ($78 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. The fair value of our guarantee, $0.3 million, is included in Other Long-Term Liabilities
in our 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.



11



---

##### Index to Financial Statements

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 Plaintiffs motion for partial summary judgment concerning plaintiffs 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 on January 12, 2007. The United States has filed its notice of appeal and Plaintiffs intend to file 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 would be 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.

Note 7Consolidating Financial Statements

We are the issuer of $500 million of 7% Senior Notes due 2017, $600 million of 73/4% Senior Notes due 2015 and 8.75% Senior Subordinated Notes due 2012, of which $0.1 million principal remains outstanding
after retirement of $274.9 million in November 2006, which are jointly and severally guaranteed on a full and unconditional basis by certain of our 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 or Parent);
| | - |  | -------------------------------

| |  |  | 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.
| | - |  | ----------------------------

The
condensed consolidating balance sheet as of December 31, 2006 has been revised to correct $66.8 million of deferred income taxes payable that was previously recorded in the accounts of the Issuer but should have been recorded in the accounts of
the Guarantor Subsidiaries. Stockholders equity in the accounts of the Guarantor Subsidiaries has also been revised to reflect $35.0 million of additional current tax expense for the year ended December 31, 2006. These revisions had no impact
on the consolidated or the Non-Guarantor Subsidiaries totals in the condensed consolidating balance sheet as of December 31, 2006. The condensed consolidating statements of income for the three and nine months ended September 30, 2006 have been
revised to correct $25.8 million of current tax expense recorded in the accounts of the Issuer that should have been recorded in the accounts of the Guarantor Subsidiaries and $13.8 million of deferred tax expense recorded in the accounts of the
Guarantor Subsidiaries that should have been recorded in the accounts of the Issuer. These revisions had no impact on the consolidated or the Non-Guarantor Subsidiaries totals in the condensed consolidating statements of income for the three and
nine months ended September 30, 2006. Additionally, the condensed consolidating statement of cash flows for the nine months ended September 30, 2006 has been revised to correct $13.8 million of deferred tax expense recorded as an
adjustment to the cash flows from operating activities of the Guarantor Subsidiaries that should have been recorded as an adjustment to the cash flows from operating activities of the Issuer, a $12.0 million reduction in equity earnings and a $25.8
million reduction in advance from affiliate in the accounts of the Issuer and a corresponding reduction in advance to affiliate in the accounts of the Guarantor Subsidiaries. Adjustments were also made to reduce corresponding amounts in the
eliminations columns to reflect the changes in the advance to affiliates. These revisions had no impact on the total cash flow for the Issuer and Guarantor Subsidiaries in the condensed consolidating statement of cash flows for the nine months ended
September 30, 2006.



12



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

SEPTEMBER 30, 2007

(in thousands)



|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|---------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | --------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | --------- | -
|                                                           |  | Issuer |           |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|ASSETS                                                     |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Current Assets                                             |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Cash and cash equivalents                                  |  | $      | 4,591     |   |                       | $ | 6         |                           |  | $ |                         |   |  | $            |         |   |  | $ | 4,597     |  
|Accounts receivable and other current assets               |  |        | 180,204   |   |                       |   | 40,233    |                           |  |   |                         |   |  |              |         |   |  |   | 220,437   |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 184,795   |   |                       |   | 40,239    |                           |  |   |                         |   |  |              |         |   |  |   | 225,034   |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Property and Equipment, at cost                            |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Oil and natural gas properties - full cost method          |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Subject to amortization                                    |  |        | 2,412,232 |   |                       |   | 1,194,977 |                           |  |   |                         |   |  |              |         |   |  |   | 3,607,209 |  
|Not subject to amortization                                |  |        | 238,270   |   |                       |   | 459,405   |                           |  |   |                         |   |  |              |         |   |  |   | 697,675   |  
|Other property and equipment                               |  |        | 55,719    |   |                       |   | 604       |                           |  |   | 23,761                   |   |  |              |         |   |  |   | 80,084    |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 2,706,221 |   |                       |   | 1,654,986 |                           |  |   | 23,761                   |   |  |              |         |   |  |   | 4,384,968 |  
|Less allowance for depreciation, depletionand amortization |  |        | (483,386  | ) |                       |   | (712,282  | )                         |  |   |                         |   |  |              | 316,889  |   |  |   | (878,779  | )
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 2,222,835 |   |                       |   | 942,704   |                           |  |   | 23,761                   |   |  |              | 316,889  |   |  |   | 3,506,189 |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Investment in and Advances to/from Subsidiaries            |  |        | 1,356,607 |   |                       |   | (746,044  | )                         |  |   | (10,652                  | ) |  |              | (599,911 | ) |  |   |          |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Other Assets                                               |  |        | 6,889     |   |                       |   | 221,463   |                           |  |   |                         |   |  |              |         |   |  |   | 228,352   |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  | $      | 3,771,126 |   |                       | $ | 458,362   |                           |  | $ | 13,109                   |   |  | $            | (283,022 | ) |  | $ | 3,959,575 |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                       |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Current Liabilities                                        |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Accounts payable and other current liabilities             |  | $      | 238,774   |   |                       | $ | 118,489   |                           |  | $ |                         |   |  | $            |         |   |  | $ | 357,263   |  
|Commodity derivative contracts                             |  |        | 76,550    |   |                       |   |          |                           |  |   |                         |   |  |              |         |   |  |   | 76,550    |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 315,324   |   |                       |   | 118,489   |                           |  |   |                         |   |  |              |         |   |  |   | 433,813   |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Long-Term Debt                                             |  |        | 1,580,000 |   |                       |   |          |                           |  |   |                         |   |  |              |         |   |  |   | 1,580,000 |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Other Long-Term Liabilities                                |  |        | 173,088   |   |                       |   | 23,961    |                           |  |   |                         |   |  |              |         |   |  |   | 197,049   |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Deferred Income Taxes                                      |  |        | 454,013   |   |                       |   | (79,252   | )                         |  |   |                         |   |  |              | 125,251  |   |  |   | 500,012   |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Stockholders Equity                                       |  |        | 1,248,701 |   |                       |   | 395,164   |                           |  |   | 13,109                   |   |  |              | (408,273 | ) |  |   | 1,248,701 |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  | $      | 3,771,126 |   |                       | $ | 458,362   |                           |  | $ | 13,109                   |   |  | $            | (283,022 | ) |  | $ | 3,959,575 |  
|                                                           |  |        |           |   |                       |   |           |                           |  |   |                          |   |  |              |          |   |  |   |           |  



13



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

DECEMBER 31, 2006

(in thousands)



|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|---------------------------------------------------------- |  | ------ | --------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | --------- | -
|                                                           |  | Issuer |           |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|ASSETS                                                     |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Current Assets                                             |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Cash and cash equivalents                                  |  | $      | 896       |   |                       | $ | 3        |                           |  | $ |                         |   |  | $            |         |   |  | $ | 899       |  
|Accounts receivable and other current assets               |  |        | 156,242   |   |                       |   | 27,655   |                           |  |   |                         |   |  |              |         |   |  |   | 183,897   |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 157,138   |   |                       |   | 27,658   |                           |  |   |                         |   |  |              |         |   |  |   | 184,796   |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Property and Equipment, at cost                            |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Oil and natural gas properties - full cost method          |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Subject to amortization                                    |  |        | 2,131,959 |   |                       |   | 492,318  |                           |  |   |                         |   |  |              |         |   |  |   | 2,624,277 |  
|Not subject to amortization                                |  |        | 124,830   |   |                       |   | 17,266   |                           |  |   |                         |   |  |              |         |   |  |   | 142,096   |  
|Other property and equipment                               |  |        | 31,237    |   |                       |   | 1,564    |                           |  |   | 8,591                    |   |  |              |         |   |  |   | 41,392    |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 2,288,026 |   |                       |   | 511,148  |                           |  |   | 8,591                    |   |  |              |         |   |  |   | 2,807,765 |  
|Less allowance for depreciation, depletionand amortization |  |        | (390,931  | ) |                       |   | (309,310 | )                         |  |   |                         |   |  |              |         |   |  |   | (700,241  | )
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 1,897,095 |   |                       |   | 201,838  |                           |  |   | 8,591                    |   |  |              |         |   |  |   | 2,107,524 |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Investment in and Advances to/from Subsidiaries            |  |        | 285,867   |   |                       |   | 133,343  |                           |  |   | (5,585                   | ) |  |              | (413,625 | ) |  |   |          |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Other Assets                                               |  |        | (1,674    | ) |                       |   | 172,582  |                           |  |   |                         |   |  |              |         |   |  |   | 170,908   |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  | $      | 2,338,426 |   |                       | $ | 535,421  |                           |  | $ | 3,006                    |   |  | $            | (413,625 | ) |  | $ | 2,463,228 |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                       |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Current Liabilities                                        |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Accounts payable and other current liabilities             |  | $      | 320,899   |   |                       | $ | 44,131   |                           |  | $ |                         |   |  | $            |         |   |  | $ | 365,030   |  
|Commodity derivative contracts                             |  |        | 95,162    |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 95,162    |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  |        | 416,061   |   |                       |   | 44,131   |                           |  |   |                         |   |  |              |         |   |  |   | 460,192   |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Long-Term Debt                                             |  |        | 235,500   |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 235,500   |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Other Long-Term Liabilities                                |  |        | 151,365   |   |                       |   | 19,209   |                           |  |   |                         |   |  |              |         |   |  |   | 170,574   |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Deferred Income Taxes                                      |  |        | 404,817   |   |                       |   | 61,462   |                           |  |   |                         |   |  |              |         |   |  |   | 466,279   |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|Stockholders Equity                                       |  |        | 1,130,683 |   |                       |   | 410,619  |                           |  |   | 3,006                    |   |  |              | (413,625 | ) |  |   | 1,130,683 |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  
|                                                           |  | $      | 2,338,426 |   |                       | $ | 535,421  |                           |  | $ | 3,006                    |   |  | $            | (413,625 | ) |  | $ | 2,463,228 |  
|                                                           |  |        |           |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |           |  



14



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 2007

(in thousands)



|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | -------- | ------------------------- |  | ------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |   |  | Consolidated |         
|Revenues                                            |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Oil sales                                           |  | $      | 239,707 |   |                       | $ | 36,389   |                           |  | $                        |  |  | $            |         |   |  | $ | 276,096 |  
|Gas sales                                           |  |        | 4,985   |   |                       |   | 17,711   |                           |  |                          |  |  |              |         |   |  |   | 22,696  |  
|Other operating revenues                            |  |        | 81      |   |                       |   | 96       |                           |  |                          |  |  |              |         |   |  |   | 177     |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 244,773 |   |                       |   | 54,196   |                           |  |                          |  |  |              |         |   |  |   | 298,969 |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Costs and Expenses                                  |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Production costs                                    |  |        | 75,660  |   |                       |   | 18,726   |                           |  |                          |  |  |              |         |   |  |   | 94,386  |  
|General and administrative                          |  |        | 17,793  |   |                       |   | 4,214    |                           |  |                          |  |  |              |         |   |  |   | 22,007  |  
|Depreciation, depletion, amortization and accretion |  |        | 38,035  |   |                       |   | 33,993   |                           |  |                          |  |  |              |         |   |  |   | 72,028  |  
|Full cost ceiling test writedown                    |  |        |        |   |                       |   | 261,000  |                           |  |                          |  |  |              | (261,000 | ) |  |   |        |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 131,488 |   |                       |   | 317,933  |                           |  |                          |  |  |              | (261,000 | ) |  |   | 188,421 |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Income from Operations                              |  |        | 113,285 |   |                       |   | (263,737 | )                         |  |                          |  |  |              | 261,000  |   |  |   | 110,548 |  
|Other Income (Expense)                              |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Equity in earnings of subsidiaries                  |  |        | (10,039 | ) |                       |   |         |                           |  |                          |  |  |              | 10,039   |   |  |   |        |  
|Interest expense                                    |  |        | (13,884 | ) |                       |   | (21,433  | )                         |  |                          |  |  |              | 17,152   |   |  |   | (18,165 | )
|Loss on mark-to-market derivative contracts         |  |        | (39,155 | ) |                       |   |         |                           |  |                          |  |  |              |         |   |  |   | (39,155 | )
|Interest and other income                           |  |        | 17,147  |   |                       |   | (367     | )                         |  |                          |  |  |              | (17,152  | ) |  |   | (372    | )
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Income (Loss) Before Income Taxes                   |  |        | 67,354  |   |                       |   | (285,537 | )                         |  |                          |  |  |              | 271,039  |   |  |   | 52,856  |  
|Income tax benefit (expense)                        |  |        | (34,494 | ) |                       |   | 116,309  |                           |  |                          |  |  |              | (101,811 | ) |  |   | (19,996 | )
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Net Income (Loss)                                   |  | $      | 32,860  |   |                       | $ | (169,228 | )                         |  | $                        |  |  | $            | 169,228  |   |  | $ | 32,860  |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  



15



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 2006

(in thousands)



|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|--------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | -------- | ------------------------- |  | ------------------------ | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                    |  | Issuer |          |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |   |  | Consolidated |        
|Revenues                                            |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Oil sales                                           |  | $      | 224,023  |   |                       | $ | 29,821   |                           |  | $                        |  |  | $            |        |   |  | $ | 253,844  |  
|Gas sales                                           |  |        | 14,189   |   |                       |   | 12,535   |                           |  |                          |  |  |              |        |   |  |   | 26,724   |  
|Other operating revenues                            |  |        | 172      |   |                       |   | 167      |                           |  |                          |  |  |              |        |   |  |   | 339      |  
|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|                                                    |  |        | 238,384  |   |                       |   | 42,523   |                           |  |                          |  |  |              |        |   |  |   | 280,907  |  
|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Costs and Expenses                                  |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Production costs                                    |  |        | 64,167   |   |                       |   | 21,168   |                           |  |                          |  |  |              |        |   |  |   | 85,335   |  
|General and administrative                          |  |        | 30,051   |   |                       |   | 1,442    |                           |  |                          |  |  |              |        |   |  |   | 31,493   |  
|Depreciation, depletion, amortization and accretion |  |        | 32,392   |   |                       |   | 21,016   |                           |  |                          |  |  |              |        |   |  |   | 53,408   |  
|Gain on sale of oil and gas properties              |  |        | (219,094 | ) |                       |   | (126,386 | )                         |  |                          |  |  |              |        |   |  |   | (345,480 | )
|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|                                                    |  |        | (92,484  | ) |                       |   | (82,760  | )                         |  |                          |  |  |              |        |   |  |   | (175,244 | )
|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Income from Operations                              |  |        | 330,868  |   |                       |   | 125,283  |                           |  |                          |  |  |              |        |   |  |   | 456,151  |  
|Other Income (Expense)                              |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Equity in earnings of subsidiaries                  |  |        | 62,613   |   |                       |   |         |                           |  |                          |  |  |              | (62,613 | ) |  |   |         |  
|Interest expense                                    |  |        | (19,093  | ) |                       |   | (3,085   | )                         |  |                          |  |  |              |        |   |  |   | (22,178  | )
|Gain on mark-to-market derivative contracts         |  |        | 12,340   |   |                       |   |         |                           |  |                          |  |  |              |        |   |  |   | 12,340   |  
|Interest and other income                           |  |        | 500      |   |                       |   |         |                           |  |                          |  |  |              |        |   |  |   | 500      |  
|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Income (Loss) Before Income Taxes                   |  |        | 387,228  |   |                       |   | 122,198  |                           |  |                          |  |  |              | (62,613 | ) |  |   | 446,813  |  
|Income tax benefit (expense)                        |  |        | 114,535  |   |                       |   | (59,585  | )                         |  |                          |  |  |              |        |   |  |   | (174,120 | )
|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Net Income (Loss)                                   |  | $      | 272,693  |   |                       | $ | 62,613   |                           |  | $                        |  |  | $            | (62,613 | ) |  | $ | 272,693  |  
|                                                    |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  



16



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2007

(in thousands)



|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | -------- | ------------------------- |  | ------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |   |  | Consolidated |         
|Revenues                                            |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Oil sales                                           |  | $      | 620,092 |   |                       | $ | 93,105   |                           |  | $                        |  |  | $            |         |   |  | $ | 713,197 |  
|Gas sales                                           |  |        | 19,191  |   |                       |   | 44,250   |                           |  |                          |  |  |              |         |   |  |   | 63,441  |  
|Other operating revenues                            |  |        | 2,226   |   |                       |   | 345      |                           |  |                          |  |  |              |         |   |  |   | 2,571   |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 641,509 |   |                       |   | 137,700  |                           |  |                          |  |  |              |         |   |  |   | 779,209 |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Costs and Expenses                                  |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Production costs                                    |  |        | 224,133 |   |                       |   | 49,283   |                           |  |                          |  |  |              |         |   |  |   | 273,416 |  
|General and administrative                          |  |        | 63,995  |   |                       |   | 10,422   |                           |  |                          |  |  |              |         |   |  |   | 74,417  |  
|Depreciation, depletion, amortization and accretion |  |        | 100,141 |   |                       |   | 87,623   |                           |  |                          |  |  |              |         |   |  |   | 187,764 |  
|Full cost ceiling test writedown                    |  |        |        |   |                       |   | 316,889  |                           |  |                          |  |  |              | (316,889 | ) |  |   |        |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|                                                    |  |        | 388,269 |   |                       |   | 464,217  |                           |  |                          |  |  |              | (316,889 | ) |  |   | 535,597 |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Income (Loss) from Operations                       |  |        | 253,240 |   |                       |   | (326,517 | )                         |  |                          |  |  |              | 316,889  |   |  |   | 243,612 |  
|Other Income (Expense)                              |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Equity in earnings of subsidiaries                  |  |        | (26,602 | ) |                       |   |         |                           |  |                          |  |  |              | 26,602   |   |  |   |        |  
|Interest expense                                    |  |        | (21,737 | ) |                       |   | (36,138  | )                         |  |                          |  |  |              | 22,652   |   |  |   | (35,223 | )
|Loss on mark-to-market derivative contracts         |  |        | (75,582 | ) |                       |   |         |                           |  |                          |  |  |              |         |   |  |   | (75,582 | )
|Interest and other income                           |  |        | 23,926  |   |                       |   | (322     | )                         |  |                          |  |  |              | (22,652  | ) |  |   | 952     |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Income (Loss) Before Income Taxes                   |  |        | 153,245 |   |                       |   | (362,977 | )                         |  |                          |  |  |              | 343,491  |   |  |   | 133,759 |  
|Income tax benefit (expense)                        |  |        | (74,497 | ) |                       |   | 144,737  |                           |  |                          |  |  |              | (125,251 | ) |  |   | (55,011 | )
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  
|Net Income (Loss)                                   |  | $      | 78,748  |   |                       | $ | (218,240 | )                         |  | $                        |  |  | $            | 218,240  |   |  | $ | 78,748  |  
|                                                    |  |        |         |   |                       |   |          |                           |  |                          |   |  |              |          |   |  |   |         |  



17



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2006

(in thousands)



|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|---------------------------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | -------- | ------------------------- |  | ------------------------ | - |  | ------------ | ------- | - |  | - | -------- | -
|                                                                             |  | Issuer |          |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | IntercompanyEliminations |   |  | Consolidated |        
|Revenues                                                                     |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Oil sales                                                                    |  | $      | 624,005  |   |                       | $ | 94,836   |                           |  | $                        |  |  | $            |        |   |  | $ | 718,841  |  
|Gas sales                                                                    |  |        | 25,498   |   |                       |   | 64,381   |                           |  |                          |  |  |              |        |   |  |   | 89,879   |  
|Other operating revenues                                                     |  |        | 1,310    |   |                       |   | 882      |                           |  |                          |  |  |              |        |   |  |   | 2,192    |  
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|                                                                             |  |        | 650,813  |   |                       |   | 160,099  |                           |  |                          |  |  |              |        |   |  |   | 810,912  |  
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Costs and Expenses                                                           |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Production costs                                                             |  |        | 169,878  |   |                       |   | 63,226   |                           |  |                          |  |  |              |        |   |  |   | 233,104  |  
|General and administrative                                                   |  |        | 89,225   |   |                       |   | 3,305    |                           |  |                          |  |  |              |        |   |  |   | 92,530   |  
|Depreciation, depletion, amortization and accretion                          |  |        | 68,670   |   |                       |   | 90,364   |                           |  |                          |  |  |              |        |   |  |   | 159,034  |  
|Gain on sale of oil and gas properties                                       |  |        | (219,094 | ) |                       |   | (126,386 | )                         |  |                          |  |  |              |        |   |  |   | (345,480 | )
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|                                                                             |  |        | 108,679  |   |                       |   | 30,509   |                           |  |                          |  |  |              |        |   |  |   | 139,188  |  
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Income from Operations                                                       |  |        | 542,134  |   |                       |   | 129,590  |                           |  |                          |  |  |              |        |   |  |   | 671,724  |  
|Other Income (Expense)                                                       |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Equity in earnings of subsidiaries                                           |  |        | 62,252   |   |                       |   |         |                           |  |                          |  |  |              | (62,252 | ) |  |   |         |  
|Interest expense                                                             |  |        | (48,621  | ) |                       |   | (8,561   | )                         |  |                          |  |  |              |        |   |  |   | (57,182  | )
|Loss on mark-to-market derivative contracts                                  |  |        | (299,902 | ) |                       |   |         |                           |  |                          |  |  |              |        |   |  |   | (299,902 | )
|Interest and other income                                                    |  |        | 40,022   |   |                       |   |         |                           |  |                          |  |  |              |        |   |  |   | 40,022   |  
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Income (Loss) Before Income Taxes and Cumulative Effect of Accounting Change |  |        | 295,885  |   |                       |   | 121,029  |                           |  |                          |  |  |              | (62,252 | ) |  |   | 354,662  |  
|Income tax benefit (expense)                                                 |  |        | (79,789  | ) |                       |   | (58,777  | )                         |  |                          |  |  |              |        |   |  |   | (138,566 | )
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Net Income (Loss) Before Cumulative Effect of Accounting Change              |  |        | 216,096  |   |                       |   | 62,252   |                           |  |                          |  |  |              | (62,252 | ) |  |   | 216,096  |  
|Cumulative effect of accounting change, net of tax benefit                   |  |        | (2,182   | ) |                       |   |         |                           |  |                          |  |  |              |        |   |  |   | (2,182   | )
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  
|Net Income (Loss)                                                            |  | $      | 213,914  |   |                       | $ | 62,252   |                           |  | $                        |  |  | $            | (62,252 | ) |  | $ | 213,914  |  
|                                                                             |  |        |          |   |                       |   |          |                           |  |                          |   |  |              |         |   |  |   |          |  



18



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2007

(in thousands)



|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                                                |  | Issuer |            |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |         
|CASH FLOWS FROM OPERATING ACTIVITIES                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net income (loss)                                               |  | $      | 78,748     |   |                       | $ | (218,240 | )                         |  | $ |                         |   |  | $            | 218,240  |   |  | $ | 78,748     |  
|Items not affecting cash flows from operating activities        |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Depreciation, depletion, amortization, accretion and impairment |  |        | 100,141    |   |                       |   | 404,512  |                           |  |   |                         |   |  |              | (316,889 | ) |  |   | 187,764    |  
|Equity in earnings of subsidiaries                              |  |        | 26,602     |   |                       |   |         |                           |  |   |                         |   |  |              | (26,602  | ) |  |   |           |  
|Deferred income taxes                                           |  |        | 84,799     |   |                       |   | (152,856 | )                         |  |   |                         |   |  |              | 125,251  |   |  |   | 57,194     |  
|Commodity derivative contracts                                  |  |        | 75,582     |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 75,582     |  
|Noncash compensation                                            |  |        | 18,013     |   |                       |   | 2,137    |                           |  |   |                         |   |  |              |         |   |  |   | 20,150     |  
|Other noncash items                                             |  |        | 21         |   |                       |   | 199      |                           |  |   |                         |   |  |              |         |   |  |   | 220        |  
|Change in assets and liabilities from operating activities      |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Accounts receivable and other assets                            |  |        | (23,747    | ) |                       |   | (8,023   | )                         |  |   |                         |   |  |              |         |   |  |   | (31,770    | )
|Income tax payable                                              |  |        | (94,272    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (94,272    | )
|Accounts payable and other liabilities                          |  |        | (6,769     | ) |                       |   | (1,086   | )                         |  |   |                         |   |  |              |         |   |  |   | (7,855     | )
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash provided by operating activities                       |  |        | 259,118    |   |                       |   | 26,643   |                           |  |   |                         |   |  |              |         |   |  |   | 285,761    |  
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Additions to oil and gas properties                             |  |        | (374,242   | ) |                       |   | (102,072 | )                         |  |   |                         |   |  |              |         |   |  |   | (476,314   | )
|Acquisition of Piceance Basin properties                        |  |        | (975,407   | ) |                       |   |         |                           |  |   |                          |   |  |              |          |   |  |   | (975,407   | )
|Derivative settlements                                          |  |        | (74,759    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (74,759    | )
|Other                                                           |  |        | (31,669    | ) |                       |   | (2,721   | )                         |  |   | (5,067                   | ) |  |              |         |   |  |   | (39,457    | )
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash used in investing activities                           |  |        | (1,456,077 | ) |                       |   | (104,793 | )                         |  |   | (5,067                   | ) |  |              |         |   |  |   | (1,565,937 | )
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                            |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Revolving credit facilities                                     |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Borrowings                                                      |  |        | 1,989,565  |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 1,989,565  |  
|Repayments                                                      |  |        | (1,745,065 | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (1,745,065 | )
|Proceeds for issuance of senior notes                           |  |        | 1,100,000  |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 1,100,000  |  
|Cost incurred in connection with financing arrangements         |  |        | (18,182    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (18,182    | )
|Investment in and advances to affiliates                        |  |        | (83,220    | ) |                       |   | 78,153   |                           |  |   | 5,067                    |   |  |              |         |   |  |   |           |  
|Purchase of treasury stock                                      |  |        | (47,485    | ) |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | (47,485    | )
|Other                                                           |  |        | 5,041      |   |                       |   |         |                           |  |   |                         |   |  |              |         |   |  |   | 5,041      |  
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net cash provided by financing activities                       |  |        | 1,200,654  |   |                       |   | 78,153   |                           |  |   | 5,067                    |   |  |              |         |   |  |   | 1,283,874  |  
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Net increase in cash and cash equivalents                       |  |        | 3,695      |   |                       |   | 3        |                           |  |   |                         |   |  |              |         |   |  |   | 3,698      |  
|Cash and cash equivalents, beginning of period                  |  |        | 896        |   |                       |   | 3        |                           |  |   |                         |   |  |              |         |   |  |   | 899        |  
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  
|Cash and cash equivalents, end of period                        |  | $      | 4,591      |   |                       | $ | 6        |                           |  | $ |                         |   |  | $            |         |   |  | $ | 4,597      |  
|                                                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |          |   |  |   |            |  



19



---

##### Index to Financial Statements

PLAINS EXPLORATION & PRODUCTION COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2006

(in thousands)



|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|---------------------------------------------------------- |  | ------ | ---------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------------------ | - |  | ------------ | ------- | - |  | - | ---------- | -
|                                                           |  | Issuer |            |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  |   | IntercompanyEliminations |   |  | Consolidated |        
|CASH FLOWS FROM OPERATING ACTIVITIES                       |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net income (loss)                                          |  | $      | 213,914    |   |                       | $ | 62,252   |                           |  | $ |                         |   |  | $            | (62,252 | ) |  | $ | 213,914    |  
|Items not affecting cash flows from operating activities   |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Depreciation, depletion, amortization and accretion        |  |        | 68,670     |   |                       |   | 90,364   |                           |  |   |                         |   |  |              |        |   |  |   | 159,034    |  
|Equity in earnings of subsidiaries                         |  |        | (62,252    | ) |                       |   |         |                           |  |   |                         |   |  |              | 62,252  |   |  |   |           |  
|Deferred income taxes                                      |  |        | 41,809     |   |                       |   | 40,510   |                           |  |   |                         |   |  |              |        |   |  |   | 82,319     |  
|Gain on sale of oil and gas properties                     |  |        | (219,094   | ) |                       |   | (126,386 | )                         |  |   |                         |   |  |              |        |   |  |   | (345,480   | )
|Cumulative effect of adoption of accounting change         |  |        | 2,182      |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 2,182      |  
|Commodity derivative contracts                             |  |        | 371,869    |   |                       |   | 37,665   |                           |  |   |                         |   |  |              |        |   |  |   | 409,534    |  
|Noncash compensation                                       |  |        | 32,594     |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 32,594     |  
|Other noncash items                                        |  |        | (64        | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (64        | )
|Change in assets and liabilities from operating activities |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Accounts receivable and other assets                       |  |        | 7,486      |   |                       |   | (1,526   | )                         |  |   |                         |   |  |              |        |   |  |   | 5,960      |  
|Accounts payable and other liabilities                     |  |        | 12,519     |   |                       |   | (1,755   | )                         |  |   |                         |   |  |              |        |   |  |   | 10,764     |  
|Income taxes payable                                       |  |        | 49,395     |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 49,395     |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net cash provided by operating activities                  |  |        | 519,028    |   |                       |   | 101,124  |                           |  |   |                         |   |  |              |        |   |  |   | 620,152    |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Additions to oil and gas properties                        |  |        | (335,295   | ) |                       |   | (121,501 | )                         |  |   |                         |   |  |              |        |   |  |   | (456,796   | )
|Proceeds from property sales, net                          |  |        | 850,427    |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 850,427    |  
|Derivative settlements                                     |  |        | (68,194    | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (68,194    | )
|Other                                                      |  |        | (3,177     | ) |                       |   | (480     | )                         |  |   | (3,810                   | ) |  |              |        |   |  |   | (7,467     | )
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net cash provided by (used in) investing activities        |  |        | 443,761    |   |                       |   | (121,981 | )                         |  |   | (3,810                   | ) |  |              |        |   |  |   | 317,970    |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Revolving credit facilities                                |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Borrowings                                                 |  |        | 1,182,700  |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 1,182,700  |  
|Repayments                                                 |  |        | (1,454,700 | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (1,454,700 | )
|Derivative settlements                                     |  |        | (28,579    | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (28,579    | )
|Investment in and advances to affiliates                   |  |        | (24,664    | ) |                       |   | 20,854   |                           |  |   | 3,810                    |   |  |              |        |   |  |   |           |  
|Purchase treasury stock                                    |  |        | (100,817   | ) |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | (100,817   | )
|Excess tax benefit from stock-based compensation           |  |        | 3,294      |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 3,294      |  
|Other                                                      |  |        | 677        |   |                       |   |         |                           |  |   |                         |   |  |              |        |   |  |   | 677        |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net cash provided by (used in) financing activities        |  |        | (422,089   | ) |                       |   | 20,854   |                           |  |   | 3,810                    |   |  |              |        |   |  |   | (397,425   | )
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Net increase (decrease) in cash and cash equivalents       |  |        | 540,700    |   |                       |   | (3       | )                         |  |   |                         |   |  |              |        |   |  |   | 540,697    |  
|Cash and cash equivalents, beginning of period             |  |        | 1,548      |   |                       |   | 4        |                           |  |   |                         |   |  |              |        |   |  |   | 1,552      |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  
|Cash and cash equivalents, end of period                   |  | $      | 542,248    |   |                       | $ | 1        |                           |  | $ |                         |   |  | $            |        |   |  | $ | 542,249    |  
|                                                           |  |        |            |   |                       |   |          |                           |  |   |                          |   |  |              |         |   |  |   |            |  



20



---

##### Index to Financial Statements

Note 8Proposed Merger with Pogo Producing Company

On July 17, 2007, we announced that we had entered into a definitive agreement to acquire Pogo Producing Company (Pogo) in a stock and cash
transaction valued at approximately $3.6 billion, based on our July 16, 2007 closing stock price of $51.19 per share. Under the terms of the definitive agreement, Pogo stockholders will receive 0.68201 shares of our common stock and $24.88 of
cash for each share of Pogo common stock. Pogo stockholders will have the right to elect to receive cash, stock or both, subject to pro-ration if either the cash or stock election is oversubscribed. When completed, we will issue approximately
40 million shares of common stock and pay approximately $1.5 billion in cash.

The transaction is expected to qualify as a tax free
reorganization under Section 368(a) and is expected to be tax free for the stock portion of the consideration received by Pogo stockholders. The Boards of Directors of both companies have approved the merger agreement and each has recommended
it to their respective stockholders for approval. The transaction remains subject to stockholder approval from both companies and other customary conditions. Upon closing, our stockholders will own approximately 66% of the combined company and
former Pogo stockholders will own approximately 34% of the combined company.

In connection with the proposed merger, Plains has received commitments
from several financial institutions to underwrite a new credit facility that will amend and restate its existing credit facility and will be used in part to fund the merger consideration and to provide additional liquidity. The aggregate commitment
of the lenders is $2.9 billion.

The special meetings of stockholders of Plains and of Pogo are scheduled for November 6, 2007, and the
transaction is expected to close on or near that date. We will account for the Pogo transaction as a purchase under purchase accounting rules and we will continue to use the full cost method of accounting for our oil and gas properties.



21



---

##### 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, 2006.

Company Overview

We are an independent
oil and gas company primarily engaged in the activities of acquiring, developing, exploiting, 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 Basin in Colorado; and
| | - |  | -----------------------------------



| |  |  | the Gulf Coast Basin onshore and offshore Louisiana, including the Gulf of Mexico.
| | - |  | ----------------------------------------------------------------------------------

Assets in our principal focus areas include mature properties with long-lived reserves and significant development and exploitation opportunities as well as newer properties with development, exploitation
and exploration potential. Our primary sources of liquidity are cash generated from our operations and our senior revolving credit facility. At September 30, 2007 we had approximately $482 million of availability under our revolving credit
facility. Oil and gas capital expenditures, excluding acquisitions, are expected to be $850 million to $950 million for the year ending December 31, 2007. 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 and anticipated capital expenditures. In addition, the majority of our capital expenditures are discretionary and
could be curtailed if our cash flows declined from expected levels.

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. For 2007, 2008 and 2009 our derivative position consists exclusively of
purchased put option contracts with a strike price of $55.00 on 50,000 barrels per day for 2007, 42,000 barrels per day for 2008 and 32,500 barrels for 2009. The only cash settlements we are required to make on these contracts are option premiums
and interest, which are expected to total approximately $28 million in the last three months of 2007, $58 million in 2008 and $40 million in 2009. In return, to the extent the daily average NYMEX price for West Texas Intermediate (WTI)
crude oil is less than $55.00, we will receive the difference between $55.00 and the daily average NYMEX price for WTI crude oil. Since our remaining derivative position consists entirely of purchased crude oil put options, there will continue to be
volatility in derivative gains or losses on our income statement; however, our ultimate potential loss will be limited to the cost of the options. See Item 3  Quantitative and Qualitative Disclosures About Market Risks.

Property Acquisition

On May 31, 2007, we acquired
interests in oil and gas producing properties covering over 60,000 gross (55,000 net) acres in the Mesaverde geologic section of the Piceance Basin in Colorado, plus associated midstream assets, including a 25% interest in the Collbran Valley Gas
Gathering, LLC. These properties, which we refer to as the Piceance Basin properties, and which include over 200 producing/productive wells and over 3,000 additional potential drilling locations, produced approximately 6 thousand barrels of oil
equivalent (MBOE) per day at the closing date, of which approximately 97% was natural gas. As of December 31, 2006, the properties had estimated proved developed reserves of approximately 15 million barrels of oil equivalent
(MMBOE), of which approximately 97% was natural gas. We paid $975 million in cash, including $10 million in related acquisition costs and $65 million for net cash outflows from the effective date to the closing date (primarily
related to capital expenditures for drilling activities and acreage acquisitions) and issued one million shares of common stock with a fair market value of approximately $45 million to the seller, Laramie Energy, LLC, a privately held Delaware
limited liability company. We financed $946 million of the acquisition using our senior revolving credit facility.



22



---

##### Index to Financial Statements

Proposed Merger with Pogo Producing Company

On July 17, 2007 we announced that we had entered into a definitive agreement to acquire Pogo Producing Company (Pogo) in a stock and cash transaction valued at approximately $3.6
billion, based on our July 16, 2007 closing stock price of $51.19 per share. Under the terms of the definitive agreement, Pogo stockholders will receive 0.68201 shares of our common stock and $24.88 of cash for each share of Pogo common stock.
Pogo stockholders will have the right to elect to receive cash, stock or both, subject to pro-ration if either the cash or stock election is oversubscribed. When completed, we will issue approximately 40 million shares of common stock and pay
approximately $1.5 billion in cash.

The transaction is expected to qualify as a tax free reorganization under Section 368(a) and is expected to
be tax free for the stock portion of the consideration received by Pogo stockholders. The Boards of Directors of both companies have approved the merger agreement and each has recommended it to their respective stockholders for approval. The
transaction remains subject to stockholder approval from both companies and other customary conditions. Upon closing, our stockholders will own approximately 66% of the combined company and former Pogo stockholders will own approximately 34% of the
combined company.

In connection with the proposed merger, Plains has received commitments from several financial institutions to underwrite a new
credit facility that will amend and restate its existing credit facility and will be used in part to fund the merger consideration and to provide additional liquidity. The aggregate commitment of the lenders is $2.9 billion. The new credit facility
will provide for an initial borrowing base of $2.9 billion that will be adjusted on an interim basis thereafter based on our oil and gas properties, reserves, other indebtedness and other relevant factors. The new credit facility will also include a
$250 million sub-limit on letters of credit. We will secure borrowings under the new credit facility, with the equity of certain of our domestic and foreign subsidiaries, and give mortgages covering at least 75% of the total present value of certain
of our domestic oil and gas properties. The new credit facility will be subject to substantially all the same terms as are provided for in our existing credit facility.

The special meetings of stockholders of Plains and of Pogo are scheduled for November 6, 2007, and the transaction is expected to close on or near that date. We will account for the Pogo transaction as a purchase under
purchase accounting rules and we will continue to use the full cost method of accounting for our oil and gas properties.

General

We follow the full cost method of accounting whereby all costs associated with property acquisition, exploration, exploitation and development activities are
capitalized. Our revenues are derived from the sale of oil, 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. We have had no write-downs due to these ceiling test limitations since 1998. Given the volatility
of 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, electric costs, maintenance costs, production, ad valorem and severance taxes, and other costs necessary to operate our producing
properties. Depletion of capitalized costs of producing oil and gas properties is provided using the units of production method based upon estimated proved reserves. For purposes of computing depletion, estimated proved reserves are redetermined as
of the end of each year and on an interim basis when deemed necessary.



23



---

##### Index to Financial Statements

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 addition to fluctuations as a result of operating in the oil and gas industry, our earnings are subject to volatility due to: (i) gains and
losses on derivative contracts subject to mark-to-market accounting as changes occur in the NYMEX price indexes; and (ii) stock appreciation rights (SARs), which are accounted for as liability awards under SFAS 123R and are
remeasured to fair value each reporting period. The fair value of SARs is related to the market price of our common stock and will fluctuate with movements in our stock price.

In the first nine months of 2007, we reported net income of $78.7 million, or $1.07 per diluted share. In the first nine months of 2006, we reported net income of $213.9 million, or $2.71 per diluted
share. Net income for 2006 includes a $345.5 million pre-tax gain on the sale of oil and gas properties, a $37.9 million pre-tax gain on termination of merger agreement, a $299.9 million pre-tax derivative mark to market loss and a non-cash,
after-tax expense related to the adoption of SFAS 123R of $2.2 million.

Results of Operations

On May 31, 2007, we acquired interests in oil and gas producing properties covering over 60,000 gross (55,000 net) acres in the Mesaverde geologic section of
the Piceance Basin in Colorado, plus associated midstream assets, including a 25% interest in the Collbran Valley Gas Gathering, LLC. These properties, which we refer to as the Piceance Basin properties, and which include over 200
producing/productive wells and over 3,000 additional potential drilling locations, produced an average of 6 MBOE per day during the third quarter, of which approximately 97% is natural gas.

On September 29, 2006, we closed the sale of non-strategic oil and gas properties located primarily in California and Texas to subsidiaries of Occidental Petroleum Corporation
(Occidental). The properties included our interests in the Asphalto, Buena Vista and Mt. Poso fields in the San Joaquin Valley, the Sansinena field in the Los Angeles Basin, the Pakenham field in West Texas and various other minor
properties. This transaction had an effective date of October 1, 2006. On a barrel of oil equivalent basis, these properties represented approximately 12% of our sales volumes for the first nine months of 2006.



24



---

##### Index to Financial Statements

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 barrel of oil equivalent (BOE) basis:



|                                                            |  |                                 |        |                                |   |        |  |      |        |  |   |       
|----------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                            |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                            |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|Sales Volumes                                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Oil and liquids sales (MBbls)                               |  |                                 | 4,369  |                                |   | 4,880  |  |      | 12,895 |  |   | 14,418
|Gas (MMcf)                                                  |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Production                                                  |  |                                 | 5,867  |                                |   | 5,728  |  |      | 13,134 |  |   | 17,413
|Used in steam operations                                    |  |                                 | 561    |                                |   | 1,538  |  |      | 1,724  |  |   | 4,022 
|Sales                                                       |  |                                 | 5,306  |                                |   | 4,190  |  |      | 11,410 |  |   | 13,391
|MBOE                                                        |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Production                                                  |  |                                 | 5,347  |                                |   | 5,835  |  |      | 15,084 |  |   | 17,320
|Sales                                                       |  |                                 | 5,252  |                                |   | 5,578  |  |      | 14,796 |  |   | 16,650
|Daily Average Volumes                                       |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Oil and liquids sales (Bbls)                                |  |                                 | 47,482 |                                |   | 53,043 |  |      | 47,233 |  |   | 52,815
|Gas (Mcf)                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Production                                                  |  |                                 | 63,768 |                                |   | 62,266 |  |      | 48,108 |  |   | 63,782
|Used in steam operations                                    |  |                                 | 6,096  |                                |   | 16,721 |  |      | 6,313  |  |   | 14,732
|Sales                                                       |  |                                 | 57,672 |                                |   | 45,545 |  |      | 41,795 |  |   | 49,050
|BOE                                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Production                                                  |  |                                 | 58,110 |                                |   | 63,421 |  |      | 55,251 |  |   | 63,445
|Sales                                                       |  |                                 | 57,094 |                                |   | 60,634 |  |      | 54,199 |  |   | 60,990
|Unit Economics (in dollars)                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Average NYMEX Prices                                        |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Oil                                                         |  | $                               | 75.15  |                                | $ | 70.54  |  | $    | 66.19  |  | $ | 68.25 
|Gas                                                         |  |                                 | 6.18   |                                |   | 6.62   |  |      | 6.84   |  |   | 7.44  
|Average Realized Sales Price Before Derivative Transactions |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Oil (per Bbl)                                               |  | $                               | 63.19  |                                | $ | 59.51  |  | $    | 55.31  |  | $ | 57.46 
|Gas (per Mcf)                                               |  |                                 | 4.28   |                                |   | 6.38   |  |      | 5.56   |  |   | 6.71  
|Per BOE                                                     |  |                                 | 56.89  |                                |   | 56.85  |  |      | 52.49  |  |   | 55.16 
|Costs and Expenses per BOE Production costs                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Lease operating expenses                                    |  | $                               | 10.04  |                                | $ | 9.03   |  | $    | 9.96   |  | $ | 8.24  
|Steam gas costs                                             |  |                                 | 4.26   |                                |   | 2.82   |  |      | 5.18   |  |   | 2.48  
|Electricity                                                 |  |                                 | 2.13   |                                |   | 1.79   |  |      | 1.99   |  |   | 1.73  
|Production and ad valorem taxes                             |  |                                 | 0.97   |                                |   | 1.25   |  |      | 1.04   |  |   | 1.19  
|Gathering and transportation                                |  |                                 | 0.58   |                                |   | 0.41   |  |      | 0.30   |  |   | 0.36  

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



|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                               |  | 2007                            |         |   | 2006                           |   |         | 2007 |  |   | 2006    |  
|Mark-to-market contracts                       |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Crude oil options                              |  | $                               | (25,615 | ) |                                | $ | (22,583 | )    |  | $ | (74,759 | ) |  | $ | (89,559 | )
|Natural gas call options                       |  |                                 |        |   |                                |   | (2,880  | )    |  |   |        |   |  |   | (8,545  | )
|Contracts accounted for using hedge accounting |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   | 1,331   |  



25



---

##### Index to Financial Statements

Comparison of Three Months Ended September 30, 2007 to Three Months Ended September 30, 2006

Oil and gas revenues. Oil and gas revenues increased $18.2 million, to $298.8 million for 2007 from $280.6 million for
2006. The increase is primarily due to the absence of an oil revenue hedging loss in 2007 partially offset by decreased volumes as a result of the Occidental property sale. Excluding the properties sold from 2006 revenues, oil and gas revenues
increased $50.9 million, to $298.8 million for 2007 from $247.9 million for 2006 primarily due to the absence of an oil revenue hedging loss in 2007 and increased gas sales in 2007 due to the acquisition of the Piceance Basin properties.

Oil revenues, excluding the effects of hedging, decreased $14.3 million to $276.1 million for 2007 from $290.4 million for 2006, reflecting lower
production ($32.3 million), partially offset by higher realized prices ($18.0 million). Our average realized price for oil increased $3.68 to $63.19 per Bbl for 2007 from $59.51 per Bbl for 2006. The increase in price is primarily
attributable to an increase in the NYMEX oil price, which averaged $75.15 per Bbl in 2007 versus $70.54 per Bbl in 2006. Oil sales volumes decreased 5.5 MBbls per day to 47.5 MBbls per day in 2007 from 53.0 MBbls per day in 2006, primarily
reflecting the properties sold which had sales of 4.2 MBbls per day in the third quarter of 2006. Hedging had the effect of decreasing our oil revenues by $36.5 million or $7.49 per Bbl in 2006.

Gas revenues decreased $4.0 million to $22.7 million in 2007 from $26.7 million in 2006 due to a decrease in realized prices ($8.8 million)
partially offset by increased sales volumes ($4.8 million). Our average realized price for gas was $4.28 per Mcf in 2007 compared to $6.38 per Mcf in 2006. Our realized price for gas decreased due to a decrease in the index price for natural
gas ($0.44 per Mcf) and the higher differentials for the Piceance Basin properties. Our average differential for gas sold in the Piceance Basin was $3.36 per Mcf during the third quarter of 2007. Gas sales volumes increased from
45.5 MMcf per day in 2006 to 57.7 MMcf per day in 2007, primarily reflecting the impact of properties purchased in the Piceance Basin which had sales of 32.6 MMcf per day in the third quarter of 2007, partially offset by properties sold to
Occidental which produced 17.0 MMcf per day.

Lease operating expenses. Lease operating expenses increased $2.3 million, to
$52.7 million in 2007 from $50.4 million in 2006. Excluding the properties sold from 2006 costs, lease operating expenses increased $10.4 million, to $52.7 million in 2007 from $42.3 in 2006. The increase is primarily attributable to the
acquisition of the Piceance Basin properties $(2.3 million), higher expenditures for repairs and maintenance and well workovers and general cost increases from service providers. Excluding the properties sold, on a per unit basis lease operating
expenses increased to $10.04 per BOE in 2007 versus $8.59 per BOE in 2006.

Steam gas costs. Steam gas costs increased $6.6 million,
to $22.3 million in 2007 from $15.7 million in 2006, primarily reflecting higher steam volumes and higher cost of gas used in steam generation. In 2007 we burned approximately 4.0 Bcf of natural gas at a cost of approximately $5.52 per Mcf
compared to 3.9 Bcf at a cost of approximately $4.03 per Mcf in 2006. The higher cost per Mcf in 2007 principally reflects that substantially all of the gas burned in 2007 was purchased while in 2006 approximately one quarter of the gas burned was
produced from the Companys properties and costs for these volumes consisted only of transportation costs.

Electricity. Electricity
increased $1.2 million, to $11.2 million in 2007 from $10.0 million in 2006. Excluding the properties sold from 2006 costs, electricity increased $2.3 million, to $11.2 million in 2007 from $8.9 million in 2006, primarily reflecting
higher usage. Excluding the properties sold, on a per unit basis electricity increased to $2.13 per BOE in 2007 versus $1.81 per BOE in 2006.

Production and ad valorem taxes. Production and ad valorem taxes decreased $1.9 million, to $5.1 million in 2007 from $7.0 million in 2006. Excluding the properties sold from 2006 costs, production and ad
valorem taxes decreased $0.5 million, to $5.1 million in 2007 from $5.6 million in 2006 due to $0.6 million of production tax abatements in Texas.

Gathering and transportation expenses. Gathering and transportation expenses increased $0.7 million, to $3.0 million in 2007 from $2.3 million in 2006. Excluding the properties sold from 2006 costs, gathering and
transportation costs increased $2.9 million to $3.0 million in 2007 from $0.1 million in 2006, primarily reflecting the Piceance Basin property acquisition.

General and administrative expense. G&A expense decreased $9.5 million, to $22.0 million in 2007 compared to $31.5 million in 2006. The decrease is primarily due to lower stock based compensation expense as a
result of a decrease in the fair value of our stock appreciation rights, or SARs, due to fluctuations in our stock price between the two periods.



26



---

##### Index to Financial Statements

G&A expense does not include amounts capitalized as part of our acquisition, exploration and development
activities. Capitalized costs increased to $9.0 million in 2007 compared to $6.1 million in 2006, primarily reflecting increases in our acquisition, exploration and development activities.

Depreciation, depletion and amortization, or DD&A. DD&A expense increased $18.9 million, to $69.7 million in 2007 from $50.8 million
in 2006. The increase was attributable to our oil and gas DD&A, primarily due to a higher per unit rate. Our average oil and gas unit of production rate increased to $12.64 per BOE in 2007 compared to $8.45 per BOE in 2006. The increase
primarily reflects the effect of increased future development costs, higher cost reserve additions, exploration costs and property acquisitions.

Accretion expense. Accretion expense decreased $0.3 million, to $2.3 million in 2007 from $2.6 million in 2006. Accretion expense for 2006 included $0.4 million attributable to the properties sold to Occidental. Excluding
such expense the $0.1 million increase primarily reflects higher estimated future costs of our abandonment obligations.

Gain on sale of oil and
gas properties. On September 29, 2006 we closed on the sale of oil and gas properties to subsidiaries of Occidental and recognized a $345.5 million pre-tax gain.

Interest expense. Interest expense decreased $4.0 million, to $18.2 million in the third quarter of 2007 from $22.2 million in 2006 due primarily to an increase of $8.4 million in the amount of
interest capitalized on unproved properties that are not subject to amortization and in the process of development. Gross interest expense before capitalization increased from $24.8 million in the third quarter of 2006 to $29.3 million in the same
period of 2007 due to higher outstanding debt as a result of the acquisition of the Piceance Basin properties partially offset by decreased interest on derivatives.

Gain (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 or receiving a payment from the counterparty.

In 2007 we recognized a $39.2 million loss related to mark-to-market derivative contracts and
cash payments totaled $25.6 million. In 2006 we recognized a $12.3 million gain related to mark-to-market derivative contracts and cash payments totaled $25.5 million.

Our derivative position in 2007 consists of purchased crude oil put options and our ultimate potential loss on these contracts will be limited to the cost of the options.

Income taxes. During interim periods income tax expense is generally 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 pre-tax 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 primarily reflecting expenses that are not deductible because of IRS limitations.

For the third quarter of 2007 income tax expense was approximately 38% of pretax income. In addition to changes in our estimated annual tax rate for
2007, specific items affecting income tax expense for the third quarter included changes in the balances of state deferred tax liabilities as a result of state apportionment changes plus the impact of changes resulting from the filing of certain
federal and state tax returns in the third quarter of 2007.

Comparison of Nine Months Ended September 30, 2007 to Nine Months Ended
September 30, 2006

Oil and gas revenues. Oil and gas revenues decreased $32.1 million, to $776.6 million for 2007 from
$808.7 million for 2006 primarily due to the Occidental property sale and a decrease in realized prices of $2.67 per BOE, partially offset by the absence of an oil revenue hedging loss in 2007. Excluding the properties sold from 2006 revenues,
oil and gas revenues increased $66.4 million, to $776.7 million in 2007 from $710.3 million for 2006 primarily due to the absence of an oil revenue hedging loss in 2007, partially offset by a decrease in price of $2.67 per BOE. Hedging decreased
revenues by $109.6 million in 2006.



27



---

##### Index to Financial Statements

Oil revenues excluding the effects of hedging, decreased $115.3 million to $713.2 million for 2007 from
$828.5 million for 2006 reflecting lower realized prices ($31.1 million) and lower production ($84.2 million). Our average realized price for oil decreased $2.15 to $55.31 per Bbl for 2007 from $57.46 per Bbl for 2006. The decrease is
primarily attributable to a decline in the NYMEX oil price, which averaged $66.19 per Bbl in 2007 versus $68.25 per Bbl in 2006. Oil sales volumes decreased 5.6 MBbls per day to 47.2 MBbls per day in 2007 from 52.8 MBbls per day
in 2006, primarily reflecting the properties sold which had sales of 4.4 MBbls per day in 2006. Hedging had the effect of decreasing our oil revenues by $109.6 million or $7.60 per Bbl in 2006.

Gas revenues, decreased $26.5 million to $63.4 million in 2007 from $89.9 million in 2006 due to decreased sales volumes ($11.0 million) and a decrease
in realized prices ($15.5 million). Our average realized price for gas was $5.56 per Mcf in 2007 compared to $6.71 per Mcf in 2006. Gas sales volumes decreased from 49.1 MMcf per day in 2006 to 41.8 MMcf per day in
2007 primarily reflecting the impact of properties sold which had sales of 17.9 MMcf per day in the 2006, offset by the increase in production from the Piceance Basin properties.

Lease operating expenses. Lease operating expenses increased $10.2 million, to $147.5 million in 2007 from $137.3 million in 2006. Excluding the properties sold from 2006 costs, lease
operating expenses increased $31.4 million, to $147.5 million in 2007 from $116.1 million in 2006. The increase is primarily attributable to higher expenditures for repairs and maintenance and well workovers, increased labor costs, general cost
increases from service providers and the acquisition of the Piceance Basin properties. Excluding the properties sold, on a per unit basis, lease operating expenses increased to $9.96 per BOE in 2007 versus $7.93 per BOE in 2006.

Steam gas costs. Steam gas costs increased $35.3 million, to $76.6 million in 2007 from $41.3 million in 2006, primarily
reflecting higher steam volumes and higher cost of gas used in steam generation. In 2007 we burned approximately 12.5 Bcf of natural gas at a cost of approximately $6.14 per Mcf compared to 10.5 Bcf at a cost of $3.95 per Mcf in 2006. The higher
cost per Mcf in 2007 principally reflects that substantially all of the gas burned in 2007 was purchased while in 2006 approximately one third of the gas burned was produced from the Companys properties and costs for these volumes consisted
only of transportation costs.

Electricity. Electricity increased $0.7 million, to $29.5 million in 2007 from
$28.8 million in 2006. Excluding the properties sold from 2006 costs, electricity increased $3.2 million, to $29.5 million in 2007 from $26.3 million in 2006, primarily reflecting higher usage.Excluding the
properties sold, on a per unit basis, electricity increased to $1.99 per BOE in 2007 versus $1.79 per BOE in 2006.

Production and ad
valorem taxes. Production and ad valorem taxes decreased $4.4 million, to $15.4 million in 2007 from $19.8 million in 2006. Excluding the properties sold from 2006 costs, production and ad valorem taxes increased $1.0 million, to $15.4
million in 2007 from $14.4 million in 2006 primarily reflecting higher ad valorem taxes due to higher property tax basis and the acquisition of the Piceance Basin properties.

Gathering and transportation expenses. Gathering and transportation expenses decreased $1.5 million, to $4.4 million in 2007 from $5.9 million in 2006. Excluding the properties
sold from 2006 costs, gathering and transportation expenses increased $4.0 million to $4.4 million in 2007 from $0.4 million in 2006 due to the acquisition of the Piceance Basin properties.

General and administrative expense. G&A expense decreased $18.1 million to $74.4 million in 2007 compared to $92.5 million in 2006. The decrease is primarily due to lower stock
based compensation expense as a result of a decrease in the fair value of our SARs due to fluctuations in our stock price between the two periods. In addition, 2006 G&A expense includes approximately $11.0 million related to officer
resignations. No similar activity occurred in 2007.

G&A expense does not include amounts capitalized as part of our acquisition, exploration and
development activities. Capitalized costs increased to $27.5 million in 2007 compared to $22.0 million in 2006, primarily reflecting increased acquisition, exploration and development activities.

Depreciation, depletion and amortization, or DD&A. DD&A expense increased $29.4 million, to $180.9 million in 2007 from
$151.5 million in 2006. The increase was attributable to our oil and gas DD&A, primarily due to a higher per unit rate. Our oil and gas unit of production rate increased to $11.59 per BOE in 2007 compared to $8.45 per BOE in 2006. The
increase primarily reflects the effect of increased future development costs, higher costs of reserve additions, exploration costs and property acquisitions.



28



---

##### Index to Financial Statements

Accretion expense. Accretion expense decreased $0.7 million, to $6.8 million in 2007 from $7.5
million in 2006. Accretion expense for 2006 included $1.3 million attributable to the properties sold to Occidental. Excluding such expense the $0.6 million increase primarily reflects higher estimated future costs of our abandonment obligations.

Gain on sale of oil and gas properties. On September 29, 2006 we closed on the sale of oil and gas properties to subsidiaries
of Occidental and recognized a $345.5 million pre-tax gain.

Interest expense. Interest expense decreased $22.0 million, to $35.2
million in 2007 from $57.2 million in 2006 due primarily to an increase of $11.6 million in the amount of interest capitalized on unproved properties that are not subject to amortization and in the process of development and decreased interest on
derivatives. Gross interest expense before capitalization decreased from $63.7 million in 2006 to $53.5 million due to decreased interest on derivatives, partially offset by increased outstanding debt in the third quarter as a result of the
acquisition of the Piceance Basin properties.

Gain (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 or receiving a payment from the counterparty.

In 2007 we recognized a $75.6 million loss related to mark-to-market derivative contracts and cash payments totaled $74.8 million. In 2006 we recognized a $299.9 million loss related to mark-to-market
derivative contracts and cash payments totaled $96.8 million. Our derivative position in 2007 consists solely of purchased crude oil options and our ultimate potential loss on these contracts will be limited to the cost of the options. In 2006 the
derivative losses were primarily related to crude oil collars.

Gain on termination of merger agreement. On April 24, 2006 we
announced that we had entered into a definitive agreement to acquire Stone Energy Corporation in a stock-for-stock transaction. On June 22, 2006 the agreement was terminated by Stone in order for Stone to enter into a merger agreement with
another company. In connection with the termination of the merger agreement we received a termination fee of $43.5 million. The gain recognized in 2006 reflects the termination fee net of certain merger related costs incurred by the Company.

Income taxes. During interim periods income tax expense is generally 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 pre-tax 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 primarily reflecting expenses that are not deductible because of IRS
limitations.

For the nine months ended September 30, 2007 income tax expense was approximately 41% of pretax income. In addition to changes in
our estimated annual tax rate for 2007, specific items affecting income tax expense for the nine months ended September 30, 2007 included changes in the balances of state deferred tax liabilities as a result of state apportionment changes
caused by the purchase of certain oil and gas properties in the second quarter of 2007 and the impact of changes to certain tax credits related to our enhanced oil recovery operations as a result of a newly issued IRS computational guidelines.

Liquidity and Capital Resources

Our
primary sources of liquidity are cash generated from our operations and our senior revolving credit facility. At September 30, 2007 we had approximately $482 million of availability under our senior revolving credit facility. We have
made and will continue to make substantial capital expenditures for the acquisition, exploitation, development, exploration and production of oil and gas. Oil and gas capital expenditures, excluding acquisitions, are expected to be $850 million to
$950 million for the year ending December 31, 2007. Currently, 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 and anticipated capital expenditures.



29



---

##### Index to Financial Statements

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. The level of derivative activity depends on our view of market conditions, available derivative prices
and our operating strategy. In addition, the majority of our capital expenditures is discretionary and could be curtailed if our cash flows declined from expected levels.

Working Capital

At September 30, 2007, we had a working capital deficit of approximately $209 million.
Our working capital deficit is affected by fluctuations in the fair value of our commodity derivative instruments and SARs. At September 30, 2007, we had net short-term liabilities of $54 million and $30 million for derivatives
and SARs, respectively. Excluding such items our working capital deficit was approximately $125 million primarily due to our drilling activities. We generally have a working capital deficit because we use excess cash to pay down borrowings
under our senior revolving credit facility.

Financing Activities

73/4% Senior Notes. In June 2007, we issued $600 million of 73/4% Senior Notes due 2015 (the
73/4% Senior Notes) at par. We may redeem all or part of the 73/4% Senior Notes on or after June 15, 2011 at specified redemption prices and prior to such date at a make-whole redemption price. In addition,
prior to June 15, 2010 we may, at our option, redeem up to 35% of the 73/4% Senior Notes with the proceeds from
certain equity offerings. In the event of a change of control, as defined in the indenture, we will be required to make an offer to repurchase the 73/4% Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.

7% Senior Notes. In March 2007, we issued $500 million of 7% Senior Notes due 2017 (the 7% Senior Notes) at par. We may redeem all or part of
the 7% Senior Notes on or after March 15, 2012 at specified redemption prices and prior to such date at a make-whole redemption price. In addition, prior to March 15, 2010 we may, at our option, redeem up to 35% of the 7%
Senior Notes with the proceeds from certain equity offerings. In the event of a change of control, as defined in the indenture, we will be required to make an offer to repurchase the 7% Senior Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase.

The 7% Senior Notes and 73/4% Senior Notes are our general unsecured, senior obligations. The 7% Senior Notes and 73/4% Senior Notes are jointly and severally guaranteed on a senior unsecured basis by certain of our existing domestic
subsidiaries. In the future, the guarantees may be released or terminated under certain circumstances. The 7% Senior Notes and 73/4% Senior Notes rank senior in right of payment to all of our existing and future subordinated indebtedness; pari passu in right of payment with any of our existing and future unsecured indebtedness that is not by its terms
subordinated to the 7% Senior Notes and 73/4% Senior Notes; effectively junior to our existing and future secured
indebtedness, including indebtedness under our senior revolving credit facility, to the extent of our assets constituting collateral securing that indebtedness; and effectively subordinate to all existing and future indebtedness and other
liabilities (other than indebtedness and liabilities owed to us) of our non-guarantor subsidiaries.

The indentures governing the 7% Senior Notes and 73/4% Senior Notes contain
covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to incur additional debt; make certain investments or pay dividends or distributions on our capital stock or purchase or redeem or retire capital
stock; sell assets, including capital stock of our restricted subsidiaries; restrict dividends or other payments by restricted subsidiaries; create liens that secure debt; enter into transactions with affiliates; and merge or consolidate with
another company.

Amended Credit Agreement.On May 31, 2007, we entered into the Amended Credit Agreement. The Amended Credit
Agreement currently has a borrowing base and commitments of $970 million, each of which will be redetermined on an annual basis, with PXP and the lenders each having the right to one annual interim unscheduled redetermination, and may be adjusted
based on PXPs oil and gas properties, reserves, other indebtedness and other relevant factors. The Amended Credit Agreement also contains a $150 million sub-limit on letters of credit. The Amended Credit Agreement matures on
April 23, 2012. Collateral consists of 100% of the equity interests of our domestic subsidiaries, 65% of the equity interests of our foreign subsidiaries and mortgages covering at least 75% of the total present value of our domestic oil
and gas properties. At September 30, 2007, there was $480 million outstanding under the Amended Credit Agreement.



30



---

##### Index to Financial Statements

The Amended Credit Agreement contains negative covenants that limit our ability, as well as the ability of our
restricted subsidiaries to, among other things, 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 gas imbalance or
take-or-pay 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 1.00.

In connection with the proposed merger with Pogo, Plains has received commitments from several financial institutions to underwrite a new credit facility that will
amend and restate its existing credit facility and will be used in part to fund the merger consideration and to provide additional liquidity. The aggregate commitment of the lenders is $2.9 billion. The new credit facility will provide for an
initial borrowing base of $2.9 billion that will be adjusted on an interim basis thereafter based on our oil and gas properties, reserves, other indebtedness and other relevant factors. The new credit facility will also include a $250 million
sub-limit on letters of credit. We will secure borrowings under the new credit facility, with the equity of certain of our domestic and foreign subsidiaries, and give mortgages covering at least 75% of the total present value of certain of our
domestic oil and gas properties. The new credit facility will be subject to substantially all the same terms, including acceleration provisions, as are provided for in our existing credit facility.

At September 30, 2007, we had $7.7 million in letters of credit outstanding under the Amended Credit Agreement. At that date we were in compliance with the
covenants contained in the Amended Credit Agreement and could have borrowed the full amount available under the Amended Credit Agreement. The effective interest rate on our borrowings under the Amended Credit Agreement was 6.7% at September 30,
2007.

Cash Flows



|                            |  |                                |          |   |      |   |        |  
|--------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------ | -
|                            |  | Nine MonthsEnded September 30, |         
|                            |  | 2007                           |          |   | 2006 |  
|                            |  | (in millions)                  |         
|Cash provided by (used in): |  |                                |          |   |      |   |        |  
|Operating activities        |  | $                              | 285.8    |   |      | $ | 620.1  |  
|Investing activities        |  |                                | (1,565.9 | ) |      |   | 318.0  |  
|Financing activities        |  |                                | 1,283.8  |   |      |   | (397.4 | )

Net cash provided by operating activities was $285.8 million in 2007 compared to $620.1 million in 2006. The
decrease in net cash provided by operating activities in 2007 is primarily a result of (i) income tax payments of $94.2 million in 2007 primarily related to the gain recognized in connection with the 2006 property sales, (ii) lower
operating income primarily related to the 2006 property sales, lower oil prices, and increased operating expenses and (iii) the $37.9 million merger termination gain, net of certain merger related costs, received in 2006. As discussed below,
certain of our derivative cash payments are classified as financing or investing activities.

Net cash used in investing activities was $1.6 billion
in 2007 primarily reflecting the purchase of the Piceance Basin properties of $975.4 million, additions to oil and gas properties of $476.3 million and derivative settlements of $74.8 million. Net cash provided by investing activities was
$318.0 million in 2006 primarily reflecting the $850.4 million proceeds, net of related costs and expenses, from the sale of oil and gas properties to Occidental, partially offset by additions to oil and gas properties of
$456.8 million and derivative settlements of $68.2 million. Derivative settlements related to derivatives that are not accounted for as hedges and do not contain a significant financing element are reflected as investing activities.

Net cash provided by financing activities in 2007 was $1.3 billion, primarily reflecting $1.3
billion of net borrowings, including $1.1 billion from the issuance of the 7% and 73/4% senior notes partially offset by
$47.5 million for treasury stock purchases. Net cash used in financing activities in 2006 was $397.4 million, primarily reflecting $272.0 million in net repayments under our revolving credit facilities, the payment of $100.8 million
to purchase treasury stock and the payment of $28.6 million in financing derivative settlements. In 2006, certain of our derivatives were deemed to contain a significant financing element and cash settlements with respect to such derivatives
were required to be reflected as financing activities.



31



---

##### Index to Financial Statements

Stock Repurchase Program

Our Board of Directors has authorized the repurchase of up to $500 million 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. We expect that the funds for these purchases will come primarily from cash flow in excess of capital investments. Since the inception of the repurchase program, we have made purchases
totaling approximately $342 million and may expend an additional $158 million under the program.

Critical Accounting Policies and Factors that
May Affect Future Results

Based on the accounting policies that we have in place, certain factors may impact our future financial results.
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, 2006.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which is effective for fiscal years beginning after November 15, 2007
and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We do not expect this pronouncement to have a significant impact on our
consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to
measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. 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 and exploration for oil and gas and in estimating reserves;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------



| |  |  | unexpected difficulties in integrating our operations as a result of any significant acquisitions, including the proposed acquisition of Pogo Producing Company;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



32



---

##### Index to Financial Statements

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



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



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



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



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

All forward-looking statements in this report are made as of the date hereof, and you should not place undue 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, 2006 for additional discussions of risks and uncertainties.



33



---

##### 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. If a derivative is designated as a cash flow hedge and
qualifies for hedge accounting, any unrealized gain or loss is deferred in accumulated Other Comprehensive Income (OCI), a component of Stockholders Equity, until the hedged oil and gas production is sold. Realized gains and losses
on derivative instruments that are designated as a hedge and qualify for hedge accounting are generally included in oil and gas revenues in the period the hedged volumes are sold. Gains and losses deferred in OCI related to cash flow hedges for
which hedge accounting has been discontinued remain in OCI until the related product has been delivered.

See Note 3 to the Consolidated Financial
Statements  Derivative Instruments and Hedging Activities for a discussion of our derivative activities.

At September 30,
2007 we had the following open commodity derivative positions, none of which were designated as hedging instruments:



|                              |  |                |  |              |  |                     |  |      
|----------------------------- |  | -------------- |  | ------------ |  | ------------------- |  | -----
|Period                        |  | InstrumentType |  | DailyVolumes |  | AveragePrice        |  | Index
|Sales of Crude Oil Production |  |                |  |              |  |                     |  |      
|2007                          |  |                |  |              |  |                     |  |      
|Oct - Dec                     |  | Put options    |  | 50,000 Bbls  |  | $55.00 Strike price |  | WTI  
|2008                          |  |                |  |              |  |                     |  |      
|Jan - Dec                     |  | Put options    |  | 42,000 Bbls  |  | $55.00 Strike price |  | WTI  
|2009                          |  |                |  |              |  |                     |  |      
|Jan - Dec                     |  | Put options    |  | 32,500 Bbls  |  | $55.00 Strike price |  | WTI  

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



|                      |  |            |                |               |   |                |   |  |   |     
|--------------------- |  | ---------- | -------------- | ------------- | - | -------------- | - |  | - | ----
|                      |  | Fair Value |                | Effect of 10%
|                      |  |            | Price Increase |               |   | Price Decrease
|Crude oil put options |  | $          | 17.2           |               | $ | (9.4           | ) |  | $ | 20.2

The fair value of the commodity derivative contracts is estimated based on quoted prices from independent
reporting services compared to the contract price of the agreement, and approximate the gain or loss that would have been realized if the contracts had been closed out at period end. The fair value does not include the deferred premiums on the
purchased put options. All positions offset physical positions exposed to the cash market. None of these offsetting physical positions are included in the above table. Price risk sensitivities were calculated by assuming an across-the-board 10%
increase or decrease in price regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. In the event of an actual 10% change in prompt month prices, the fair value of our
derivative portfolio would typically change less than that shown in the table due to lower volatility in out-month prices.

The six financial
institutions that are contract counterparties for our derivative commodity contracts all have Standard & Poors ratings of A or better and all such financial institutions are participating lenders in our revolving credit facility. At
September 30, 2007 we were in a net liability position with all such 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.



34



---

##### 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 September 30, 2007 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 September 30, 2007 that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



35



---

##### Index to Financial Statements

PART II. OTHER INFORMATION

ITEM 6  Exhibits



|            |   |  |                                                                                                                                                                                                                                    
|----------- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  | Description                                                                                                                                                                                                                        
|2.1         |   |  | Agreement and Plan of Merger, dated July 17, 2007, by and among Plains Exploration and Production Company, PXP Acquisition LLC and Pogo Producing Company (incorporated by reference to
Exhibit 2.1 to the July 18, 2007 Form 8-K).
|            |  
|10.1        | * |  | Amended and Restated Plains Exploration and Production Company 2004 Stock Incentive Plan.                                                                                                                                          
|            |  
|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, 2, 3, 4 and 5 are not
applicable and have been omitted.



36



---

##### 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: |  | November 1, 2007 |  |                                         |  | By: |  | /s/ Winston M. Talbert                                                            
|      |  |                  |  |                                         |  |     |  | Winston M. Talbert                                                                
|      |  |                  |  |                                         |  |     |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)



37



---

##### Index to Financial Statements

EXHIBIT INDEX



|            |   |  |                                                                                                                                                                                                                                    
|----------- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  | Description                                                                                                                                                                                                                        
|2.1         |   |  | Agreement and Plan of Merger, dated July 17, 2007, by and among Plains Exploration and Production Company, PXP Acquisition LLC and Pogo Producing Company (incorporated by
reference to Exhibit 2.1 to the July 18, 2007 Form 8-K).
|            |  
|10.1        | * |  | Amended and Restated Plains Exploration and Production Company 2004 Stock Incentive Plan.                                                                                                                                          
|            |  
|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
|- | --------------



38