YPF S.A. — Interim / Quarterly Report 2005

Dec 2, 2005

COVER 1	YPF Holdings, Inc. and Subsidiaries (A Wholly Owned Subsidiary of YPF S.A.) Consolidated Financial Statements for the Three and Six-Month Periods Ended June 30, 2005, and Independent Accountants’ Review Report

YPF HOLDINGS, INC. AND SUBSIDIARIES

(A Wholly Owned Subsidiary of YPF S.A.)

TABLE OF CONTENTS

Page

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT 1

CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE-MONTH
AND SIX-MONTH PERIODS ENDED JUNE 30, 2005 (UNAUDITED):

Consolidated Balance Sheet 2–3

Consolidated Statements of Operations 4

Consolidated Statement of Cash Flows 5

Notes to Consolidated Financial Statements 6–15

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Board of Directors of
YPF Holdings, Inc. and Subsidiaries:

We have reviewed the accompanying consolidated balance sheet of YPF Holdings, Inc. and subsidiaries (the “Company”), a wholly owned subsidiary of YPF S.A., as of June 30, 2005, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2005 and cash flows for the six-month period ended June 30, 2005, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the Company’s management.

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

October 7, 2005

YPF HOLDINGS, INC. AND SUBSIDIARIES

(A Wholly Owned Subsidiary of YPF S.A.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIX-MONTH PERIOD ENDED JUNE 30, 2005 (UNAUDITED)
(See Independent Accountants’ Review Report)

1. ORGANIZATION

YPF Holdings, Inc. (“Holdings” or the “Company”), was incorporated in Delaware, U.S.A., on July 31, 1996, and holds investments in certain subsidiaries. The Company is engaged in oil and gas exploration activities in the Gulf of Mexico.

YPF International Ltd. owned 100% of the Company’s shares. On December 1, 2001, 100% of the shares of the Company were sold by YPF International Ltd. to YPF S.A. (“YPF”). YPF S.A. is an approximately 99% owned subsidiary of Repsol YPF.

The consolidated financial statements as of and for the three-month and six-month period ended June 30, 2005, include the following wholly owned subsidiaries (collectively referred to hereafter as “Subsidiaries”) Tierra Solutions Inc. (“Tierra”), Maxus Energy Corporation (“Maxus”), RYTTSA USA INC.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The consolidated financial statements of the Company include the financial statements of the Company and its subsidiaries. All significant intercompany transactions have been eliminated.

Interim Financial Statements—The financial statements as of and for the three-month and six-month periods ended June 30, 2005, have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The interim financial statements as of and for the three-month and six-month periods ended June 30, 2005, should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2004.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from these estimates.

Cash and Cash Equivalents—Short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash are considered cash equivalents.

Fair Value of Financial Instruments—Financial instruments are composed of accounts receivable, notes receivable, and accounts payable. The carrying value of such financial instruments approximates their fair value.

Oil and Gas Producing Activities—The Company follows the “successful efforts” method of accounting for its oil and gas exploration and production operations. Accordingly, exploratory costs, excluding the costs of exploratory wells, are charged to expense as incurred. Costs of drilling exploratory wells, including stratigraphic test wells, have been capitalized pending determination as to whether the wells have found proved reserves, which justify commercial development.

The capitalized costs related to producing activities, including tangible and intangible costs, have been depreciated on the unit-of-production basis by applying the ratio of produced oil and gas to estimated recoverable proved oil and gas reserves. The Company’s proved oil and gas properties include overriding royalty interest.

The Company reviews its proved oil and gas properties for impairment when changes in circumstances indicate that the carrying amount of such properties may not be recoverable.

The capitalized costs related to acquisitions of properties with unproved reserves are reviewed periodically by management to insure the carrying value is recoverable. If necessary a valuation allowance is provided, by a charge against earnings, to reflect the impairment of unproved property.

Other Property, Plant and Equipment—The Company’s other property, plant and equipment consisting of software, furniture, fixtures and installations has been depreciated using the straight-line method, with depreciation rates based on the estimated useful life of each class of property. Normal maintenance and repairs to all other fixed assets have been charged to expense as incurred.

Restricted Cash—The restricted cash balance represents cash used to pay workers compensation claims for one of the Company’s subsidiaries.

Income Taxes—Income taxes are recognized for (a) the amount of taxes payable or refundable for the current year, and (b) deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax assets and liabilities are measured based upon enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Significant deferred tax assets and liabilities are related primarily to net operating loss carryforwards, postretirement benefit costs, and litigation and environmental costs. A full valuation allowance has been provided for the net deferred tax assets because their future realization is not currently deemed more likely than not by management.

Revenue Recognition—Net revenues are recorded based on the Company’s share of overriding royalties recorded on the accrual basis.

1. RELATED PARTY TRANSACTIONS

The Company performs geological and geophysical exploration activities and provides payroll and financial services for affiliated companies. As of June 30, 2005, the Company had accounts receivable from those affiliated companies related to these services of $8.4 million, net of an allowance for uncollectible accounts of $6.5 million.

At June 30, 2005, the Company had $2.6 million accounts payable to Repsol YPF.

As of June 30, 2005, the Company has a promissory note receivable from Repsol International Finance B.V. of $13.6 million. The maturity date is December 31, 2005. The note accrues interest at a variable interest rate. The average interest rate for the six-month period was 2.98%.

On August 1, 2005 the Company entered into a credit agreement with YPF S.A. allowing it to borrow up to $35 million as needed until January 1, 2006. The interest rate is LIBOR +.40% per annum. Amounts borrowed under this agreement are payable on demand.

1. EMPLOYEE BENEFIT PLANS

Pensions—The Company has a number of trustee noncontributory pension plans covering substantially all current and former full-time employees. The Company’s funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements under governmental regulations, plus such additional amounts as management may determine to be appropriate. The benefits related to the plans are based on years of service and compensation earned during years of employment. The Company also has a noncontributory supplemental retirement plan for executive officers and selected key employees. Key information of these plans as of the date of the last actuarial report is as follows (in thousands):

Other Postretirement and Postemployment Benefits—The Company provides certain health care and life insurance benefits for eligible retired employees and certain insurance and other postemployment benefits for eligible individuals whose employment is terminated by the Company prior to their normal retirement. The Company accrues the estimated cost of retiree benefit payments, other than pensions, during employees’ active service periods. Employees become eligible for these benefits if they meet minimum age and service requirements. The Company accounts for benefits provided after employment but before retirement be accruing the estimated cost of postemployment benefits when the minimum service period is met, payment of the benefit is probable and the amount of the benefit can be reasonably estimated. The Company’s policy is to fund other postretirement and postemployment benefits as claims are incurred. Key information of these plans as of the date of the last actuarial report is as follows (in thousands):

1. COMMITMENTS AND CONTINGENCIES

Laws and regulations relating to health and environmental quality in the United States affect nearly all of the operations of the Company. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances remedial obligations.

The Company believes that its policies and procedures in the area of pollution control, product safety and occupational health are adequate to prevent unreasonable risk of environmental and other damage, and of resulting financial liability, in connection with its business. Some risk of environmental and other damage is, however, inherent in particular operations of the Company and, as discussed below, Maxus Energy Corporation (“Maxus”) and Tierra Solutions, Inc. (“Tierra”) have certain potential liabilities associated with operations of Maxus’ former chemical subsidiary. The Company cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could in the future require material expenditures by the Company for the installation and operation of systems and equipment for remedial measures, possible dredging requirements and in certain other respects. Also, certain laws allow for recovery of natural resource damages from responsible parties and ordering the implementation of interim remedies to abate an imminent and substantial endangerment to the environment. Potential expenditures for any such actions cannot be reasonably estimated.

In connection with the sale of Maxus’ former chemical subsidiary, Diamond Shamrock Chemicals Company (“Chemicals”), to Occidental Petroleum Corporation (together with its subsidiary Occidental Chemical Corporation, “Occidental”) in 1986, Maxus agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business or activities of Chemicals prior to the September 4, 1986 closing date (the “Closing Date”), including certain environmental liabilities relating to certain chemical plants and waste disposal sites used by Chemicals prior to the Closing Date.

In addition, under the agreement pursuant to which Maxus sold Chemicals to Occidental, Maxus is obligated to indemnify Chemicals and Occidental for 50% of certain environmental costs incurred on projects involving remedial activities relating to chemical plant sites or other property used in the conduct of the business of Chemicals as of the Closing Date and for any period of time following the Closing Date which relate to, result from or arise out of conditions, events or circumstances discovered by Chemicals and as to which Chemicals provided written notice prior to September 4, 1996, irrespective of when Chemicals incurs and gives notice of such costs, with Maxus’ aggregate exposure for this cost sharing being limited to $75 million. The total expended by the Company under this cost sharing arrangement was approximately $72.9 million as of June 30, 2005. The remaining portion of this cost sharing arrangement ($2.1 million as of June 30, 2005) has been reserved.

Tierra has agreed to assume essentially all of Maxus’ aforesaid indemnity obligations to Occidental in respect of Chemicals.

At June 30, 2005, reserves for the environmental contingencies discussed herein totaled approximately $92.9 million. Management believes it has adequately reserved for all environmental contingencies, which are probable and can be reasonably estimated; however, changes in circumstances could result in changes, including additions, to such reserves in the future.

In the following discussion concerning plant sites and third party sites, references to the Company include, as appropriate and solely for ease of reference, references to Maxus and Tierra. As indicated above, Tierra is also a subsidiary of the Company and has assumed certain of Maxus’ obligations.

The major components of reserves as of June 30, 2005, are as follows (in thousands):

Newark, New Jersey—A consent decree, previously agreed upon by the U.S. Environmental Protection Agency (the “EPA”), the New Jersey Department of Environmental Protection and Energy (the “DEP”) and Occidental, as successor to Chemicals, was entered in 1990 by the United States District Court of New Jersey and requires implementation of a remedial action plan at Chemicals’ former Newark, New Jersey agricultural chemicals plant. In 1998, the EPA approved the remedial design. Tierra believes the construction of the approved remedy has been completed and has submitted to the EPA its report in connection with the required optimization phase, which included testing and related operations. Tierra is awaiting the EPA’s response to such report so that it may move beyond the optimization phase. This work was supervised and paid for by Tierra pursuant to the above described indemnification obligation to Occidental. The Company has fully reserved the estimated costs required to conduct ongoing operation and maintenance of such remedy (at an average cost of approximately $1 million annually) for 10 years from and after January 1, 2005.

Passaic River, New Jersey—Studies have indicated that sediments of the Newark Bay watershed, including the Passaic River adjacent to the former Newark plant, are contaminated with hazardous chemicals from many sources. These studies suggest that the older and more contaminated sediments located adjacent to the former Newark plant generally are buried under more recent sediment deposits. Maxus, on behalf of Occidental, negotiated an agreement with the EPA under which Tierra is conducting further testing and studies to characterize contaminated sediment and biota in a six-mile portion of the Passaic River near the plant site. The stability of the sediments in the entire six-mile portion of the Passaic River study area is also being examined as a part of Tierra’s studies. The Company currently expects the testing and studies to be completed in 2005 and cost approximately $3 million after June 30, 2005, which amount has been fully reserved. Maxus and Tierra have been conducting similar studies under their own auspices for several years. In addition, the EPA and other agencies are addressing for the lower Passaic River in a cooperative effort designated as the Lower Passaic River Restoration Project (the “PRRP”). Tierra has agreed, along with approximately 30 other entities, to participate in a remedial investigation and feasibility study proposed in connection with the PRRP. Twelve additional parties have agreed to join in helping fund the EPA’s activities in this regard, and negotiations are underway to amend the order regarding this study to include a total of 43 participants. After such amendment is finalized, Tierra’s estimated share of the cost of this remedial investigation and feasibility study is $250,000 over the next three years, which amount has been fully reserved. As of June 30, 2005, there is a total of $10.9 million reserved in connection with continuing such other studies and related matters related to the Passaic River and the Newark Bay. (See discussion of the DEP’s Directive No. 1 and the AOC below). Studies are ongoing with respect to the Passaic River and the Newark Bay watershed. Until these studies are completed and evaluated, the Company cannot estimate what additional costs, if any, will be required to be incurred. However, it is possible that additional work, including interim remedial measures, may be ordered with respect to the Passaic River and/or the Newark Bay.

In 2003, the DEP issued its Directive No. 1 for Natural Resource Injury Assessment and Interim Compensatory Restoration of Natural Resources for the Lower Passaic River (“Directive No. 1”). Directive No. 1 was served on approximately 66 entities, including Occidental and Maxus and certain of their respective related entities, and seeks to address natural resource damages allegedly resulting from almost 200 years of historic industrial and commercial development of the lower 17  miles of the Passaic River and a part of its watershed. Directive No. 1 asserts that the named entities are jointly and severally liable for the alleged natural resource damages without regard to fault. The DEP has asserted jurisdiction in this matter even though all or part of the lower Passaic River has been designated as a Superfund site and is a subject of the PRRP, a Congressional urban rivers restoration initiative designed to address urban rivers such as the Passaic through a joint federal, state, local and private sector cooperative effort. Directive No. 1 calls for the following actions: interim compensatory restoration, injury identification, injury quantification and value determination. Maxus and Tierra have filed a response to Directive No. 1 on behalf of themselves and Occidental, as successor to Chemicals, which sets forth both how these parties are complying with Directive No. 1 and certain defenses thereto. Settlement discussions between the DEP and the named entities have been held; however, no agreement has been reached or is assured.

In February 2004, the EPA and Occidental entered into an administrative order on consent (the “AOC”) pursuant to which Tierra (on behalf of Occidental) has agreed to conduct testing and studies to characterize contaminated sediment and biota in the Newark Bay. Tierra presented a proposed initial work plan, a study that includes sampling in Newark Bay, to the EPA. The EPA has commented on the proposed work plan, and Tierra anticipates that the plan, with any modifications required by the EPA, will be approved in 2005. If approved, Tierra currently plans to begin this study in 2005 at a currently estimated cost of $4.5 million. Such amount has been fully reserved; however, the reserved amount may be adjusted depending upon the details of the work plan that is approved by the EPA. After the data has been collected in the initial study, a determination will be made as to what additional work, if any, might be required. The Company has learned that in a lawsuit between several environmental groups and the U.S. Army Corps of Engineers (the “Army Corps”), the U.S. District Court for Southern District of New York determined that the Army Corps erred in determining not to prepare a supplemental environmental impact statement the plaintiffs allege is required in connection with a dredging project proposed for the New York – New Jersey Harbor. Although neither the Company nor any of its subsidiaries is a party to this lawsuit, it could impact the timing, cost and approval of the proposed initial work plan.

Hudson County, New Jersey—Until 1972, Chemicals operated a chromite ore processing plant at Kearny, New Jersey (the “Kearny Plant”). According to the DEP, wastes from these ore processing operations were used as fill material at a number of sites in and near Hudson County. The DEP and Occidental, as successor to Chemicals, signed an administrative consent order with the DEP in 1990 for investigation and remediation work at certain chromite ore residue sites in Kearny and Secaucus, New Jersey. Tierra, on behalf of Occidental, is presently performing the work, and Tierra is funding Occidental’s share of the cost of investigation and remediation of these sites. Tierra, on behalf of Occidental, is providing financial assurance in the amount of $20 million for performance of the work. This financial assurance may be reduced with the approval of the DEP following any annual cost review. While Tierra has participated in the cost of studies and is implementing interim remedial actions and conducting remedial investigations, the ultimate cost of remediation is uncertain. Tierra submitted its remedial investigation reports to the DEP in late 2001, and the DEP continues to review these reports. The results of the DEP’s review of these reports could increase the cost of any further remediation that may be required. The Company has reserved its best estimate of the remaining cost to perform the investigations and remedial work as being approximately $25.8 million as of June 30, 2005.

On May 3, 2005, the DEP took two actions in connection with the chrome sites in Hudson and Essex Counties. First, the DEP issued a directive to Maxus, Occidental and two other chromium manufacturers (the “Respondents”) directing them to arrange for the cleanup of chromite ore residue at three sites in Jersey City and the conduct of a study by paying the DEP a total of $19.55 million. While the Company believes that Maxus is improperly named and there is little or no evidence that Chemicals’ chromite ore residue was sent to any of these sites, the DEP claims the Respondents are jointly and severally liable without regard to fault. Second, the State filed a lawsuit against Occidental and two other entities in state court in Hudson County seeking, among other things, cleanup of various sites where chromite ore residue is allegedly located, recovery of past costs incurred by the State at such sites (including in excess of $2.3 million dollars allegedly spent for investigations and studies) and, with respect to certain costs at 18 sites, treble damages. The DEP claims that the defendants are jointly and severally liable, without regard to fault, for much of the damages alleged. The parties have engaged in preliminary discussion regarding possible settlement; however, there is no assurance that these discussions will be successful.

In addition, in June 2004, the DEP expressed a desire that a sediments testing program be conducted on a portion of the Hackensack River near the former Kearny Plant. Tierra, on behalf of Occidental, and other parties are engaged in discussions with the DEP regarding this issue. The Governor of New Jersey issued an Executive Order requiring state agencies to provide specific justification for any state requirements more stringent than federal requirements. In 1998, the DEP proposed new soil action levels for chromium. While the proposal remains incomplete in certain regards, the DEP is currently reviewing the proposed action levels.

Painesville, Ohio—From about 1912 through 1976, Chemicals operated manufacturing facilities in Painesville, Ohio (the “Painesville Works”). The operations over the years involved several discrete but contiguous plant sites over an area of about 1,300 acres. The primary area of concern historically has been Chemicals’ former chromite ore processing plant (the “Chrome Plant”). For many years, the site of the Chrome Plant has been under the administrative control of the EPA pursuant to an administrative consent order under which Chemicals is required to maintain a clay cap over the Chrome Plant site and to conduct certain ground water and surface water monitoring. Certain other areas have previously been clay-capped, and one specific site, which was a waste disposal site from the mid-1960s until the 1970s, has been encapsulated and is being controlled and monitored. In 1995, the Ohio Environmental Protection Agency (the “OEPA”) issued its Director’s Final Findings and Order (the “Director’s Order”) by consent ordering that a remedial investigation and feasibility study (the “RIFS”) be conducted at the former Painesville Works area. Tierra has agreed to participate in the RIFS as required by the Director’s Order. Tierra submitted the remedial investigation report to the OEPA, which report was finalized in 2003. Tierra will submit required feasibility reports separately. As of June 30, 2005, it is estimated that the remaining cost of performing the RIFS will be approximately $0.5 million. In addition, , the OEPA has approved certain work, including the remediation of the site of a former cement plant, remediation of a former aluminum smelting plant and work associated with the development plans discussed below (the “Remediation Work”). This has begun, and Tierra estimates its share of the costs associated with these projects to be approximately $8.8 million. As the OEPA approves additional projects for the site of the former Painesville Works, additional amounts may need to be reserved. Over ten years ago, the former Painesville Works site was proposed for listing on the National Priority List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”); however, the EPA has stated that the site will not be listed so long as it is satisfactorily addressed pursuant to the Director’s Order and OEPA’s programs. The site has not been listed. The Company has reserved a total of $9.4 million as of June 30, 2005 for its estimated share of the cost to perform the RIFS, the Remediation Work and other operation and maintenance activities at this site. The scope and nature of any further investigation or remediation that may be required cannot be determined at this time; however, as the RIFS progresses, the Company will continuously assess the condition of the Painesville Works site and make any changes, including additions, to its reserve as may be required. Tierra has entered into an agreement with a developer for the possible development and use of all or portions of this site. While the developer is proceeding with its development plans, there can be no assurance that this site will be successfully developed or that any productive use can be made of all or a portion of this site.

Third Party Sites—Chemicals has also been designated as a potentially responsible party (“PRP”) by the EPA under CERCLA with respect to a number of third party sites where hazardous substances from Chemicals’ plant operations allegedly were disposed or have come to be located. Numerous PRPs have been named at substantially all of these sites. At several of these, Chemicals has no known exposure. Although PRPs are typically jointly and severally liable for the cost of investigations, cleanups and other response costs, each has the right of contribution from other PRPs and, as a practical matter, cost sharing by PRPs is usually effected by agreement among them. At a number of these sites, the ultimate response cost and Chemicals’ share of such costs cannot be estimated at this time. At June 30, 2005, the Company has reserved approximately $3.3 million in connection with its estimated share of costs related to these sites.

The Port of Houston Authority (the “Port”) sued a number of parties, including Occidental (as successor to Chemicals) and Maxus, alleging in excess of $25 million in damages to its property, plus the need for remediation at certain of its property, as a result of contamination allegedly emanating from a facility adjoining Greens Bayou formerly owned by Chemicals and at which DDT and certain other chemicals were manufactured. Tierra is handling this matter on behalf of Occidental. The Port’s claims were settled for an initial payment of $30 million and certain other undertakings, including an agreement to remediate various properties in the vicinity of the Greens Bayou facility, an agreement by another defendant to purchase a tract of land for up to $5 million, and an agreement to indemnify the Port up to an aggregate of $20 million in respect of certain matters. Based on current estimates, the cost of such remediation is not expected to exceed a total of $44 million. Pursuant to a cost sharing agreement among the defendants, Tierra (on behalf of Occidental) contributed $6.3 million toward the settlement, subject to the defendants’ agreement to arbitrate their respective obligations in connection with the settlement. The hearing in this arbitration was completed in October 2004, and the arbitral tribunal issued its final award on or about January 7, 2005, after having issued an initial award in November 2004. The award, if it stands, would require Tierra (on behalf of Occidental) to pay the other defendants a total of approximately $26 million, and possibly interest (the “Current Payment Amount”), and bear approximately 70% of the costs of the aforesaid remediation. Maxus and Tierra paid approximately $28 million into a trust account in December 2004, which amount is to be made available to pay the Current Payment Amount if required. On February 7, 2005 Maxus and Tierra requested pursuant to the arbitration agreement that a second arbitration panel review the award. Maxus and Tierra have also challenged the award in a court proceeding in Houston, Texas. There is no assurance of success of the review. As of June 30, 2005, the Company accrued a total of $31.2 million related to this matter. The defendants have reached tentative agreement to settle this matter; but, settlement cannot be assured until the settlement has received the necessary approvals and has been reduced to a written agreement.

Legal Proceedings—In 1998, a subsidiary of Occidental filed a lawsuit in state court in Ohio seeking a declaration of the parties’ rights with respect to obligations for certain costs allegedly related to Chemicals’ Ashtabula, Ohio facility, as well as certain other costs. Both Maxus and Occidental filed motions for partial summary judgment. In 2002, the court granted Occidental’s and denied Maxus’ respective motions for partial summary judgment. In late 2004, the appellate court reversed the ruling of the trial court in certain respects and remanded the case for trial. The parties have commenced settlement discussions, although there can be no assurance that a settlement will be effected.

In 2001, the Texas State Comptroller assessed Maxus Corporate Company, a former subsidiary of the Company that was merged into Maxus in December 1998, approximately $1.4 million in Texas state sales taxes for the period of September 1, 1995 through December 31, 1998, plus penalty and interest. In August 2004, the administrative law judge issued a decision affirming approximately $1 million of such assessment, plus penalty and interest. The Company believes the decision is erroneous, has paid the revised tax assessment, penalty and interest (a total of approximately $1.8 million) under protest. Maxus filed suit in Texas state court in December 2004 challenging the administrative decision. The matter will be reviewed by a trial de novo in the court action.

In 2002, Occidental sued Maxus and Tierra in state court in Dallas, Texas seeking a declaration that Maxus and Tierra have the obligation under the agreement pursuant to which Maxus sold Chemicals to Occidental to defend and indemnify Occidental from and against certain historical obligations of Chemicals, including claims related to “Agent Orange” and vinyl chloride monomer (VCM), notwithstanding the fact that (a) said agreement contains a 12 year cut-off for defense and indemnity obligations with respect to most litigation, and (b) Tierra is not a party to said agreement. This matter currently is set for trial in the first quarter of 2006. In developments related to the “Agent Orange” litigation that may be impacted by this lawsuit, the U.S. district court has granted the defendants’ motions for summary judgment, and the plaintiffs’ have appealed the judgments to the Second Circuit Court of Appeals.

In May 2003, the U.S. Internal Revenue Service (“IRS”) assessed Maxus (for 1994, 1995 and 1996) and the Company (for 1997) an aggregate of approximately $24.3 million in additional income taxes. Maxus and the Company believe that most of these assessments are without substantial merit, and they have protested this assessment. On January 30, 2004, the IRS assessed the Company an additional $7.7 million in withholding taxes the IRS contends should have been withheld from an interest payment to YPF International Ltd. in 1997. The Company believes this assessment is without substantial merit and has challenged same. The Company has reached tentative agreement to settle all of these matters, with no net payment expected to be due from the Company. However, no assurance can be given that a settlement will be effectuated until it as been finally documented and approved by the IRS.

Maxus has agreed to defend Occidental, as successor to Chemicals, in respect of the Malone Services Company Superfund Site in Galveston County, Texas. This site is a former waste disposal site where Chemicals is alleged to have sent waste products prior to September 1986. It is the subject of enforcement activities by the EPA and a lawsuit for damages brought by certain private parties. With respect to the EPA enforcement activities, although Occidental is one of many PRPs that have been identified and have agreed to an Administrative Order on Consent, Tierra (which is handling this matter on behalf of Maxus) presently believes the degree of Occidental’s alleged involvement as successor to Chemicals is relatively small. Occidental currently is not a defendant in the private lawsuit. Maxus is named as a defendant in this lawsuit; however, it believes it is improperly named and has requested that it be dismissed.

In March 2005, Maxus agreed to defend Occidental, as successor to Chemicals, in respect of an action seeking the contribution of costs incurred in connection with the remediation of the Turtle Bayou waste disposal site in Liberty County, Texas. The plaintiffs alleged that certain wastes attributable to Chemicals found their way to the Turtle Bayou site. Trial in the liability phase of this matter was held in May 2005, and on August 18, 2005 the trial judge informed the parties that he will enter a decision against all defendants. After the judge enters his decision, trial will be scheduled to determine and allocate responsibility for damages.

In June 2005, the EPA designated Maxus as PRP at the Milwaukee Solvay Coke & Gas Site in Milwaukee, Wisconsin. The basis for this designation is Maxus’ alleged status as the successor to Pickands Mather & Co. and Milwaukee Solvay Coke Co., companies that the EPA has asserted are former owners or operators of such site. Maxus is assessing this matter; but, presently lacks sufficient knowledge to determine the extent of its liability, if any, at or in respect of this site.

In June 2005, the Texas General Land Office made a claim against Midgard Energy Company (“Midgard”), a subsidiary of Maxus, for approximately $658,000 in connection with allegedly unpaid royalties due on production dating back to 1981 and related penalty and interest charges. Midgard is attempting to resolve this matter.

The Company, including its subsidiaries, is a party to various other lawsuits, the outcomes of which are not expected to have a material adverse affect on the Company’s financial condition. The Company has established reserves for legal contingencies in situations where a loss is probable and can be reasonably estimated.

The Company has entered into various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. Such contractual, financial and/or performance commitments are not material.

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