##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the Fiscal Year Ended December 31, 2004                                                 
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-33275


Warren Resources, Inc.


(Exact name of registrant as specified in its charter)


|                                                                       |  |                                            
|---------------------------------------------------------------------- |  | -------------------------------------------
|Maryland                                                               |  | 11-3024080                                 
|(State or other jurisdiction of
    incorporation or organization)     |  | (I.R.S. Employer
    Identification Number)
|                                                                      
|489 Fifth Avenue, New York, NY(Address of principal executive offices) |  | 10017(Zip Code)                            

Registrants telephone number, including area code:


(212) 697-9660


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


None


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


Common Stock, $.0001 par value per share


(Title of Class)


þ o


o


o þ














---










DOCUMENTS INCORPORATED BY REFERENCE:




WARREN RESOURCES, INC.


FORM 10-K


TABLE OF CONTENTS


|                                                           |  |                                                                                                                      |  |      |    | 
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                           |  |                                                                                                                      |  | Page |   
|                                                           |  |                                                                                                                      |  |      |   
|PART I                                                    
|Items 1 and 2:                                             |  | Business and Properties                                                                                              |  |      | 4  | 
|Item 3:                                                    |  | Legal Proceedings                                                                                                    |  |      | 27 | 
|Item 4:                                                    |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 28 | 
|                                                          
|PART II                                                   
|Item 5:                                                    |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 28 | 
|Item 6:                                                    |  | Selected Consolidated Financial Data                                                                                 |  |      | 30 | 
|Item 7:                                                    |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 31 | 
|Item 7A:                                                   |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | 42 | 
|Item 8:                                                    |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 56 | 
|Item 9:                                                    |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | 56 | 
|Item 9A:                                                   |  | Controls and Procedures                                                                                              |  |      | 56 | 
|                                                          
|PART III                                                  
|Item 10:                                                   |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | 56 | 
|Item 11:                                                   |  | Executive Compensation                                                                                               |  |      | 56 | 
|Item 12:                                                   |  | Security Ownership of Certain Beneficial
    Owners and Management                                                   |  |      | 57 | 
|Item 13:                                                   |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 57 | 
|Item 14:                                                   |  | Principal Accountant Fees and Services                                                                               |  |      | 57 | 
|PART IV                                                   
|Item 15:                                                   |  | Exhibits, Financial Statement Schedules                                                                              |  |      | 57 | 
|EX-3.1: ARTICLES OF INCORPORATION                         
|EX-4.1: SPECIMEN STOCK CERTIFICATE FOR COMMON STOCK       
|EX-23.1: CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
|EX-23.2: CONSENT OF CBIZ VALUATION GROUP, LLC             
|EX-31.1: CERTIFICATION                                    
|EX-31.2: CERTIFICATION                                    
|EX-32: CERTIFICATIONS                                     


















2



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##### Table of Contents






PART I


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS








| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | our growth strategies;                                                                         
|
| |  | our reserve estimates;                                                                         
|
| |  | our ability to successfully and economically explore for and
    develop oil and gas resources;
|
| |  | anticipated trends in our business;                                                            
|
| |  | our future results of operations;                                                              
|
| |  | our liquidity and ability to finance our exploration and
    development activities;           
|
| |  | market conditions in the oil and gas industry;                                                 
|
| |  | our ability to make and integrate acquisitions; and                                            
|
| |  | the impact of environmental and other governmental regulation.                                 







| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | the failure to obtain sufficient capital resources to fund our
    operations;                                  
|
| |  | an inability to replace our reserves through exploration and
    development activities;                        
|
| |  | unsuccessful drilling activities;                                                                               
|
| |  | a decline in oil or natural gas production or oil or natural gas
    prices;                                    
|
| |  | incorrect estimates of required capital expenditures;                                                           
|
| |  | increases in the cost of drilling, completion and gas gathering
    or other costs of production and operations;
|
| |  | impact of environmental and other governmental regulation;                                                      
|
| |  | hazardous and risky drilling operations; and                                                                    
|
| |  | an inability to meet growth projections.                                                                        

3



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##### Table of Contents












|               |                        
|-------------- | -----------------------
|Items 1 and 2: | Business and Properties

Overview












4



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5



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##### Table of Contents



Business Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exploit Existing Properties Through the Drillbit. We
    intend to increase our proved reserves by drilling numerous
    locations identified on our Rocky Mountain CBM properties and on
    our Wilmington unit. As of December 31, 2004, we have
    identified a total of 1,164 drilling locations, of which we plan
    to participate in the drilling of 100 gross wells during
    2005.                                                                                                                                                                                                                               
|
| |  | Increase Our Working Interest in Future Wells. We plan to
    increase our level of participation in future wells by investing
    more of our own capital to drilling operations in our high
    growth areas. We believe this will enable us to accelerate our
    growth in production, reserves and cash flows.                                                                                                                                                                                                                                                                                                           
|
| |  | Pursue Selective Acquisitions and Joint Ventures. We
    believe we are well positioned, given our asset base and
    technical expertise, to pursue selected acquisitions and attract
    industry joint venture partners. We expect to pursue further
    acquisitions of natural gas and oil properties in areas where we
    have specific technical knowledge and experience. We also plan
    to enter into additional joint ventures to increase our CBM
    acreage and develop our reserves.                                                                                                                         
|
| |  | Reduce Costs Through Economies of Scale and Efficient
    Operations. As we continue to increase our production and
    develop our existing properties, we expect that our unit cost
    structure will benefit from economies of scale. With respect to
    our CBM operations, we anticipate reducing unit costs by greater
    utilization of our existing infrastructure over a larger number
    of wells. We seek to exert more control over costs and timing in
    our exploration, development and production activities through
    our operating activities and relationships with our joint
    venture partners.

Competitive Strengths






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Substantial Rocky Mountain Undeveloped CBM Acreage
    Position. We believe that the Rocky Mountain region is one
    of the few remaining high potential CBM natural gas provinces in
    North America. We have assembled a substantial undeveloped
    acreage position in the Rocky Mountains of 241,244 gross
    (135,925 net) acres containing 1,061 identified drilling
    locations. In the Rocky Mountains, our estimated total net
    proved reserves of 13.9 Bcf are located on less than 1% of
    our net acreage.
|
| |  | Technical Expertise. Since the beginning of our CBM
    operations in 1996, we have gained considerable expertise in
    advanced CBM drilling, completion and re-entry techniques. We
    also have expertise in directional and horizontal drilling
    relating to our waterflood recovery program in the Wilmington
    unit.                                                                                                                                                                                                 
|
| |  | Experienced Management Team. Our management team has
    25 years of experience on average in the oil and gas
    industry, and our technical professionals have 17 years of
    experience on average in oil and gas operations. Our personnel
    have extensive experience in managing large-scale operations in
    each of our areas of concentration. Most members of our senior
    management have been with us since the mid-1990s.                                                                                      
|
| |  | Incentivized Management Ownership. The equity ownership
    of our management team is strongly aligned with that of our
    stockholders. As of March 15, 2005, our 14 directors
    and executive officers beneficially owned 6,491,344 shares
    of our common stock, which includes exercisable options to
    purchase 2,312,285 shares of our common stock.                                                                                                                                                                 

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##### Table of Contents



Areas of Exploration and Development Activities




|             |              |       |       |         |       |         |       |             |  |  |    |     | 
|------------ | ------------ | ----- | ----- | ------- | ----- | ------- | ----- | ----------- |  |  | -- | --- | 
|             |              |       |       |         |       | Planned |      
|             |              | Gross |       |         | Net   |         |       | Gross Wells | 
|Area         |              | Acres |       |         | Acres |         |       | in 2005     | 
|             |              |       |       |         |       |         |       |             | 
|Washakie:    |              |       |       |         |       |         |       |             |  |  |    |    
|             | Atlantic Rim |       |       | 217,205 |       |         |       | 114,177     |  |  |    | 40  | 
|             | Pacific Rim  |       |       | 35,679  |       |         |       | 28,005      |  |  |    | 19  | 
|Powder River |              |       | 5,110 |         |       |         | 2,570 |             |  |  | 12 |    
|Wilmington   |              |       | 1,440 |         |       |         | 1,242 |             |  |  | 29 |    
|Other(1)     |              |       | 7,800 |         |       |         | 1,990 |             |  |  |   |    
|             |              |       |       |         |       |         |       |             | 
|             | Total        |       |       | 267,234 |       |         |       | 147,984     |  |  |    | 100 | 
|             |              |       |       |         |       |         |       |             | 






|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | Includes conventional oil and gas properties located primarily
    in New Mexico, Texas and North Dakota.

Rocky Mountain CBM Projects




| |               
| | --------------
| | Washakie Basin







| |                     
| | --------------------
| | Atlantic Rim Project



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| |             
| | ------------
| | Sun Dog Unit





| |              
| | -------------
| | Blue Sky Unit





| |             
| | ------------
| | Red Rim Unit





| |                   
| | ------------------
| | Doty Mountain Unit





| |                 
| | ----------------
| | Jolly Roger Unit



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| |                    
| | -------------------
| | Muddy Mountain Unit





| |                    
| | -------------------
| | Pacific Rim Project



1 2






| |                  
| | -----------------
| | Pacific Isle Unit





| |               
| | --------------
| | Rifes Rim Unit





| |                     
| | --------------------
| | Chicken Springs Unit





| |                   
| | ------------------
| | Powder River Basin



9



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##### Table of Contents





Wilmington Townlot Unit














| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all of the oil and gas mineral leases, working interests, net
    revenue interests, royalty interests, overriding royalty
    interests, mineral interests, carried interests and farmout
    rights described in the agreement;
|
| |  | certain surface properties and surface estates;                                                                                                                                                                                  
|
| |  | all oil, gas and water injection wells;                                                                                                                                                                                          
|
| |  | all leasehold interest in and to areas formally pooled,
    unitized, communitized or consolidated and approved by the
    applicable governmental body;                                                                         
|
| |  | interests in, to and under or derived from certain contracts,
    agreements and instruments related to the interests being
    purchased;                                                                                       
|
| |  | all easements, permits and agreements with surface owners,
    surface use agreements, licenses, rights-of-way and other
    surface rights relating to the interests being purchased;                                           
|
| |  | certain equipment, machinery, fixtures and other tangible
    personal property and improvements located on and used in
    connection with, the interests being acquired; and                                                   
|
| |  | all oil, gas, condensate and other minerals produced from or
    attributable to the interests in the leases, lands and wells
    being acquired from the effective date of January 1, 2005.                                     

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| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $1.5 million was deposited with an escrow agent within ten
    days of the date of the purchase agreement;                                                                                       
|
| |  | at the closing, we delivered an additional $13.3 million to
    the escrow agent;                                                                                                                
|
| |  | at the closing, the escrow agent delivered $14.55 million
    to Magness Petroleum and its affiliate;                                                                                            
|
| |  | the remaining $250,000 of the purchase price will remain in
    escrow for a period of 90 days after the closing to secure
    post-closing obligations;                                         
|
| |  | after any post-closing adjustments during the 90-day period, the
    escrow agent will pay the balance of the escrow account to
    Magness Petroleum; and                                       
|
| |  | assume certain liabilities and obligations of Magness Petroleum
    and its affiliate associated with the Wilmington unit including
    Magness Petroleums plugging and abandonment obligations.









Drilling Programs










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12



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Natural Gas and Oil Reserves






|                                                                               |                    |                          |         |         |         |   |         |         |         |   |        |         |         | 
|------------------------------------------------------------------------------ | ------------------ | ------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                               |                    | Years Ended December 31, |        
|                                                                               |                    |                          |        
|                                                                               |                    | 2004                     |         |         | 2003    |   |         | 2002    |        
|                                                                               |                    |                          |         |         |         |   |         |         |        
|Estimated Proved Natural Gas and Oil Reserves:                                 |                    |                          |         |         |         |   |         |         |         |   |        |        
|Net natural gas reserves (MMcf):                                               |                    |                          |         |         |         |   |         |         |         |   |        |        
|                                                                               | Proved developed   |                          |         | 8,496   |         |   |         | 7,006   |         |   |        | 4,544   |        
|                                                                               | Proved undeveloped |                          |         | 10,046  |         |   |         | 8,442   |         |   |        | 3,959   |        
|                                                                               |                    |                          |         |         |         |   |         |         |        
|                                                                               |                    | Total(1)                 |         |         | 18,542  |   |         |         | 15,448  |   |        |         | 8,503   | 
|                                                                               |                    |                          |         |         |         |   |         |         |        
|Net oil reserves (MBbls):                                                      |                    |                          |         |         |         |   |         |         |         |   |        |        
|                                                                               | Proved developed   |                          |         | 395     |         |   |         | 476     |         |   |        | 404     |        
|                                                                               | Proved undeveloped |                          |         | 13,781  |         |   |         | 14,648  |         |   |        | 11,920  |        
|                                                                               |                    |                          |         |         |         |   |         |         |        
|                                                                               |                    | Total(2)                 |         |         | 14,176  |   |         |         | 15,124  |   |        |         | 12,324  | 
|                                                                               |                    |                          |         |         |         |   |         |         |        
|Total Net Proved Natural Gas & Oil Reserves
    (MMcfe)                        |                    |                          | 103,601 |         |         |   | 106,190 |         |         |   | 82,447 |        
|                                                                               |                    |                          |         |         |         |   |         |         |        
|Estimated Present Value of Net Proved Reserves:                                |                    |                          |         |         |         |   |         |         |         |   |        |        
|PV-10 Value (in thousands) Proved developed                                    |                    | $                        | 26,901  |         |         | $ | 20,461  |         |         | $ | 10,041 |        
|                                                                               | Proved undeveloped |                          |         | 215,392 |         |   |         | 162,524 |         |   |        | 103,913 |        
|                                                                               |                    |                          |         |         |         |   |         |         |        
|                                                                               |                    | Total                    |         | $       | 242,293 |   |         | $       | 182,985 |   |        | $       | 113,954 | 
|                                                                               |                    |                          |         |         |         |   |         |         |        
|Standardized measure of discounted future net cash flows (in
    thousands)(3) |                    | $                        | 192,645 |         |         | $ | 146,126 |         |         | $ | 71,418 |        
|                                                                               |                    |                          |         |         |         |   |         |         |        
|Prices Used in Calculating Reserves:                                           |                    |                          |         |         |         |   |         |         |         |   |        |        
|Natural Gas (per Mcf)                                                          |                    | $                        | 5.30    |         |         | $ | 4.50    |         |         | $ | 3.36   |        
|Oil (per Bbl)                                                                  |                    |                          | 37.59   |         |         |   | 28.45   |         |         |   | 27.15  |        
|Proved Developed Reserves (MMcfe)                                              |                    |                          | 10,866  |         |         |   | 9,862   |         |         |   | 6,967  |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included in 2004, 2003 and 2002 reserves, 357 MMcf,
    1,028 MMcf and 577 MMcf is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 23%, 25% and 34%, respectively.                                                                                                                                                                                          
|   
|(2) | Included in 2004, 2003 and 2002 reserves, 2,142 MBbls,
    2,469 MBbls and 1,195 MBbls is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 23%, 25% and 34%, respectively.                                                                                                                                                                                   
|   
|(3) | Standardized measure of discounted future net cash flows differ
    from PV-10 value because it includes the effect of future income
    taxes. Included in 2004, 2003 and 2002 standardized measure of
    discounted future net cash flows $26,054, $23,017 and $10,462 is
    attributable to consolidated subsidiaries in which there is an
    average minority interest of 23%, 25% and 34%, respectively.

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##### Table of Contents







Productive Wells




|           |       |             |       |       |           |  |      |       |  |  |      |      |  |       |      |      |     |  |       |       |  |  |      |      | 
|---------- | ----- | ----------- | ----- | ----- | --------- |  | ---- | ----- |  |  | ---- | ---- |  | ----- | ---- | ---- | --- |  | ----- | ----- |  |  | ---- | ---- | 
|           |       | Natural Gas |       |       |           |  |     
|           |       | Wells       |       |       | Oil Wells |  |      | Total | 
|           |       |             |       |       |           |  |      |       | 
|           |       | Gross       |       |       | Net       |  |      | Gross |  |  | Net  |      |  | Gross |      |      | Net | 
|           |       |             |       |       |           |  |      |       |  |  |      |      |  |       |      |      |     | 
|California |       |             | 0.0   |       |           |  | 0.0  |       |  |  | 31.0 |      |  |       | 15.0 |      |     |  | 31.0  |       |  |  | 15.0 |     
|New Mexico |       |             | 19.0  |       |           |  | 0.6  |       |  |  | 5.0  |      |  |       | 0.2  |      |     |  | 24.0  |       |  |  | 0.8  |     
|Texas      |       |             | 6.0   |       |           |  | 1.5  |       |  |  | 0.0  |      |  |       | 0.0  |      |     |  | 6.0   |       |  |  | 1.5  |     
|Wyoming    |       |             | 136.0 |       |           |  | 59.2 |       |  |  | 3.0  |      |  |       | 3.0  |      |     |  | 139.0 |       |  |  | 62.2 |     
|Other      |       |             | 1.0   |       |           |  | 0.7  |       |  |  | 2.0  |      |  |       | 0.1  |      |     |  | 3.0   |       |  |  | 0.8  |     
|           |       |             |       |       |           |  |      |       |  |  |      |      |  |       |      |      |     | 
|           | Total |             |       | 162.0 |           |  |      | 62.0  |  |  |      | 41.0 |  |       |      | 18.3 |     |  |       | 203.0 |  |  |      | 80.3 | 
|           |       |             |       |       |           |  |      |       |  |  |      |      |  |       |      |      |     | 



14



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Drilling Activity




|                     |                  |                          |      |      |      |  |     |       |  |  |      |      |  |       |     |     |     |  |      |      |  |  |     |     | 
|-------------------- | ---------------- | ------------------------ | ---- | ---- | ---- |  | --- | ----- |  |  | ---- | ---- |  | ----- | --- | --- | --- |  | ---- | ---- |  |  | --- | --- | 
|                     |                  | Years Ended December 31, |     
|                     |                  |                          |     
|                     |                  | 2004                     |      |      | 2003 |  |     | 2002  | 
|                     |                  |                          |      |      |      |  |     |       | 
|                     |                  | Gross                    |      |      | Net  |  |     | Gross |  |  | Net  |      |  | Gross |     |     | Net | 
|                     |                  |                          |      |      |      |  |     |       |  |  |      |      |  |       |     |     |     | 
|Exploratory Wells(1) |                  |                          |      |      |      |  |     |       |  |  |      |      |  |       |     |     |     |  |      |      |  |  |     |    
|                     | Productive(2)    |                          |      | 52.0 |      |  |     | 5.1   |  |  |      | 16.0 |  |       |     | 2.8 |     |  |      | 15.0 |  |  |     | 1.9 | 
|                     | Nonproductive(3) |                          |      | 1.0  |      |  |     | 0.1   |  |  |      |     |  |       |     |    |     |  |      |     |  |  |     |    | 
|Development Wells(1) |                  |                          |      |      |      |  |     |       |  |  |      |      |  |       |     |     |     |  |      |      |  |  |     |    
|                     | Productive(2)    |                          |      | 14.0 |      |  |     | 2.1   |  |  |      | 19.0 |  |       |     | 3.3 |     |  |      | 12.0 |  |  |     | 2.3 | 
|                     | Nonproductive(3) |                          |      | 1.0  |      |  |     | 0.3   |  |  |      | 1.0  |  |       |     | 0.1 |     |  |      |     |  |  |     |    | 
|                     |                  |                          |      |      |      |  |     |       |  |  |      |      |  |       |     |     |     | 
|Total                |                  |                          | 68.0 |      |      |  | 7.6 |       |  |  | 36.0 |      |  |       | 6.2 |     |     |  | 27.0 |      |  |  | 4.2 |    
|                     |                  |                          |      |      |      |  |     |       |  |  |      |      |  |       |     |     |     | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | An exploratory well is a well drilled either in search of a new,
    as yet undiscovered oil or gas reservoir or to greatly extend
    the known limits of a previously discovered reservoir. A
    development well is a well drilled within the presently proved
    productive area of an oil or gas reservoir, as indicated by
    reasonable interpretation of available data, with the objective
    of completing in that reservoir.
|   
|(2) | A productive well is an exploratory or development well found to
    be capable of producing either oil or gas in sufficient
    quantities to justify completion as an oil or gas well.                                                                                                                                                                                                                                                   
|   
|(3) | A nonproductive well is an exploratory or development well that
    is not a producing well.                                                                                                                                                                                                                                                                                                                                               

Natural Gas and Oil Acreage




|           |       |           |        |        |             |  |       |       |  |  |         |         |  |       |         |         |     |  |         |         |  |  |         |         | 
|---------- | ----- | --------- | ------ | ------ | ----------- |  | ----- | ----- |  |  | ------- | ------- |  | ----- | ------- | ------- | --- |  | ------- | ------- |  |  | ------- | ------- | 
|           |       | Developed |        |        | Undeveloped |  |       | Total | 
|           |       |           |        |        |             |  |       |       | 
|           |       | Gross     |        |        | Net         |  |       | Gross |  |  | Net     |         |  | Gross |         |         | Net | 
|           |       |           |        |        |             |  |       |       |  |  |         |         |  |       |         |         |     | 
|California |       |           | 388    |        |             |  | 334   |       |  |  | 1,052   |         |  |       | 908     |         |     |  | 1,440   |         |  |  | 1,242   |        
|New Mexico |       |           | 1,386  |        |             |  | 105   |       |  |  | 3,602   |         |  |       | 398     |         |     |  | 4,988   |         |  |  | 503     |        
|Texas      |       |           | 704    |        |             |  | 176   |       |  |  |        |         |  |       |        |         |     |  | 704     |         |  |  | 176     |        
|Wyoming    |       |           | 16,030 |        |             |  | 8,374 |       |  |  | 241,964 |         |  |       | 136,378 |         |     |  | 257,994 |         |  |  | 144,752 |        
|Other      |       |           | 948    |        |             |  | 418   |       |  |  | 1,160   |         |  |       | 893     |         |     |  | 2,108   |         |  |  | 1,311   |        
|           |       |           |        |        |             |  |       |       |  |  |         |         |  |       |         |         |     | 
|           | Total |           |        | 19,456 |             |  |       | 9,407 |  |  |         | 247,778 |  |       |         | 138,577 |     |  |         | 267,234 |  |  |         | 147,984 | 
|           |       |           |        |        |             |  |       |       |  |  |         |         |  |       |         |         |     | 

Production Volumes, Sales Prices and Production Costs




15



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##### Table of Contents





|                              |                                  |                             |   |       |         |  |   |       |         |  |   |       |      | 
|----------------------------- | -------------------------------- | --------------------------- | - | ----- | ------- |  | - | ----- | ------- |  | - | ----- | ---- | 
|                              |                                  | Years Ended December 31,    |  
|                              |                                  |                             |  
|                              |                                  | 2004                        |   |       | 2003    |  |   | 2002  |        
|                              |                                  |                             |   |       |         |  |   |       |        
|Production:                   |                                  |                             |   |       |         |  |   |       |         |  |   |      
|                              | Natural gas (MMcf)               |                             |   | 817.2 |         |  |   | 785.8 |         |  |   | 54.8  |     
|                              | Oil (MBbls)                      |                             |   | 68.2  |         |  |   | 87.4  |         |  |   | 4.3   |     
|                              |                                  |                             |   |       |         |  |   |       |        
|                              |                                  | Total equivalents (MMcfe)   |   |       | 1,226.3 |  |   |       | 1,310.1 |  |   |       | 80.3 | 
|Average Sales Price Per Unit: |                                  |                             |   |       |         |  |   |       |         |  |   |      
|                              | Natural gas (per Mcf)            |                             | $ | 5.03  |         |  | $ | 3.70  |         |  | $ | 1.90  |     
|                              | Oil (per Bbl)                    |                             |   | 34.38 |         |  |   | 25.42 |         |  |   | 20.84 |     
|                              |                                  | Weighted average (per Mcfe) |   |       | 5.26    |  |   |       | 3.92    |  |   |       | 2.40 | 
|Expenses (per Mcfe):          |                                  |                             |   |       |         |  |   |       |         |  |   |      
|                              | Lease operating expense(1)(2)(3) |                             | $ | 3.12  |         |  | $ | 2.94  |         |  | $ | 1.50  |     






|    |                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Lease operating expenses for 2002 excludes operating expenses
    incurred by the drilling programs and paid for by us of
    approximately $1,200,000.                                                                                                                      
|   
|(2) | The lease operating expenses for the Wilmington unit that were
    utilized for this calculation include direct labor that was
    improperly charged to us by the prior operator of the Wilmington
    unit.                                                                
|   
|(3) | Lease operating expenses related to our CBM operations include
    costs for operating our commercially productive CBM wells,
    together with the costs for operating our CBM wells that are
    still in the dewatering phase and are not yet commercially
    productive.

Purchasers and Marketing








16



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##### Table of Contents



Our Service and Operational Activities




Competition




Regulations




| |        
| | -------
| | General









| |                                                                  
| | -----------------------------------------------------------------
| | Federal Regulation of Sales and Transportation of Natural
    Gas



17



---



##### Table of Contents









| |                                         
| | ----------------------------------------
| | Operations on Federal Oil and Gas Leases





| |                 
| | ----------------
| | State Regulation





Environmental Matters




| |        
| | -------
| | General



18



---



##### Table of Contents



















19



---



##### Table of Contents









| |                           
| | --------------------------
| | Coalbed Methane Operations







| |             
| | ------------
| | Atlantic Rim





20



---



##### Table of Contents











| |            
| | -----------
| | Pacific Rim





| |                   
| | ------------------
| | Powder River Basin





21



---



##### Table of Contents







| |                
| | ---------------
| | Wilmington Unit



Operating Hazards And Insurance






Title to Properties




Employees




Facilities




22



---



##### Table of Contents





Available Information




Glossary of Abbreviations and Terms




Adsorption.


AMI.


Bbl.


Bbl/d.


Bcf.


Bcfe.


Boe.


Btu or British thermal unit.


Coalbed methane (CBM).


Completion.


Condensate.


Desorption.


Developed Acreage.


Development well.


Dewatering.


23



---



##### Table of Contents



Dry hole.


Environmental assessment (EA).


Environmental impact statement (EIS).


Exploitation.


Exploration.


Exploratory well.


Farmout or Farmin.


Field.


Fracturing.


Gross Acres.


Gross Wells.


Horizontal Drilling.


Identified drilling locations.


Injection Well or Injector.


Intangible Drilling Costs.




| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | ground clearing, drainage construction, location work, road
    making, temporary roads and ponds, surveying and geological
    works;

24



---



##### Table of Contents





| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | drilling, completion, logging, cementing, acidizing, perforating
    and fracturing of wells;                                    
|
| |  | hauling mud and water, perforating, swabbing, supervision and
    overhead;                                                      
|
| |  | renting horizontal tools, milling tools and bits; and                                                                            
|
| |  | construction of derricks, pipelines and other physical
    structures necessary for the drilling or preparation of the
    wells.

Lease.


MBbl.


Mcf.


Mcf/d.


Mcfe.


MMbbl.


MMBoe.


MMBtu.


MMcf.


MMcf/d.


MMcfe.


MMcfe/d.


Net acres.


Net production.


Net wells.


NYMEX.


Operator.


Overpressured.


Permeability.


Pod.


Porosity.


Plugging and abandonment.


25



---



##### Table of Contents



PV-10 Value.


Productive well.


Prospect.


Proved developed reserves.


Proved reserves.


Proved undeveloped reserves (PUD).


Re-entry.


Reservoir.


Royalty.


Secondary Recovery.


Standardized Measure of Discounted Future Net Cash Flows.


Tangible Drilling Costs.




| |   |                           
| | - | --------------------------
| |  | well casings;             
|
| |  | wellhead equipment;       
|
| |  | water disposal facilities;

26



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##### Table of Contents





| |   |                                          
| | - | -----------------------------------------
| |  | metering equipment;                      
|
| |  | pumps;                                   
|
| |  | gathering lines;                         
|
| |  | storage tanks;                           
|
| |  | gas compression and treatment facilities.

3-D Seismic.


Undeveloped acreage.


Waterflood.


Working Interest.


Ultimate recovery.







|        |                  
|------- | -----------------
|Item 3: | Legal Proceedings

Gotham Insurance Company v. Warren.


27



---



##### Table of Contents










|        |                                                    
|------- | ---------------------------------------------------
|Item 4: | Submission of Matters to a Vote of Security Holders






PART II







|        |                                                                              
|------- | -----------------------------------------------------------------------------
|Item 5: | Market for the Registrants Common Equity and Related
    Stockholder Matters

Market Information.




|                                |  |             |       |  |     |   |      | 
|------------------------------- |  | ----------- | ----- |  | --- | - | ---- | 
|                                |  | Common      |      
|                                |  | Stock Price |      
|                                |  |             |      
|                                |  | High        |       |  | Low |  
|                                |  |             |       |  |     |  
|Quarter ended December 31, 2004 |  |             |       |  |     |   |      | 
|(commencing December 17, 2004)  |  | $           | 10.00 |  |     | $ | 8.00 | 



Holders




Dividend Policy




Securities Authorized for Issuance Under Compensation
Plans




|                                       |  |                     |           |                      |                      |  |                  |                      |                      |                     |                     |  |  |  |           | 
|-------------------------------------- |  | ------------------- | --------- | -------------------- | -------------------- |  | ---------------- | -------------------- | -------------------- | ------------------- | ------------------- |  |  |  | --------- | 
|                                       |  |                     |           | Number of Securities |                      |  |                  |                      | Number of Securities |                    
|                                       |  |                     |           | to be Issued upon    |                      |  | Weighted-Average |                      |                      | Remaining Available |                    
|                                       |  | Number of Shares    |           |                      | Exercise of          |  |                  | Exercise Price of    |                      |                     | for Future Issuance | 
|                                       |  | Authorized for      |           |                      | Outstanding Options, |  |                  | Outstanding Options, |                      |                     | under Equity        | 
|                                       |  | Issuance under Plan |           |                      | Warrants and Rights  |  |                  | Warrants and Rights  |                      |                     | Compensation Plans  | 
|                                       |  |                     |           |                      |                      |  |                  |                      |                      |                     |                     | 
|2000 Equity Incentive Plan             |  |                     | 1,975,000 |                      |                      |  | 710,500          |                      |                      | $                   | 4.74                |  |  |  | 1,264,500 | 
|2001 Stock Incentive Plan              |  |                     | 2,500,000 |                      |                      |  | 847,956          |                      |                      | $                   | 7.37                |  |  |  | 1,465,988 | 
|2001 Key Employee Stock Incentive Plan |  |                     | 2,500,000 |                      |                      |  | 1,066,750        |                      |                      | $                   | 4.91                |  |  |  | 1,433,250 | 
|Total                                  |  |                     | 6,975,000 |                      |                      |  | 2,625,206        |                      |                      | $                   | 5.66                |  |  |  | 4,163,738 | 

28



---



##### Table of Contents



Use of Proceeds




29



---



##### Table of Contents








|        |                                     
|------- | ------------------------------------
|Item 6: | Selected Consolidated Financial Data



|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |            |        |         |   |            |        |        |  
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------ | ---------- | ------ | ------- | - | ---------- | ------ | ------ | - | ---------- | ------ | ------ | ---- | ---------- | ------ | ------- | - | ---------- | ------ | ------ | -
|                                                                                                         |                                                            | Year Ended December 31,                    |           
|                                                                                                         |                                                            |                                            |           
|                                                                                                         |                                                            | 2004                                       |            |        | 2003    |   |            | 2002   |        |   | 2001       |        |        | 2000 |           
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|Consolidated Statement of Operations Data:                                                               |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |            |        |         |   |            |       
|Revenues:                                                                                                |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |            |        |         |   |            |       
|                                                                                                         | Turnkey contracts with affiliated partnerships             |                                            | $          | 10,530 |         |   | $          | 11,301 |        |   | $          | 5,841  |        |      | $          | 30,103 |         |   | $          | 33,985 |       
|                                                                                                         | Oil & gas sales from marketing activities                  |                                            |            | 6,171  |         |   |            | 5,621  |        |   |            | 11,272 |        |      |            | 14,867 |         |   |            | 15,421 |       
|                                                                                                         | Well services                                              |                                            |            | 1,070  |         |   |            | 1,168  |        |   |            | 1,895  |        |      |            | 5,574  |         |   |            | 4,297  |       
|                                                                                                         | Oil & gas sales                                            |                                            |            | 6,454  |         |   |            | 5,717  |        |   |            | 593    |        |      |            | 948    |         |   |            | 200    |       
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|                                                                                                         | Total revenues                                             |                                            |            | 24,225 |         |   |            | 23,807 |        |   |            | 19,601 |        |      |            | 51,492 |         |   |            | 53,903 |       
|Costs and operating expenses:                                                                            |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |            |        |         |   |            |       
|                                                                                                         | Turnkey contracts                                          |                                            |            | 12,932 |         |   |            | 7,285  |        |   |            | 4,965  |        |      |            | 25,953 |         |   |            | 22,783 |       
|                                                                                                         | Cost of oil and gas purchased from affiliated partnerships |                                            |            | 6,028  |         |   |            | 5,500  |        |   |            | 11,121 |        |      |            | 15,299 |         |   |            | 15,800 |       
|                                                                                                         | Well services                                              |                                            |            | 673    |         |   |            | 662    |        |   |            | 839    |        |      |            | 3,519  |         |   |            | 3,168  |       
|                                                                                                         | Production and exploration                                 |                                            |            | 3,935  |         |   |            | 3,812  |        |   |            | 1,326  |        |      |            | 568    |         |   |            | 355    |       
|                                                                                                         | Depreciation, depletion, amortization and impairment       |                                            |            | 4,023  |         |   |            | 3,249  |        |   |            | 9,930  |        |      |            | 14,462 |         |   |            | 3,065  |       
|                                                                                                         | Contingent repurchase obligation                           |                                            |            |       |         |   |            |       |        |   |            | (3,065 | )      |      |            | 3,319  |         |   |            |       |       
|                                                                                                         | General and administrative                                 |                                            |            | 8,116  |         |   |            | 4,496  |        |   |            | 6,278  |        |      |            | 5,485  |         |   |            | 6,416  |       
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|                                                                                                         |                                                            | Total costs and operating expenses         |            |        | 35,707  |   |            |        | 25,004 |   |            |        | 31,394 |      |            |        | 68,605  |   |            |        | 51,587 |  
|Income (loss) from operations                                                                            |                                                            |                                            | (11,482    | )      |         |   | (1,197     | )      |        |   | (11,793    | )      |        |      | (17,113    | )      |         |   | 2,316      |       
|Other income (expense):                                                                                  |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |            |        |         |   |            |       
|                                                                                                         | Interest and other income                                  |                                            |            | 2,089  |         |   |            | 1,340  |        |   |            | 5,258  |        |      |            | 1,977  |         |   |            | 2,457  |       
|                                                                                                         | Interest expense                                           |                                            |            | (494   | )       |   |            | (1,528 | )      |   |            | (6,313 | )      |      |            | (5,776 | )       |   |            | (6,968 | )     
|                                                                                                         | Gain on sale of oil and gas properties                     |                                            |            | 120    |         |   |            | 494    |        |   |            | 4,287  |        |      |            |       |         |   |            |       |       
|                                                                                                         | Net gain (loss) on investment                              |                                            |            | (43    | )       |   |            | 21     |        |   |            | 464    |        |      |            | (10    | )       |   |            | 587    |       
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|                                                                                                         |                                                            | Total other income (expense)               |            |        | 1,672   |   |            |        | 327    |   |            |        | 3,696  |      |            |        | (3,809  | ) |            |        | (3,924 | )
|Loss before income taxes, extraordinary item and cumulative
    effect of change in accounting principle |                                                            |                                            | (9,810     | )      |         |   | (870       | )      |        |   | (8,097     | )      |        |      | (20,922    | )      |         |   | (1,608     | )     
|                                                                                                         |                                                            | Income tax expense (benefit)               |            |        | (59     | ) |            |        | 129    |   |            |        | (471   | )    |            |        | 152     |   |            |        | (412   | )
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|Loss before minority interest and cumulative change in
    accounting principle                          |                                                            |                                            | (9,751     | )      |         |   | (999       | )      |        |   | (7,626     | )      |        |      | (21,074    | )      |         |   | (1,196     | )     
|                                                                                                         |                                                            | Minority interest                          |            |        | (209    | ) |            |        | (112   | ) |            |        |       |      |            |        |        |   |            |        |       |  
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|Net loss before change in accounting principle                                                           |                                                            |                                            | (9,960     | )      |         |   | (1,111     | )      |        |   | (7,626     | )      |        |      | (21,074    | )      |         |   | (1,196     | )     
|Cumulative effect of change in accounting principle                                                      |                                                            |                                            |           |        |         |   | (88        | )      |        |   |           |        |        |      |           |        |         |   |           |       
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|Net loss                                                                                                 |                                                            |                                            | (9,960     | )      |         |   | (1,199     | )      |        |   | (7,626     | )      |        |      | (21,074    | )      |         |   | (1,196     | )     
|Preferred dividends and accretion                                                                        |                                                            |                                            | 6,591      |        |         |   | 4,562      |        |        |   | 16         |        |        |      |           |        |         |   |           |       
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|                                                                                                         |                                                            | Net loss applicable to common stockholders |            | $      | (16,551 | ) |            | $      | (5,761 | ) |            | $      | (7,642 | )    |            | $      | (21,074 | ) |            | $      | (1,196 | )
|                                                                                                         |                                                            |                                            |            |        |         |   |            |        |        |   |            |        |        |      |           
|Basic and diluted loss per common share                                                                  |                                                            | $                                          | (0.84      | )      |         | $ | (0.34      | )      |        | $ | (0.44      | )      |        | $    | (1.20      | )      |         | $ | (0.10      | )     
|Weighted average shares outstanding basic and diluted                                                    |                                                            |                                            | 19,739,048 |        |         |   | 16,827,857 |        |        |   | 17,339,869 |        |        |      | 17,532,882 |        |         |   | 12,461,814 |       

30



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|                                           |  |                         |         |   |      |   |         |      |  |   |        |   |  |      |         |   |  |   |         |  
|------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | ---- | ------- | - |  | - | ------- | -
|                                           |  | Year Ended December 31, |        
|                                           |  |                         |        
|                                           |  | 2004                    |         |   | 2003 |   |         | 2002 |  |   | 2001   |   |  | 2000 |        
|                                           |  |                         |         |   |      |   |         |      |  |   |        |   |  |      |        
|Consolidated Statement of Cash Flows Data: |  |                         |         |   |      |   |         |      |  |   |        |   |  |      |         |   |  |   |         |  
|Net cash provided by (used in):            |  |                         |         |   |      |   |         |      |  |   |        |   |  |      |         |   |  |   |         |  
|Operating activities                       |  | $                       | (4,507  | ) |      | $ | 5,278   |      |  | $ | (6,101 | ) |  | $    | (15,712 | ) |  | $ | 10,659  |  
|Investing activities                       |  |                         | (29,033 | ) |      |   | (13,524 | )    |  |   | 5,317  |   |  |      | (17,635 | ) |  |   | (19,012 | )
|Financing activities                       |  |                         | 108,931 |   |      |   | 9,591   |      |  |   | 1,045  |   |  |      | (2,700  | ) |  |   | 26,701  |  

|                                                    |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |        |   |  |   |         | 
|--------------------------------------------------- |  | ------------------ | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------ | - |  | - | ------- | 
|                                                    |  | As of December 31, |        
|                                                    |  |                    |        
|                                                    |  | 2004               |         |  | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |       
|                                                    |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |       
|Balance Sheet Data:                                 |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |        |   |  |   |         | 
|Cash and cash equivalents                           |  | $                  | 99,921  |  |      | $ | 24,529  |      |  | $ | 23,184  |  |  | $    | 22,924 |   |  | $ | 58,970  | 
|Total assets                                        |  |                    | 246,911 |  |      |   | 151,054 |      |  |   | 108,262 |  |  |      | 94,900 |   |  |   | 128,649 | 
|Total long-term debt (including current maturities) |  |                    | 50,038  |  |      |   | 49,916  |      |  |   | 56,202  |  |  |      | 61,880 |   |  |   | 60,447  | 
|Stockholders equity (deficit)                      |  |                    | 157,569 |  |      |   | 56,394  |      |  |   | 7,002   |  |  |      | (6,434 | ) |  |   | 14,876  | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7: | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The discussion and analysis that follows should be read
together with the Selected Consolidated Financial
Data and the accompanying financial statements and notes
related thereto that are included elsewhere in this annual
report. It includes forward-looking statements that may reflect
our estimates, beliefs, plans and expected performance. The
forward-looking statements are based upon events, risks and
uncertainties that may be outside our control. Our actual
results could differ significantly from those discussed in these
forward-looking statements. Factors that could cause or
contribute to these differences include but are not limited to,
market prices for natural gas and oil, regulatory changes,
estimates of proved reserves, economic conditions, competitive
conditions, development success rates, capital expenditures and
other uncertainties, as well as those factors discussed below
and elsewhere in this annual report, including in Risk
Factors and Cautionary Note Regarding
Forward-Looking Statements, all of which are difficult to
predict. As a result of these assumptions, risks and
uncertainties, the forward-looking matters discussed may not
occur.


Overview








31



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|                                   |  |      |           |  |      |   |           | 
|---------------------------------- |  | ---- | --------- |  | ---- | - | --------- | 
|                                   |  | 2004 |           |  | 2003 |  
|                                   |  |      |           |  |      |  
|Oil and gas sales                  |  | $    | 6,454,334 |  |      | $ | 5,717,814 | 
|Production and exploration expense |  |      | 3,935,137 |  |      |   | 3,811,595 | 
|                                   |  |      |           |  |      |  
|Gross margin                       |  | $    | 2,519,197 |  |      | $ | 1,906,219 | 
|                                   |  |      |           |  |      |  

|                                                      |  |      |            |   |      |   |            | 
|----------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | 
|                                                      |  | 2004 |            |   | 2003 |  
|                                                      |  |      |            |   |      |  
|Turnkey contract revenue with affiliated partnerships |  | $    | 10,529,883 |   |      | $ | 11,300,646 | 
|Turnkey contract expense                              |  |      | 12,932,124 |   |      |   | 7,284,653  | 
|                                                      |  |      |            |   |      |  
|Gross margin                                          |  | $    | (2,402,241 | ) |      | $ | 4,015,993  | 
|                                                      |  |      |            |   |      |  







32



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##### Table of Contents









Critical Accounting Policies




| |                                 
| | --------------------------------
| | Oil and Gas Producing Activities













33



---



##### Table of Contents







| |                    
| | -------------------
| | Revenue Recognition







| |                     
| | --------------------
| | Capitalized Interest





| |                             
| | ----------------------------
| | Asset Retirement Obligations



New Accounting Pronouncement




34



---



##### Table of Contents





Results of Operations




| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003



| |                                      
| | -------------------------------------
| | Turnkey contract revenue and expenses







| |                                                      
| | -----------------------------------------------------
| | Oil and gas sales and costs from marketing activities







| |                        
| | -----------------------
| | Well service activities







| |                  
| | -----------------
| | Oil and gas sales





| |                               
| | ------------------------------
| | Net gain (loss) on investments





| |                          
| | -------------------------
| | Interest and other income





| |                       
| | ----------------------
| | Gain on sale of assets



35



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##### Table of Contents





| |                                  
| | ---------------------------------
| | Production & exploration expenses





| |                                                     
| | ----------------------------------------------------
| | Depreciation, depletion, amortization and impairment





| |                                    
| | -----------------------------------
| | General and administrative expenses





| |                 
| | ----------------
| | Interest Expense





| |             
| | ------------
| | Income Taxes







| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared To Year Ended
    December 31, 2002



| |                                      
| | -------------------------------------
| | Turnkey contract revenue and expenses



36



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##### Table of Contents







| |                                                      
| | -----------------------------------------------------
| | Oil and gas sales and costs from marketing activities







| |                         
| | ------------------------
| | Well services activities





| |                  
| | -----------------
| | Oil and gas sales





| |                        
| | -----------------------
| | Net gain on investments





| |                          
| | -------------------------
| | Interest and other income





| |                       
| | ----------------------
| | Gain on sale of assets



37



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##### Table of Contents





| |                                  
| | ---------------------------------
| | Production & exploration expenses





| |                                                     
| | ----------------------------------------------------
| | Depreciation, depletion, amortization and impairment





| |                                    
| | -----------------------------------
| | General and administrative expenses





| |                 
| | ----------------
| | Interest expense





| |                                 
| | --------------------------------
| | Contingent repurchase obligation



Liquidity and Capital Resources






38



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##### Table of Contents









| |                                    
| | -----------------------------------
| | Cash Flow from Operating Activities





2005 Capital Expenditure Program






| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the availability of sufficient capital resources;                                                                                                            
|
| |  | the ability to acquire proper governmental permits and
    approvals; and                                                                                    
|
| |  | economic and industry conditions at the time of drilling such as
    prevailing and anticipated energy prices and the availability of
    drilling equipment.

Debentures






39



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##### Table of Contents







|                                                     |  |                |        |            |              |   |       |                 |           |   |           |  |  |   |       | 
|---------------------------------------------------- |  | -------------- | ------ | ---------- | ------------ | - | ----- | --------------- | --------- | - | --------- |  |  | - | ----- | 
|                                                     |  |                |        | Conversion |              |   |       |                 | Estimated |  
|                                                     |  | Outstanding at |        |            | Price as of  |   |       | Fair Market     |           |   | Debenture | 
|Debentures (In thousands,                            |  | December 31,   |        |            | December 31, |   |       | Value of        |           |   | Interest  | 
|except for conversion prices)                        |  | 2004           |        |            | 2004         |   |       | U.S. Treasuries |           |   | for 2005  | 
|                                                     |  |                |        |            |              |   |       |                 |           |   |           | 
|12% Sinking Fund Debentures due December 31, 2007    |  | $              | 9,036  |            |              |   | n/a   |                 |           | $ | 4,121     |  |  | $ | 271   | 
|12% Secured Fund Debentures due December 31, 2009    |  |                | 770    |            |              | $ | 9.00  |                 |           |   | 647       |  |  |   | 92    | 
|12% Secured Fund Debentures due December 31, 2010    |  |                | 1,700  |            |              |   | 9.00  |                 |           |   | 1,362     |  |  |   | 204   | 
|13.02% Sinking Fund Debentures due December 31, 2010 |  |                | 14,372 |            |              |   | 5.00  |                 |           |   | 5,760     |  |  |   | 1,871 | 
|13.02% Sinking Fund Debentures due December 31, 2015 |  |                | 11,633 |            |              |   | 8.00  |                 |           |   | 2,512     |  |  |   | 1,515 | 
|12% Secured Fund Debentures due December 31, 2016    |  |                | 1,305  |            |              |   | 9.00  |                 |           |   | 751       |  |  |   | 157   | 
|12% Sinking Fund Debentures due December 31, 2017    |  |                | 5,040  |            |              |   | 15.00 |                 |           |   | 762       |  |  |   | 151   | 
|12% Secured Fund Debentures due December 31, 2020    |  |                | 1,485  |            |              |   | 25.00 |                 |           |   | 673       |  |  |   | 178   | 
|12% Secured Fund Debentures due December 31, 2022    |  |                | 1,136  |            |              |   | 25.00 |                 |           |   | 460       |  |  |   | 136   | 
|                                                     |  |                |        |            |              |   |       |                 |           |   |           | 
|                                                     |  | $              | 46,477 |            |              |   |       |                 |           | $ | 17,048    |  |  | $ | 4,575 | 
|                                                     |  |                |        |            |              |   |       |                 |           |   |           | 

Preferred Stock






Contractual Obligations




40



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##### Table of Contents



|                                              |  |                        |            |           |        |   |            |       |  |     |           |  |           |         |           |  |  |   |            | 
|--------------------------------------------- |  | ---------------------- | ---------- | --------- | ------ | - | ---------- | ----- |  | --- | --------- |  | --------- | ------- | --------- |  |  | - | ---------- | 
|                                              |  | Payments Due by period |           
|                                              |  |                        |           
|Contractual Obligations                       |  |                        |            | Less Than |        |   | 1-3        |       |  | 3-5 |           |  | More Than |        
|As of December 31, 2004                       |  | Total                  |            |           | 1 Year |   |            | Years |  |     | Years     |  |           | 5 Years |          
|                                              |  |                        |            |           |        |   |            |       |  |     |           |  |           |         |          
|Debentures  net of sinking fund requirements |  | $                      | 33,589,598 |           |        | $ | 15,896,035 |       |  | $   | 2,429,675 |  |           | $       | 1,113,745 |  |  | $ | 14,150,143 | 
|Debenture sinking fund requirements           |  |                        | 12,887,102 |           |        |   | 1,420,035  |       |  |     | 3,110,844 |  |           |         | 3,374,076 |  |  |   | 4,982,147  | 
|Leases                                        |  |                        | 510,479    |           |        |   | 160,186    |       |  |     | 311,372   |  |           |         | 38,921    |  |  |   |           | 
|                                              |  |                        |            |           |        |   |            |       |  |     |           |  |           |         |          
|Total                                         |  | $                      | 46,987,179 |           |        | $ | 17,476,256 |       |  | $   | 5,851,891 |  |           | $       | 4,526,742 |  |  | $ | 19,132,290 | 
|                                              |  |                        |            |           |        |   |            |       |  |     |           |  |           |         |          



Off-Balance Sheet Arrangements






|                                           |  |                                            |   |  |       |   |       |       |  |   |           |  |  |       |     |  |  |   |        | 
|------------------------------------------ |  | ------------------------------------------ | - |  | ----- | - | ----- | ----- |  | - | --------- |  |  | ----- | --- |  |  | - | ------ | 
|                                           |  | Amount of Repurchase Commitment per Period |  
|                                           |  |                                            |  
|                                           |  | Less Than                                  |   |  | 1-3   |   |       | 3-5   |  |   | More Than |  |  |      
|                                           |  | 1 Year                                     |   |  | Years |   |       | Years |  |   | 5 Years   |  |  | Total |    
|                                           |  |                                            |   |  |       |   |       |       |  |   |           |  |  |       |    
|                                           |  | (In thousands)                             |  
|Maximum potential repurchase commitment(1) |  |                                            |  |  |       | $ | 5,569 |       |  | $ | 13,130    |  |  | $     | 343 |  |  | $ | 19,042 | 
|                                           |  |                                            |   |  |       |   |       |       |  |   |           |  |  |       |    






|    |                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the partnership reserves taken from the Williamson
    partnership reserve report as of December 31, 2004 and
    using pricing at that date. This report does not include
    reserves for 9 net wells that are schedules to be drilled
    for these programs by the fourth quarter of 2005 or for the
    35 net wells drilled and waiting to be placed on production.



| |                                  
| | ---------------------------------
| | Additional Repurchase Commitments



41



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|                                    |                       |                                            |   |       |       |  |  |       |  |  |           |   |  |       |   |     |  |  |   |       | 
|----------------------------------- | --------------------- | ------------------------------------------ | - | ----- | ----- |  |  | ----- |  |  | --------- | - |  | ----- | - | --- |  |  | - | ----- | 
|                                    |                       | Amount of Repurchase Commitment per Period |  
|                                    |                       |                                            |  
|Other Commitments                   |                       | Less Than                                  |   |       | 1-3   |  |  | 4-5   |  |  | More Than |   |  |      
|As of December 31, 2004             |                       | 1 Year                                     |   |       | Years |  |  | Years |  |  | 5 Years   |   |  | Total |  
|                                    |                       |                                            |   |       |       |  |  |       |  |  |           |   |  |       |  
|                                    |                       | ?(in thousands)                            |  
|Partnership repurchase commitments: |                       |                                            |   |       |       |  |  |       |  |  |           |   |  |       |   |     |  |  |   |      
|                                    | Pre-1998 Partnerships |                                            | $ | 3,417 |       |  |  |      |  |  |           |  |  |       | $ | 939 |  |  | $ | 4,356 | 
|                                    |                       |                                            |   |       |       |  |  |       |  |  |           |   |  |       |  






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A: | Quantitative and Qualitative Disclosures About Market
    Risk



| |               
| | --------------
| | Commodity Risk





| |                   
| | ------------------
| | Interest Rate Risk





| |                      
| | ---------------------
| | Financial Instruments





| |                                
| | -------------------------------
| | Inflation and Changes in Prices



42



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##### Table of Contents



RISK FACTORS


You should be aware that the occurrence of any of the events
described in this Risk Factors section and elsewhere in this
annual report or in any other of our filings with the Securities
and Exchange Commission (SEC) could have a material
adverse effect on our business, financial position, liquidity
and results of operations. In evaluating us, you should consider
carefully, among other things, the factors and the specific
risks set forth below, and in documents we incorporate by
reference. This annual report contains forward-looking
statements that involve risks and uncertainties. Some of the
following risks relate principally to the industry in which we
operate and to our business. Other risks relate principally to
the securities markets and ownership of our common shares. If
any of the following risks develop into actual events, our
business, financial condition or results of operations could be
materially adversely affected, the trading price of your shares
could decline, and you may lose all or part of your
investment.


Risks Relating to Our Business




| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Our reserve estimates depend on many assumptions that may
    turn out to be inconclusive, subject to varying interpretations
    or inaccurate.









43



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| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to obtain financing and environmental approvals
    for the development of our Washakie Basin properties in which we
    own interests could have a material adverse effect on our
    business, financial condition or results of operations.





| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our substantial contingent obligations to
    repurchase 10% of our outstanding bonds and debentures
    annually and to repurchase drilling program interests could
    strain our financial resources.









44



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| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We face significantly increasing water disposal costs in
    our CBM drilling operations.





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Operational impediments may hinder our access to natural
    gas and oil markets or delay our production.







| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | the lack of pipeline transmission facilities or carrying
    capacity; 
|
| |  | federal and state regulation of natural gas and oil
    production; and
|
| |  | federal and state transportation, tax and energy policies.             



45



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##### Table of Contents







| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Our level of indebtedness reduces our financial
    flexibility and could impede our ability to operate.







| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a large portion of our net cash flow from operations has and
    will continue to be used to pay interest on borrowings;                                                                              
|
| |  | a high level of debt may impair our ability to obtain additional
    financing in the future for working capital, capital
    expenditures, acquisitions, general corporate or other
    purposes; and
|
| |  | our leveraged financial position may make us more vulnerable to
    economic downturns and may limit our ability to withstand
    competitive pressures.                                              



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may incur additional debt in order to fund our
    exploration and development activities, which would continue to
    reduce our financial flexibility and could have a material
    adverse effect on our business, financial condition or results
    of operations.





| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | We have substantial capital requirements that, if not met,
    may hinder our growth and operations.





| |   |                                                       
| | - | ------------------------------------------------------
| |  | the success of our CBM projects in the Washakie Basin;
|
| |  | our success in locating and producing new reserves;   

46



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##### Table of Contents





| |   |                                                 
| | - | ------------------------------------------------
| |  | the level of production from existing wells; and
|
| |  | prices of natural gas and oil.                  





| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | a substantial portion of our operating cash flow being dedicated
    to the payment of principal and interest;
|
| |  | our being more vulnerable to competitive pressures and economic
    downturns; and                            
|
| |  | restrictions on our operations.                                                                               





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We have incurred losses from operations in the past and
    cannot guarantee profitability in the future.





| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Properties that we buy may not produce as projected, and
    we may be unable to determine reserve potential, identify
    liabilities associated with the properties or obtain protection
    from sellers against them, which could cause us to incur
    losses.





| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Our operations in Wyoming could be adversely affected by
    abnormally poor weather conditions.





| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As general partner of limited partnerships and co-venturer
    in joint ventures, we are liable for various obligations of
    those partnerships and joint ventures.



47



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##### Table of Contents







| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our role as general partner of limited partnerships and
    co-venturer in joint ventures may result in conflicts of
    interest, which may not be resolved in our best interests or the
    best interests of our stockholders.





| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of our chief executive officer or other key
    management and technical personnel or our inability to attract
    and retain experienced technical personnel could adversely
    affect our ability to operate.







| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not insure against all potential operating risks. We
    may incur substantial losses and be subject to substantial
    liability claims as a result of our natural gas and oil
    operations.





| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | environmental hazards, such as uncontrollable flows of natural
    gas, oil, brine, well fluids, toxic gas or other pollution into
    the environment, including groundwater and shoreline
    contamination;
|
| |  | abnormally pressured formations;                                                                                                                                                                              
|
| |  | mechanical difficulties, such as stuck oil field drilling and
    service tools and casing collapse;                                                                                                          
|
| |  | fires and explosions;                                                                                                                                                                                         
|
| |  | personal injuries and death;                                                                                                                                                                                  

48



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| |   |                                             
| | - | --------------------------------------------
| |  | regulatory investigations and penalties; and
|
| |  | natural disasters.                          





| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | We have limited control over activities on properties we
    do not operate, which could reduce our production and
    revenues.





| |   |                                                       
| | - | ------------------------------------------------------
| |  | timing and amount of capital expenditures;            
|
| |  | expertise and financial resources;                    
|
| |  | inclusion of other participants in drilling wells; and
|
| |  | use of technology.                                    



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Defects in the title to any of our natural gas and oil
    interests could result in the loss of some of our natural gas
    and oil properties or portions thereof or liability for losses
    resulting from defects in the assignment of leasehold
    rights.



Risks Relating to the Oil and Gas Industry




| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A substantial or extended decline in natural gas and oil
    prices may adversely affect our ability to meet our capital
    expenditure obligations and financial commitments.



49



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| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in domestic and global supply and demand for natural gas
    and oil;                                                                          
|
| |  | levels of production and other activities of the Organization of
    Petroleum Exporting Countries and other natural gas and oil
    producing nations;
|
| |  | market expectations about future prices;                                                                                                               
|
| |  | the level of global natural gas and oil exploration, production
    activity and inventories;                                                          
|
| |  | political conditions, including embargoes, in or affecting other
    oil producing activity; and                                                       
|
| |  | the price and availability of alternative fuels.                                                                                                       





| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Drilling for and producing natural gas and oil are high
    risk activities with many uncertainties that could have a
    material adverse effect on our business, financial condition or
    results of operations.





| |   |                                                         
| | - | --------------------------------------------------------
| |  | unexpected drilling conditions;                         
|
| |  | pressure or irregularities in geological formations;    
|
| |  | equipment failures or accidents;                        
|
| |  | well blow-outs;                                         
|
| |  | fires and explosions;                                   
|
| |  | pipeline and processing interruptions or unavailability;
|
| |  | title problems;                                         
|
| |  | adverse weather conditions;                             

50



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##### Table of Contents





| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | lack of market demand for natural gas and oil;                                                          
|
| |  | delays imposed by or resulting from compliance with
    environmental and other regulatory requirements;
|
| |  | shortages of or delays in the availability of drilling rigs and
    the delivery of equipment; and      
|
| |  | reductions in natural gas and oil prices.                                                               





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | If natural gas and oil prices decrease, we may be required
    to record an impairment, which would reduce our
    stockholders equity.





| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Competition in the oil and gas industry is intense, and
    many of our competitors have greater financial, technological
    and other resources than we do, which may adversely affect our
    ability to compete.





| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | acquiring desirable producing properties or new leases for
    future exploration;        
|
| |  | marketing our natural gas and oil production;                                             
|
| |  | integrating new technologies; and                                                         
|
| |  | acquiring the equipment and expertise necessary to develop and
    operate our properties.



51



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| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to complex laws and regulations, including
    environmental regulations, that can have a material adverse
    effect on the cost, manner or feasibility of doing
    business.





| |   |                                                              
| | - | -------------------------------------------------------------
| |  | water discharge and disposal permits for drilling operations;
|
| |  | drilling permits;                                            
|
| |  | drilling bonds;                                              
|
| |  | reclamation;                                                 
|
| |  | spacing of wells;                                            
|
| |  | occupational safety and health;                              
|
| |  | unitization and pooling of properties;                       
|
| |  | air quality, noise levels and related permits;               
|
| |  | rights-of-way and easements;                                 
|
| |  | reports concerning operations to regulatory authorities;     
|
| |  | calculation and payment of royalties;                        
|
| |  | gathering, transportation and marketing of gas and oil;      
|
| |  | taxation; and                                                
|
| |  | waste disposal.                                              





| |   |                                                   
| | - | --------------------------------------------------
| |  | personal injuries;                                
|
| |  | property damage;                                  
|
| |  | oil spills;                                       
|
| |  | discharge of hazardous materials;                 
|
| |  | well reclamation costs;                           
|
| |  | surface remediation and clean-up costs;           
|
| |  | fines and penalties;                              
|
| |  | natural resource damages; and                     
|
| |  | other environmental protection and damages issues.



52



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| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Shortages of rigs, equipment, supplies and personnel could
    delay or otherwise adversely affect our cost of operations or
    our ability to operate according to our business plans.





| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Unless we replace, maintain or expand our natural gas and
    oil reserves, our reserves and production will decline, which
    could have a material adverse effect on our business, financial
    condition and results of operations.





Risks Relating to Ownership of Our Common Stock




| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | The number of shares eligible for future sale or which
    have registration rights could adversely affect the future
    market for our common stock.





53



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| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Our stock price may be volatile, and your investment in
    our stock could decline in value.





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | domestic and worldwide supplies and prices of and demand for
    natural gas and oil;                                                       
|
| |  | political conditions in natural gas and oil producing regions;                                                                              
|
| |  | war and acts of terrorism;                                                                                                                  
|
| |  | demand for our common stock;                                                                                                                
|
| |  | revenue and operating results failing to meet the expectations
    of securities analysts or investors in any particular quarter;           
|
| |  | changes in expectations as to our future financial performance
    or changes in financial estimates, if any, of public market
    analysts;
|
| |  | investor perception of our industry or our prospects;                                                                                       
|
| |  | general economic trends;                                                                                                                    
|
| |  | limited trading volume of our stock;                                                                                                        
|
| |  | changes in environmental and other governmental regulations;                                                                                
|
| |  | actual or anticipated quarterly variations in our operating
    results;                                                                    
|
| |  | our involvement in litigation;                                                                                                              
|
| |  | conditions generally affecting the oil and natural gas industry;                                                                            
|
| |  | the prices of oil and natural gas;                                                                                                          
|
| |  | announcements relating to our business or the business of our
    competitors;                                                              
|
| |  | our liquidity; and                                                                                                                          
|
| |  | our ability to obtain or raise additional funds.                                                                                            

54



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| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Control by our executive officers and directors will limit
    your ability to influence the outcome of matters requiring
    stockholder approval and could discourage our potential
    acquisition by third parties.





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our articles of incorporation, bylaws and
    Maryland law may make it more difficult to effect a change in
    control, which could adversely affect the price of our common
    stock.







| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | giving the board the exclusive right to fill all board vacancies;                                                      
|
| |  | providing that special meetings of stockholders may only be
    called by the board pursuant to a resolution adopted by



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a majority of the board, either upon a motion or upon written
    request by holders of at least 66 2/3% of the voting power of
    the shares entitled to vote, or
|
| |  | by our president;                                                                                                                                                  



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | a classified board of directors;                                                                          
|
| |  | permitting removal of directors only for cause and with a
    super-majority vote of the stockholders; and
|
| |  | prohibiting cumulative voting in the election of directors.                                               





55



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| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | We have not paid cash dividends on our common stock and do
    not anticipate paying any dividends on our common stock in the
    foreseeable future.








|        |                                            
|------- | -------------------------------------------
|Item 8: | Financial Statements and Supplementary Data








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








|         |                        
|-------- | -----------------------
|Item 9A: | Controls and Procedures








PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10: | Directors and Executive Officers of the Registrant










|         |                       
|-------- | ----------------------
|Item 11: | Executive Compensation



56



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##### Table of Contents








|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 12: | Securities Ownership of Certain Beneficial Owners and
    Management








|         |                                               
|-------- | ----------------------------------------------
|Item 13: | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14: | Principal Accountant Fees and Services






PART IV







|         |                                        
|-------- | ---------------------------------------
|Item 15: | Exhibits, Financial Statement Schedules



|                                                                                                         |  |           |     | 
|-------------------------------------------------------------------------------------------------------- |  | --------- | --- | 
|                                                                                                         |  | Form 10-K |    
|                                                                                                         |  | Pages     |    
|                                                                                                         |  |           |    
|Report of Independent Registered Public Accounting Firm                                                  |  |           | F-2 | 
|Consolidated Balance Sheets, December 31, 2004 and 2003                                                  |  |           | F-3 | 
|Consolidated Statements of Operations for the Years Ended
    December 31, 2004, 2003 and 2002           |  |           | F-4 | 
|Consolidated Statements of Stockholders Equity for the
    Years Ended December 31, 2004, 2003 and 2002 |  |           | F-5 | 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2004, 2003 and 2002           |  |           | F-6 | 
|Notes to Consolidated Financial Statements, December 31,
    2004, 2003 and 2002                         |  |           | F-8 | 





|        |   |             |  |                                                                                                                                                                             
|------- | - | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|No.     |   | Description
|        |   |            
|        | 2 | .1(1)       |  | Stock Exchange Agreement, dated September 1, 2000, by and
    among the Registrant, Petroleum Development Corporation, James
    C. Johnson, Jr. and Gregory S. Johnson.    
|        | 3 | .1         |  | Articles of Incorporation of Registrant filed May 20, 2004
    (Maryland)                                                                                                   
|       
|        | 3 | .2(10)      |  | Bylaws of the Registrant, dated June 2, 2004                                                                                                                                
|       
|        | 3 | .3(10)      |  | Articles Supplementary (Series A 8% Cumulative Convertible
    Preferred Stock ($.0001 Par Value) (Maryland)                                                                
|       
|        | 3 | .4(10)      |  | Certificate of Correction to Articles Supplementary
    (Series A 8% Cumulative Convertible Preferred Stock)
    (Maryland)                                                 
|       
|        | 3 | .5(10)      |  | Articles Supplementary (Series A Institutional 8%
    Cumulative Convertible Preferred Stock ($.0001 Par Value)
    (Maryland)                                              
|       
|        | 3 | .6(10)      |  | Certificate of Correction to Articles Supplementary
    (Series A Institutional 8% Cumulative Convertible Preferred
    Stock) (Maryland)                                   
|       
|        | 4 | .1         |  | Specimen Stock Certificate for Common Stock                                                                                                                                 
|       
|        | 4 | .2(1)       |  | Indenture between the Registrant and Continental Stock Transfer
    and Trust Company, as Trustee, dated December 1, 2000
    regarding 12% debentures due December 31, 2007

57



---



##### Table of Contents



|        |    |         |             |                                                                                                                                                                                                                                      
|------- | -- | ------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|No.     |    |         | Description
|        |    |         |            
|       
|        | 4  | .3(1)   |             | Form of Bond Certificate for 12% debentures due
    December 31, 2007                                                                                                                                                                
|       
|        | 4  | .4(1)   |             | Indenture between the Registrant and Continental Stock Transfer
    and Trust Company, as Trustee, dated February 1, 1999
    regarding 13.02% debentures due December 31, 2010 and
    December 31, 2015                            
|       
|        | 4  | .5(1)   |             | Form of Bond Certificate for 13.02% debentures due
    December 31, 2010                                                                                                                                                             
|       
|        | 4  | .6(1)   |             | Form of Bond Certificate for 13.02% debentures due
    December 31, 2015                                                                                                                                                             
|       
|        | 4  | .7(8)   |             | Form of Class A Common Stock Warrant                                                                                                                                                                                                 
|       
|        | 4  | .8(8)   |             | Form of Class B Common Stock Warrant                                                                                                                                                                                                 
|       
|        | 4  | .9(3)   |             | Form of Registration Rights Agreement made as of
    December 12, 2002, by and between Warren Resources the
    Investors in the Series A 8% Cumulative Convertible
    Preferred Stock.                                             
|       
|        | 4  | .10(6)  |             | Form of Subscription and Registration Rights Agreement dated
    February 3, 2004 by and between Warren Resources, Inc. and
    the Accredited Investors in Warren Resources, Inc.s
    private placement dated January 21, 2004    
|       
|        | 4  | .11(10) |             | Form of Subscription and Registration Rights Agreement dated
    July 30, 2004 by and between Warren Resources, Inc. and the
    Accredited Investors in Warren Resources, Inc.s private
    placement dated July 9, 2004           
|       
|        | 4  | .12(5)  |             | Form of Contribution Agreement by and between Warren Resources,
    Inc., and various Delaware limited liability companies.                                                                                                          
|       
|        | 10 | .1(1)   |             | 2000 Equity Incentive Plan for Warren E&P Subsidiary                                                                                                                                                                                 
|       
|        | 10 | .2(1)   |             | Amendment to 2000 Stock Incentive Plan for Warren E&P
    Subsidiary                                                                                                                                                                 
|       
|        | 10 | .3(1)   |             | 2001 Stock Incentive Plan                                                                                                                                                                                                            
|       
|        | 10 | .4(1)   |             | 2001 Key Employee Stock Incentive Plan                                                                                                                                                                                               
|       
|        | 10 | .5(1)   |             | Employment Agreement dated January 1, 2001, between the
    Registrant and Norman F. Swanton                                                                                                                                         
|       
|        | 10 | .6(1)   |             | Employment Agreement dated January 1, 2001, between the
    Registrant and Timothy A. Larkin                                                                                                                                         
|       
|        | 10 | .7(9)   |             | Amendment to Employment Agreement dated January 1, 2004,
    between the Registrant and Norman F. Swanton                                                                                                                            
|       
|        | 10 | .8(9)   |             | Amendment to Employment Agreement dated January 1, 2004,
    between the Registrant and Timothy A. Larkin                                                                                                                            
|       
|        | 10 | .9(9)   |             | Employment Agreement dated March 1, 2004, between the
    Registrant and Lloyd Davies                                                                                                                                                
|       
|        | 10 | .10(9)  |             | Employment Agreement dated January 1, 2004, between the
    Registrant and David E. Fleming                                                                                                                                          
|       
|        | 10 | .11(10) |             | Employment Agreement dated January 1, 2004, between the
    Registrant and Ellis G. Vickers                                                                                                                                          
|       
|        | 10 | .12(1)  |             | Form of Indemnification Agreement                                                                                                                                                                                                    
|       
|        | 10 | .13(1)  |             | Joint Venture Agreement dated May 24, 1999, by and between
    Warren Resources of California, Inc., Warren Development Corp.,
    Warren E&P and Magness Petroleum Company                                                          
|       
|        | 10 | .15(1)  |             | Gas Purchase Agreement dated January 28, 2000, by and
    between Western Gas Resources, Inc. and Big Basin Petroleum, LLC                                                                                                           
|       
|        | 10 | .16(1)  |             | December 20, 2000 Letter of Agreement to Amend the Gas
    Purchase Contract dated January 28, 2000, between Western
    Gas Resources Inc. and Petroleum Development Corp., as successor
    in interest to Big Basin Petroleum, LLC
|       
|        | 10 | .17(1)  |             | Gas Purchase and Sales Contract dated April 1, 2000,
    between the Registrant and Tenaska Marketing Ventures                                                                                                                       
|       
|        | 10 | .18(1)  |             | Form of Partnership Production Marketing Agreement                                                                                                                                                                                   
|       
|        | 10 | .19(4)  |             | Exchange Agreement dated as of the 11th day of December, 2002,
    between Anadarko E&P Company LP, and Warren Resources, Inc.                                                                                                       
|       
|        | 10 | .20(4)  |             | Joint Exploration Agreement, dated December 13, 2002
    between Warren Resources, Inc., Anadarko E&P Company LP, and
    Anadarko Land Corp.                                                                                        

58



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##### Table of Contents



|        |       |         |             |                                                                                                                                                                                                                          
|------- | ----- | ------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |         |            
|No.     |       |         | Description
|        |       |         |            
|       
|        | 10    | .21(4)  |             | Form of Rocky Mountain Unit Operating Agreement Between Anadarko
    E&P Company, LP and Warren Resources, Inc.                                                                                                          
|       
|        | 10    | .22(11) |             | Purchase and Sale Agreement dated November 24, 2004 by and
    among Warren Resources of California, Inc., Magness Petroleum
    Company and Next Generation Investments, LLC.                                           
|       
|        | 10    | .23(11) |             | Settlement Agreement and Release dated November 24, 2004 by
    and among Warren Resources, Inc., Warren Resources of
    California, Inc., Warren E&P, Inc., Warren Development Corp.
    and Magness Petroleum Company.
|       
|        | 11   |         |             | Statements regarding Computation of Per Share Earnings (Included
    in the Financial Statement in Part 4)                                                                                                               
|       
|        | 14(7) |         |             | Code of Ethics for Senior Financial Officers                                                                                                                                                                             
|       
|        | 21    | .1(12)  |             | Subsidiaries of the Registrant                                                                                                                                                                                           
|       
|        | 23    | .1     |             | Consent of Williamson Petroleum Consultants, Inc.                                                                                                                                                                        
|       
|        | 23    | .2     |             | Consent of CBIZ Valuation Group, LLC                                                                                                                                                                                     
|       
|        | 31    | .1     |             | Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                   
|        | 31    | .2     |             | Certification of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                  
|        | 32   |         |             | Section 1350 Certification                                                                                                                                                                                               






| |     |                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Companys Registration
    Statement on Form 10, Commission File No. 000-33275,
    filed on October 26, 2001.                  
|
| | (2) | Incorporated by reference to the Companys Amendment
    No. 1 to Registration Statement on Form 10/A,
    Commission File No. 000-33275, filed on March 6, 2002.
|
| | (3) | Incorporated by reference to the Companys Current Report
    on Form 8-K filed on December 12, 2002.                                                            
|
| | (4) | Incorporated by reference to the Companys Current Report
    on Form 8-K filed on December 24, 2002.                                                            
|
| | (5) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2003.                                                
|
| | (6) | Incorporated by reference to the Companys Current Report
    on Form 8-K, Commission File No. 000-33275, filed on
    February 11, 2004.                        
|
| | (7) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002, filed
    on March 31, 2003.                     
|
| | (8) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2003, filed
    on March 15, 2004.                     
|
| | (9) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2004,
    filed May 12, 2004.                       



|     |                                                                                                                                                  
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2004,
    filed on August 13, 2003.  
|    
|(11) | Incorporated by reference to the Companys Current Report
    on Form 8-K, Commission File No. 000-33275, filed
    November 30, 2004.           
|    
|(12) | Incorporated by reference to the Companys Registration
    Statement on From S-1/ A, Commission File
    No. 333-118535, filed December 2, 2004.



| |   |                
| | - | ---------------
| |  | Filed herewith.

59



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##### Table of Contents






SIGNATURES






| |                       
| | ----------------------
| | WARREN RESOURCES, INC.



| |    |                      
| | -- | ---------------------
| | By | /s/ Norman F. Swanton

| |                                    
| | -----------------------------------
| |                                    
| | Norman F. Swanton                  
| | President, Chief Executive Officer,
| | Director and Chairman              



| |    |                      
| | -- | ---------------------
| | By | /s/ Timothy A. Larkin

| |                             
| | ----------------------------
| |                             
| | Timothy A. Larkin           
| | Executive Vice President,   
| | Chief Financial Officer, and
| | Principal Accounting Officer





|                                             |  |                                                                                        |  |                |  | 
|-------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                    |  | Title (Principal Function)                                                             |  | Date          
|                                             |  |                                                                                        |  |               
|                                            
|/s/ Norman F. SwantonNorman
    F. Swanton   |  | President, Chief Executive Officer, Director and Chairman                              |  | March 15, 2005
|                                            
|/s/ Timothy A. LarkinTimothy
    A. Larkin   |  | Executive Vice President, Chief Financial Officer and Principal
    Accounting Officer |  | March 15, 2005
|                                            
|/s/ Anthony CoelhoAnthony
    Coelho         |  | Director                                                                               |  | March 15, 2005
|                                            
|/s/ Lloyd DaviesLloyd
    Davies             |  | Director                                                                               |  | March 15, 2005
|                                            
|/s/ Dominick DAllevaDominick
    DAlleva   |  | Director                                                                               |  | March 15, 2005
|                                            
|/s/ Marshall MillerMarshall
    Miller       |  | Director                                                                               |  | March 15, 2005
|                                            
|/s/ Thomas NoonanThomas
    Noonan           |  | Director                                                                               |  | March 15, 2005
|                                            
|/s/ Michael R. QuinlanMichael
    R. Quinlan |  | Director                                                                               |  | March 15, 2005
|                                            
|/s/ Chet BorgidaChet
    Borgida             |  | Director                                                                               |  | March 15, 2005

60



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS


|                                                                                                                      |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                      |  | Page |    
|                                                                                                                      |  |      |    
|Report of Independent Registered Public
    Accounting Firm                                                           |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                                      |  |      | F-3 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2004, 2003 and 2002                        |  |      | F-4 | 
|Consolidated Statement of
    Stockholders Equity (Deficit) for the years ended
    December 31, 2004, 2003 and 2002 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2004, 2003 and 2002                        |  |      | F-6 | 
|Notes to Consolidated Financial
    Statements                                                                        |  |      | F-8 | 

F-1



---



##### Table of Contents






Report of Independent Registered Public Accounting
Firm












Asset Retirement Obligations.








F-2



---



##### Table of Contents



Warren Resources, Inc. and Subsidiaries





CONSOLIDATED BALANCE SHEETS


|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |             |             |             |         |             | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------- | ----------- | ------- | ----------- | ----------- | ----------- | ------- | ----------- | 
|                                     |                                                                                                                                                                                                                                                                | December 31,                                                                 |                          
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                          
|                                     |                                                                                                                                                                                                                                                                | 2004                                                                         |                           |             | 2003    |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|ASSETS                              
|Current Assets                       |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |             |             |            
|                                     | Cash and cash equivalents                                                                                                                                                                                                                                      |                                                                              | $                         | 99,920,885  |         |             | $           | 24,528,999  |        
|                                     | Accounts receivable  trade                                                                                                                                                                                                                                    |                                                                              |                           | 1,481,925   |         |             |             | 2,386,180   |        
|                                     | Accounts receivable from affiliated partnerships                                                                                                                                                                                                               |                                                                              |                           | 143,297     |         |             |             | 389,271     |        
|                                     | Trading securities                                                                                                                                                                                                                                             |                                                                              |                           | 174,247     |         |             |             | 201,152     |        
|                                     | Restricted investments in U.S. Treasury bonds 
    available for sale, at fair value (amortized cost of $5,944,587
    in 2004 and $1,293,411 in 2003)                                                                                                        |                                                                              |                           | 6,099,968   |         |             |             | 1,402,358   |        
|                                     | Other current assets                                                                                                                                                                                                                                           |                                                                              |                           | 211,509     |         |             |             | 2,031,701   |        
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              | Total current assets      |             |         | 108,031,831 |             |             |         | 30,939,661  | 
|Other Assets                         |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |             |             |            
|                                     | Oil and gas properties  at cost, based on successful
    efforts method of accounting, net of accumulated depreciation,
    depletion, amortization and impairment                                                                                            |                                                                              |                           | 116,595,306 |         |             |             | 94,949,545  |        
|                                     | Property and equipment  at cost, net                                                                                                                                                                                                                          |                                                                              |                           | 395,444     |         |             |             | 591,663     |        
|                                     | Restricted investments in U.S. Treasury bonds 
    available for sale, at fair value (amortized cost of $10,778,899
    in 2004 and $12,627,574 in 2003)                                                                                                      |                                                                              |                           | 12,062,085  |         |             |             | 13,808,777  |        
|                                     | Deferred bond offering costs, net of accumulated amortization of
    $4,080,257 in 2004 and $3,684,097 in 2003                                                                                                                                                 |                                                                              |                           | 2,360,812   |         |             |             | 2,756,971   |        
|                                     | Goodwill                                                                                                                                                                                                                                                       |                                                                              |                           | 3,430,246   |         |             |             | 3,430,246   |        
|                                     | Other assets                                                                                                                                                                                                                                                   |                                                                              |                           | 4,034,937   |         |             |             | 4,576,800   |        
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              | Total other assets        |             |         | 138,878,830 |             |             |         | 120,114,002 | 
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                | $                                                                            | 246,910,661               |             |         | $           | 151,053,663 |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|Current Liabilities                  |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |             |             |            
|                                     | Current maturities of debentures                                                                                                                                                                                                                               |                                                                              | $                         | 17,316,070  |         |             | $           | 4,809,470   |        
|                                     | Current maturities of other long-term liabilities                                                                                                                                                                                                              |                                                                              |                           | 353,516     |         |             |             | 208,383     |        
|                                     | Accounts payable and accrued expenses                                                                                                                                                                                                                          |                                                                              |                           | 16,153,851  |         |             |             | 8,956,529   |        
|                                     | Deferred income  turnkey drilling contracts with
    affiliated partnerships                                                                                                                                                                                  |                                                                              |                           | 11,908,389  |         |             |             | 22,438,272  |        
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              | Total current liabilities |             |         | 45,731,826  |             |             |         | 36,412,654  | 
|Long-Term Liabilities                |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |             |             |            
|                                     | Debentures, less current portion                                                                                                                                                                                                                               |                                                                              |                           | 29,160,630  |         |             |             | 43,285,230  |        
|                                     | Other long-term liabilities, less current portion                                                                                                                                                                                                              |                                                                              |                           | 3,207,809   |         |             |             | 1,613,081   |        
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              | 32,368,439                |             |         |             | 44,898,311  |            
|Minority Interest                    |                                                                                                                                                                                                                                                                |                                                                              | 11,240,990                |             |         |             | 13,348,654  |            
|Stockholders Equity                 |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |             |             |            
|                                     | 8% convertible preferred stock  $.0001 par
    value; authorized, 10,000,000 shares; issued and
    outstanding, 6,560,809 shares in 2004 and
    6,507,729 shares in 2003 (aggregate liquidation preference
    $78,729,708 in 2004 and $78,092,748 in 2003) |                                                                              |                           | 77,270,413  |         |             |             | 76,334,024  |        
|                                     | Common stock  $.0001 par value; authorized,
    100,000,000 shares; issued, 34,347,854 shares in 2004
    and 17,349,070 shares in 2003                                                                                                                       |                                                                              |                           | 3,435       |         |             |             | 1,735       |        
|                                     | Additional paid-in capital                                                                                                                                                                                                                                     |                                                                              |                           | 157,847,314 |         |             |             | 47,739,159  |        
|                                     | Accumulated deficit                                                                                                                                                                                                                                            |                                                                              |                           | (77,689,476 | )       |             |             | (67,729,178 | )      
|                                     | Accumulated other comprehensive income, net of applicable income
    taxes of $576,000 in 2004 and $517,000 in 2003                                                                                                                                            |                                                                              |                           | 865,775     |         |             |             | 776,359     |        
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              | 158,297,461               |             |         |             | 57,122,099  |            
|                                     |                                                                                                                                                                                                                                                                | Less common stock in Treasury  at cost;
    632,250 shares in 2004 and 2003 |                           |             | 728,055 |             |             |             | 728,055 |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              | 157,569,406               |             |         |             | 56,394,044  |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            
|                                     |                                                                                                                                                                                                                                                                | $                                                                            | 246,910,661               |             |         | $           | 151,053,663 |            
|                                     |                                                                                                                                                                                                                                                                |                                                                              |                           |             |         |            



F-3



---



##### Table of Contents



Warren Resources, Inc. and Subsidiaries





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                         |                                                                                |                                            |            |            |             |   |            |            |            |   |            |            |            |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ---------- | ----------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                         |                                                                                | Year Ended December 31,                    |           
|                                                                         |                                                                                |                                            |           
|                                                                         |                                                                                | 2004                                       |            |            | 2003        |   |            | 2002       |           
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|Revenues                                                                 |                                                                                |                                            |            |            |             |   |            |            |            |   |            |           
|                                                                         | Turnkey contracts with affiliated partnerships                                 |                                            | $          | 10,529,883 |             |   | $          | 11,300,646 |            |   | $          | 5,841,110  |           
|                                                                         | Oil and gas sales from marketing activities                                    |                                            |            | 6,171,338  |             |   |            | 5,620,522  |            |   |            | 11,272,398 |           
|                                                                         | Well services, 84%, 81% and 79% with affiliated partnerships,
    respectively |                                            |            | 1,070,004  |             |   |            | 1,167,564  |            |   |            | 1,895,453  |           
|                                                                         | Oil and gas sales                                                              |                                            |            | 6,454,334  |             |   |            | 5,717,814  |            |   |            | 592,528    |           
|                                                                         | Net gain (loss) on investments                                                 |                                            |            | (42,916    | )           |   |            | 21,761     |            |   |            | 464,185    |           
|                                                                         | Interest and other income                                                      |                                            |            | 2,088,994  |             |   |            | 1,340,059  |            |   |            | 5,257,842  |           
|                                                                         | Gain on sale of unproved oil and gas properties                                |                                            |            | 120,193    |             |   |            | 494,497    |            |   |            | 4,286,774  |           
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|                                                                         |                                                                                |                                            | 26,391,830 |            |             |   | 25,662,863 |            |            |   | 29,610,290 |           
|Expenses                                                                 |                                                                                |                                            |            |            |             |   |            |            |            |   |            |           
|                                                                         | Turnkey contracts                                                              |                                            |            | 12,932,124 |             |   |            | 7,284,653  |            |   |            | 4,965,426  |           
|                                                                         | Cost of marketed oil and gas purchased from affiliated
    partnerships        |                                            |            | 6,028,727  |             |   |            | 5,500,426  |            |   |            | 11,121,522 |           
|                                                                         | Well services                                                                  |                                            |            | 672,933    |             |   |            | 662,128    |            |   |            | 838,878    |           
|                                                                         | Production and exploration                                                     |                                            |            | 3,935,137  |             |   |            | 3,811,595  |            |   |            | 1,325,764  |           
|                                                                         | Depreciation, depletion, amortization and impairment                           |                                            |            | 4,022,725  |             |   |            | 3,249,860  |            |   |            | 9,930,162  |           
|                                                                         | General and administrative                                                     |                                            |            | 8,116,164  |             |   |            | 4,496,034  |            |   |            | 6,277,792  |           
|                                                                         | Interest                                                                       |                                            |            | 493,977    |             |   |            | 1,528,069  |            |   |            | 6,312,631  |           
|                                                                         | Contingent repurchase obligation                                               |                                            |            |           |             |   |            |           |            |   |            | (3,064,661 | )         
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|                                                                         |                                                                                |                                            | 36,201,787 |            |             |   | 26,532,765 |            |            |   | 37,707,514 |           
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|                                                                         |                                                                                | Loss before provision for income taxes     |            |            | (9,809,957  | ) |            |            | (869,902   | ) |            |            | (8,097,224 | )
|Deferred income tax expense (benefit)                                    |                                                                                |                                            | (59,000    | )          |             |   | 129,000    |            |            |   | (471,000   | )         
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|Net loss before minority interest and change in accounting
    principle |                                                                                |                                            | (9,750,957 | )          |             |   | (998,902   | )          |            |   | (7,626,224 | )         
|Minority interest                                                        |                                                                                |                                            | (209,341   | )          |             |   | (112,263   | )          |            |   |           |           
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|Net loss before change in accounting principle                           |                                                                                |                                            | (9,960,298 | )          |             |   | (1,111,165 | )          |            |   | (7,626,224 | )         
|Cumulative effect of change in accounting principle                      |                                                                                |                                            |           |            |             |   | (88,218    | )          |            |   |           |           
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|                                                                         |                                                                                | Net loss                                   |            |            | (9,960,298  | ) |            |            | (1,199,383 | ) |            |            | (7,626,224 | )
|Less dividends and accretion on preferred shares                         |                                                                                |                                            | 6,590,886  |            |             |   | 4,561,543  |            |            |   | 16,206     |           
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|                                                                         |                                                                                | Net loss applicable to common stockholders |            | $          | (16,551,184 | ) |            | $          | (5,760,926 | ) |            | $          | (7,642,430 | )
|                                                                         |                                                                                |                                            |            |            |             |   |            |            |           
|Basic and diluted loss per common share                                  |                                                                                | $                                          | (0.84      | )          |             | $ | (0.34      | )          |            | $ | (0.44      | )         
|Weighted average common shares outstanding                               |                                                                                |                                            | 19,739,048 |            |             |   | 16,827,857 |            |            |   | 17,339,869 |           



F-4



---



##### Table of Contents



Warren Resources, Inc. and Subsidiaries





CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(DEFICIT)


Years ended December 31, 2004, 2003 and 2002


|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |            |          |            |  
|---------------------------------------------------------------- | ------------------ | ------------------------------------------------------------------------------------------------------------- | ------------------------ | - | ------------ | - | ---------- | ---------- | - | ----------- | ----------- | - | ----- | ------------- | ------- | - | -------- | ------------- | ----------- | ------ | - | - | ----------- | ---------- | - | --------- | ------- | - | -------- | - | -------- | - | - | - | ----------- | ---------- | -------- | ---------- | -
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   | Accumulated |             |   |       |               | Total   |  
|                                                                 |                    | Preferred Stock                                                                                               |                          |   | Common Stock |   |            | Additional |   |             |             |   | Other |               |         |   |          | Stockholders |            
|                                                                 |                    |                                                                                                               |                          |   |              |   |            | Paid-in    |   |             | Accumulated |   |       | Comprehensive |         |   | Treasury |               |             | Equity |  
|                                                                 |                    | Shares                                                                                                        |                          |   | Amount       |   |            | Shares     |   |             | Amount      |   |       | Capital       |         |   | Deficit  |               |             | Income |   |   | Stock       |            |   | (Deficit) |        
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        
|Balance at January 1, 2002                                       |                    |                                                                                                               |                         |   |              |   |           |            |   |             | 17,537,579  |   |       |               | 17,538  |   |          |               | 52,197,669  |        |   |   | (58,903,571 | )          |   |           | 264,260 |   |          |   | (10,010  | ) |   |   | (6,434,114  | )         
|Change in par value of common stock                              |                    |                                                                                                               |                         |   |              |   |           |            |   |             |            |   |       |               | (15,784 | ) |          |               | 15,784      |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   |            |           
|Dividends declared on preferred stock                            |                    |                                                                                                               |                         |   |              |   |           |            |   |             |            |   |       |               |        |   |          |               | (16,206     | )      |   |   |            |            |   |           |        |   |          |   |         |   |   |   | (16,206     | )         
|Shares issued for services                                       |                    |                                                                                                               |                         |   |              |   |           |            |   |             | 23,695      |   |       |               | 2       |   |          |               | 86,902      |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 86,904      |           
|Conversion to common stock from convertible debt                 |                    |                                                                                                               |                         |   |              |   |           |            |   |             | 20,722      |   |       |               | 2       |   |          |               | 139,998     |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 140,000     |           
|Issuance of preferred stock, net of offering costs of $454,740   |                    |                                                                                                               | 1,784,197                |   |              |   | 20,955,838 |            |   |             |            |   |       |               |        |   |          |               |            |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 20,955,838  |           
|Purchase of treasury stock                                       |                    |                                                                                                               |                         |   |              |   |           |            |   |             |            |   |       |               |        |   |          |               |            |        |   |   |            |            |   |           |        |   |          |   | (811,573 | ) |   |   | (811,573    | )         
|Comprehensive loss                                               |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |           
|                                                                 | Net loss           |                                                                                                               |                          |  |              |   |            |           |   |             |             |  |       |               |         |  |          |               |             |       |   |   |             | (7,626,224 | ) |           |         |  |          |   |          |  |   |   |             | (7,626,224 | )       
|                                                                 | Comprehensive loss |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |            |         
|                                                                 |                    | Net change in unrealized gain on investment securities available
    for sale, net of applicable income taxes |                          |   |             |   |            |            |  |             |             |   |      |               |         |   |         |               |             |        |  |   |             |            |  |           |         |   | 707,248  |   |          |   |  |   |             |            | 707,248  |           
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        
|                                                                 |                    |                                                                                                               | Total comprehensive loss |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |            |          | (6,918,976 | )
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        
|Balance at December 31, 2002                                     |                    |                                                                                                               | 1,784,197                |   |              |   | 20,955,838 |            |   |             | 17,581,996  |   |       |               | 1,758   |   |          |               | 52,424,147  |        |   |   | (66,529,795 | )          |   |           | 971,508 |   |          |   | (821,583 | ) |   |   | 7,001,873   |           
|Retirement of common stock                                       |                    |                                                                                                               |                         |   |              |   |           |            |   |             | (232,926    | ) |       |               | (23     | ) |          |               | (123,445    | )      |   |   |            |            |   |           |        |   |          |   | 93,528   |   |   |   | (29,940     | )         
|Dividends declared on preferred stock                            |                    |                                                                                                               |                         |   |              |   |           |            |   |             |            |   |       |               |        |   |          |               | (4,272,297  | )      |   |   |            |            |   |           |        |   |          |   |         |   |   |   | (4,272,297  | )         
|Issuance of preferred stock, net of offering costs of $2,048,730 |                    |                                                                                                               | 4,723,532                |   |              |   | 55,088,940 |            |   |             |            |   |       |               |        |   |          |               |            |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 55,088,940  |           
|Accretion of preferred stock to redemption value                 |                    |                                                                                                               |                         |   |              |   | 289,246    |            |   |             |            |   |       |               |        |   |          |               | (289,246    | )      |   |   |            |            |   |           |        |   |          |   |         |   |   |   |            |           
|Comprehensive loss                                               |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |           
|                                                                 | Net loss           |                                                                                                               |                          |  |              |   |            |           |   |             |             |  |       |               |         |  |          |               |             |       |   |   |             | (1,199,383 | ) |           |         |  |          |   |          |  |   |   |             | (1,199,383 | )       
|                                                                 | Comprehensive loss |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |            |         
|                                                                 |                    | Net change in unrealized gain on investment securities available
    for sale, net of applicable income taxes |                          |   |             |   |            |            |  |             |             |   |      |               |         |   |         |               |             |        |  |   |             |            |  |           |         |   | (195,149 | ) |          |   |  |   |             |            | (195,149 | )         
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        
|                                                                 |                    |                                                                                                               | Total comprehensive loss |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |            |          | (1,394,532 | )
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        
|Balance at December 31, 2003                                     |                    |                                                                                                               | 6,507,729                |   |              |   | 76,334,024 |            |   |             | 17,349,070  |   |       |               | 1,735   |   |          |               | 47,739,159  |        |   |   | (67,729,178 | )          |   |           | 776,359 |   |          |   | (728,055 | ) |   |   | 56,394,044  |           
|Issuance of common stock, net of offering costs                  |                    |                                                                                                               |                         |   |              |   |           |            |   |             | 16,793,980  |   |       |               | 1,679   |   |          |               | 115,802,018 |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 115,803,697 |           
|Shares issued from exercise of options                           |                    |                                                                                                               |                         |   |              |   |           |            |   |             | 186,056     |   |       |               | 19      |   |          |               | 744,205     |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 744,224     |           
|Shares issued from exercise of Class A Warrants                  |                    |                                                                                                               |                         |   |              |   |           |            |   |             | 8,482       |   |       |               | 1       |   |          |               | 84,819      |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 84,820      |           
|Conversion to common stock from debentures                       |                    |                                                                                                               |                         |   |              |   |           |            |   |             | 10,266      |   |       |               | 1       |   |          |               | 67,999      |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 68,000      |           
|Dividends declared on preferred stock                            |                    |                                                                                                               |                         |   |              |   |           |            |   |             |            |   |       |               |        |   |          |               | (6,282,213  | )      |   |   |            |            |   |           |        |   |          |   |         |   |   |   | (6,282,213  | )         
|Issuance of preferred stock, net of offering costs of $9,232     |                    |                                                                                                               | 53,080                   |   |              |   | 627,716    |            |   |             |            |   |       |               |        |   |          |               |            |        |   |   |            |            |   |           |        |   |          |   |         |   |   |   | 627,716     |           
|Accretion of preferred stock to redemption value                 |                    |                                                                                                               |                         |   |              |   | 308,673    |            |   |             |            |   |       |               |        |   |          |               | (308,673    | )      |   |   |            |            |   |           |        |   |          |   |         |   |   |   |            |           
|Comprehensive loss                                               |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |           
|                                                                 | Net loss           |                                                                                                               |                          |  |              |   |            |           |   |             |             |  |       |               |         |  |          |               |             |       |   |   |             | (9,960,298 | ) |           |         |  |          |   |          |  |   |   |             | (9,960,298 | )       
|                                                                 | Comprehensive loss |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |            |         
|                                                                 |                    | Net change in unrealized gain on investment securities available
    for sale, net of applicable income taxes |                          |   |             |   |            |            |  |             |             |   |      |               |         |   |         |               |             |        |  |   |             |            |  |           |         |   | 89,416   |   |          |   |  |   |             |            | 89,416   |           
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        
|                                                                 |                    |                                                                                                               | Total comprehensive loss |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |         |   |          |   |          |   |   |   |             |            |          | (9,870,882 | )
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        
|Balance at December 31, 2004                                     |                    |                                                                                                               | 6,560,809                |   |              | $ | 77,270,413 |            |   |             | 34,347,854  |   |       | $             | 3,435   |   |          | $             | 157,847,314 |        |   | $ | (77,689,476 | )          |   | $         | 865,775 |   |          | $ | (728,055 | ) |   | $ | 157,569,406 |           
|                                                                 |                    |                                                                                                               |                          |   |              |   |            |            |   |             |             |   |       |               |         |   |          |               |             |        |   |   |             |            |   |           |        



F-5



---



##### Table of Contents



Warren Resources, Inc. and Subsidiaries





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |   |            |             |            |   |            |            |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ---- | ----------- | ----------- | ----------- | - | ---------- | ----------- | ---------- | - | ---------- | ---------- | -
|                                               |                                                                                               | Year Ended December 31,           |                                                                            
|                                               |                                                                                               |                                   |                                                                            
|                                               |                                                                                               | 2004                              |                                                                             |                                                     | 2003 |             |             | 2002        |  
|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |  
|Cash flows from operating activities:          |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |   |            |             |           
|                                               | Net loss                                                                                      |                                   | $                                                                           | (9,960,298                                          | )    |             | $           | (1,199,383  | ) |            | $           | (7,626,224 | )
|                                               | Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities: |                                   |                                                                             |                                                     |      |             |             |             |   |            |             |            |  
|                                               |                                                                                               |                                   | Accretion of discount on available for sale debt securities                 |                                                     |      | (669,882    | )           |             |   | (563,495   | )           |            |   | (514,818   | )         
|                                               |                                                                                               |                                   | Amortization and write-off of deferred bond offering costs                  |                                                     |      | 396,160     |             |             |   | 633,051    |             |            |   | 515,886    |           
|                                               |                                                                                               |                                   | Gain on sale of U.S. Treasury bonds  available
    for sale                |                                                     |      | (58,693     | )           |             |   | (132,827   | )           |            |   | (28,104    | )         
|                                               |                                                                                               |                                   | Depreciation, depletion, amortization and impairment                        |                                                     |      | 4,022,725   |             |             |   | 3,249,860  |             |            |   | 9,930,162  |           
|                                               |                                                                                               |                                   | Accretion of asset retirement obligation                                    |                                                     |      | 52,771      |             |             |   | 62,452     |             |            |   |           |           
|                                               |                                                                                               |                                   | Cumulative effect of accounting change                                      |                                                     |      |            |             |             |   | 88,218     |             |            |   |           |           
|                                               |                                                                                               |                                   | Gain on sale of oil and gas properties                                      |                                                     |      | (120,193    | )           |             |   | (494,497   | )           |            |   | (4,286,774 | )         
|                                               |                                                                                               |                                   | Common stock issued for services                                            |                                                     |      |            |             |             |   |           |             |            |   | 86,904     |           
|                                               |                                                                                               |                                   | Non-cash compensation                                                       |                                                     |      |            |             |             |   |           |             |            |   | 200,000    |           
|                                               |                                                                                               |                                   | Deferred tax expense (benefit)                                              |                                                     |      | (59,000     | )           |             |   | 129,000    |             |            |   | (471,000   | )         
|                                               |                                                                                               | Change in assets and liabilities: |                                                                             |                                                     |      |             |             |             |   |            |             |            |   |           
|                                               |                                                                                               |                                   | (Increase) decrease in trading securities                                   |                                                     |      | 26,906      |             |             |   | (122,769   | )           |            |   | 127,606    |           
|                                               |                                                                                               |                                   | (Increase) decrease in accounts receivable  trade                          |                                                     |      | 904,255     |             |             |   | 4,509,303  |             |            |   | (902,157   | )         
|                                               |                                                                                               |                                   | (Increase) decrease in accounts receivable from affiliated
    partnerships |                                                     |      | 245,974     |             |             |   | 531,981    |             |            |   | (119,591   | )         
|                                               |                                                                                               |                                   | Decrease in other assets                                                    |                                                     |      | 2,362,056   |             |             |   | 810,183    |             |            |   | 2,886,299  |           
|                                               |                                                                                               |                                   | Increase (decrease) in accounts payable and accrued expenses                |                                                     |      | 7,122,794   |             |             |   | 3,633,658  |             |            |   | (2,704,532 | )         
|                                               |                                                                                               |                                   | Decrease in deferred income from affiliated partnerships                    |                                                     |      | (10,529,883 | )           |             |   | (5,223,496 | )           |            |   | (677,861   | )         
|                                               |                                                                                               |                                   | Decrease in contingent repurchase obligation to affiliated
    partnerships |                                                     |      |            |             |             |   |           |             |            |   | (3,064,661 | )         
|                                               |                                                                                               |                                   | Increase (decrease) in other long-term liabilities                          |                                                     |      | 1,757,769   |             |             |   | (633,611   | )           |            |   | 548,200    |           
|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |  
|                                               |                                                                                               |                                   |                                                                             | Net cash provided by (used in) operating activities |      |             | (4,506,539  | )           |   |            | 5,277,628   |            |   |            | (6,100,665 | )
|Cash flows from investing activities:          |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |   |            |             |           
|                                               | Purchases of oil and gas properties                                                           |                                   |                                                                             | (27,093,223                                         | )    |             |             | (12,699,505 | ) |            |             | (4,699,453 | )
|                                               | Purchases of property and equipment                                                           |                                   |                                                                             | (9,725                                              | )    |             |             | (40,043     | ) |            |             | (50,592    | )
|                                               | Proceeds from the sale of oil and gas properties, net of selling
    fees                     |                                   |                                                                             | 120,193                                             |      |             |             | 494,497     |   |            |             | 12,874,512 |  
|                                               | Proceeds from the sale of property and equipment                                              |                                   |                                                                             | 24,000                                              |      |             |             | 52,353      |   |            |             |           |  
|                                               | Purchases of U.S. Treasury bonds  available for
    sale                                     |                                   |                                                                             | (2,367,786                                          | )    |             |             | (5,692,731  | ) |            |             | (14,906    | )
|                                               | Proceeds from U.S. Treasury bonds  available for
    sale                                    |                                   |                                                                             | 293,858                                             |      |             |             | 723,442     |   |            |             | 845,081    |  
|                                               | (Increase) decrease in restricted cash                                                        |                                   |                                                                             |                                                    |      |             |             | 3,637,775   |   |            |             | (3,637,775 | )
|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |  
|                                               |                                                                                               |                                   |                                                                             | Net cash provided by (used in) investing activities |      |             | (29,032,683 | )           |   |            | (13,524,212 | )          |   |            | 5,316,867  |  
|Cash flows from financing activities:          |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |   |            |             |           
|                                               | Payments on long-term debt                                                                    |                                   |                                                                             | (1,620,679                                          | )    |             |             | (1,911,336  | ) |            |             | (2,813,965 | )
|                                               | Issuance of common stock, net                                                                 |                                   |                                                                             | 116,632,741                                         |      |             |             |            |   |            |             |           |  
|                                               | Issuance of preferred stock, net                                                              |                                   |                                                                             | 126,730                                             |      |             |             | 14,304,156  |   |            |             | 3,861,718  |  
|                                               | Dividends paid on preferred stock                                                             |                                   |                                                                             | (6,207,684                                          | )    |             |             | (2,772,233  | ) |            |             |           |  
|                                               | Purchase of treasury stock                                                                    |                                   |                                                                             |                                                    |      |             |             | (29,940     | ) |            |             | (2,624     | )
|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |  
|                                               |                                                                                               |                                   |                                                                             | Net cash provided by financing activities           |      |             | 108,931,108 |             |   |            | 9,590,647   |            |   |            | 1,045,129  |  
|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |  
|                                               |                                                                                               |                                   |                                                                             | Net increase in cash and cash equivalents           |      |             | 75,391,886  |             |   |            | 1,344,063   |            |   |            | 261,331    |  
|Cash and cash equivalents at beginning of year |                                                                                               |                                   | 24,528,999                                                                  |                                                     |      |             | 23,184,936  |             |   |            | 22,923,605  |           
|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |  
|Cash and cash equivalents at end of year       |                                                                                               | $                                 | 99,920,885                                                                  |                                                     |      | $           | 24,528,999  |             |   | $          | 23,184,936  |           
|                                               |                                                                                               |                                   |                                                                             |                                                     |      |             |             |             |  



F-6



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Continued)


Year ended December 31,


|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            |  |  |   |           |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | - | --------- | ---- |  | - | ---------- |  |  | - | --------- | ---------- | 
|                                                                                                                                                                                                                                                |                                                                                                                                                                   | 2004                                    |   |           | 2003 |  |   | 2002       | 
|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            | 
|Supplemental disclosure of cash flow information                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            |  |  |   |          
|                                                                                                                                                                                                                                                | Cash paid for interest, net of amount capitalized                                                                                                                 |                                         | $ | 45,082    |      |  | $ | 895,018    |  |  | $ | 5,770,006 |           
|                                                                                                                                                                                                                                                | Cash paid for income taxes                                                                                                                                        |                                         | $ |          |      |  | $ |           |  |  | $ |          |           
|Noncash investing and financing activities:                                                                                                                                                                                                     |                                                                                                                                                                   |                                         |   |           |      |  |   |            |  |  |   |          
|                                                                                                                                                                                                                                                | Conversion to common stock from convertible debt                                                                                                                  |                                         |   | 68,000    |      |  |   |           |  |  |   | 140,000   |           
|                                                                                                                                                                                                                                                | Exchange of 2007 Sinking Fund Bond for preferred stock                                                                                                            |                                         |   |          |      |  |   | 3,858,392  |  |  |   | 978,600   |           
|                                                                                                                                                                                                                                                | Exchange of 2017 Sinking Fund Bond for preferred stock                                                                                                            |                                         |   |          |      |  |   | 864,160    |  |  |   |          |           
|                                                                                                                                                                                                                                                | Accounts receivable consisting of service credits relating to
    the sale of Pinnacle                                                                            |                                         |   |          |      |  |   |           |  |  |   | 450,000   |           
|                                                                                                                                                                                                                                                | Other assets consisting of deferred payments relating to the
    conveyance of oil and gas property                                                               |                                         |   |          |      |  |   |           |  |  |   | 5,818,183 |           
|                                                                                                                                                                                                                                                | Purchase of treasury stock of $808,949 and incurrence of noncash
    compensation of $200,000 through the issuance of a
    noninterest-bearing note (see note D) |                                         |   |          |      |  |   |           |  |  |   | 1,008,949 |           
|                                                                                                                                                                                                                                                | Accrued preferred stock dividend                                                                                                                                  |                                         |   | 1,574,594 |      |  |   | 1,500,064  |  |  |   | 16,206    |           
|                                                                                                                                                                                                                                                | Preferred stock issued to minority interest (see note J)                                                                                                          |                                         |   | 500,986   |      |  |   | 3,782,664  |  |  |   |          |           
|                                                                                                                                                                                                                                                | Preferred stock issued to acquire property (see note I)                                                                                                           |                                         |   |          |      |  |   | 7,972,000  |  |  |   |          |           
|During 2003, the Company acquired affiliated L.L.C. interests in
    ex-change for 1,641,628 shares of preferred stock (see
    note J). In conjunction with the acquisition, assets were
    acquired and liabilities were assumed as follows: |                                                                                                                                                                   |                                         |   |           |      |  |   |            |  |  |   |          
|                                                                                                                                                                                                                                                | Estimated fair value of assets acquired                                                                                                                           |                                         |   |           |      |  | $ | 28,346,462 |  |  |   |           |           
|                                                                                                                                                                                                                                                | Liabilities assumed                                                                                                                                               |                                         |   |           |      |  |   | 8,646,926  |  |  |   |           |           
|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            | 
|                                                                                                                                                                                                                                                | Estimated fair value of preferred stock                                                                                                                           |                                         |   |           |      |  | $ | 19,699,536 |  |  |   |           |           
|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            | 
|During 2003, the Company recorded the cumulative effect of
    SFAS 143 for asset retirement obligations, as follows:                                                                                                                           |                                                                                                                                                                   |                                         |   |           |      |  |   |            |  |  |   |          
|                                                                                                                                                                                                                                                | Increase to oil and gas properties                                                                                                                                |                                         |   |           |      |  | $ | 557,465    |  |  |   |           |           
|                                                                                                                                                                                                                                                | Increase of asset retirement obligation                                                                                                                           |                                         |   |           |      |  |   | 645,683    |  |  |   |           |           
|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            | 
|                                                                                                                                                                                                                                                | Cumulative effect of accounting change                                                                                                                            |                                         |   |           |      |  | $ | 88,218     |  |  |   |           |           
|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            | 
|During 2002, the Company acquired affiliated L.L.C. interests in
    ex-change for 1,342,960 shares of preferred stock
    (note J). In conjunction with the acquisition, assets were
    acquired and liabilities were assumed as follows:     |                                                                                                                                                                   |                                         |   |           |      |  |   |            |  |  |   |          
|                                                                                                                                                                                                                                                |                                                                                                                                                                   | Estimated fair value of assets acquired |   |           |      |  |   |            |  |  |   | $         | 25,256,708 | 
|                                                                                                                                                                                                                                                |                                                                                                                                                                   | Liabilities assumed                     |   |           |      |  |   |            |  |  |   |           | 9,141,188  | 
|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            | 
|                                                                                                                                                                                                                                                |                                                                                                                                                                   | Estimated fair value of preferred stock |   |           |      |  |   |            |  |  |   | $         | 16,115,520 | 
|                                                                                                                                                                                                                                                |                                                                                                                                                                   |                                         |   |           |      |  |   |            | 



F-7



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004, 2003 and 2002


NOTE A  ORGANIZATION AND ACCOUNTING POLICIES




| |                     
| | --------------------
| | Nature of Operations





| |                            
| | ---------------------------
| | Principles of Consolidation







| |                       
| | ----------------------
| | Oil and Gas Properties









F-8



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                    
| | -------------------
| | Revenue Recognition







| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                    
| | -------------------
| | Accounts Receivable



F-9



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |            
| | -----------
| | Investments





| |               
| | --------------
| | Offering Costs





| |             
| | ------------
| | Income Taxes





| |                 
| | ----------------
| | Use of Estimates





| |               
| | --------------
| | Gas Imbalances







| |                     
| | --------------------
| | Capitalized Interest





| |                                 
| | --------------------------------
| | Accounting For Long-Lived Assets



F-10



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | Stock Based Compensation



|                                           |                                                                      |      |   |             |      |  |   |            |   |  |   |            |  
|------------------------------------------ | -------------------------------------------------------------------- | ---- | - | ----------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                           |                                                                      | 2004 |   |             | 2003 |  |   | 2002       |  
|                                           |                                                                      |      |   |             |      |  |   |            |  
|Net loss applicable to common stockholders |                                                                      |      |   |             |      |  |   |            |   |  |   |           
|                                           | As reported                                                          |      | $ | (16,551,184 | )    |  | $ | (5,760,926 | ) |  | $ | (7,642,430 | )
|                                           | Deduct: Stock-based employee compensation expense under
    SFAS 123 |      |   | (963,483    | )    |  |   | (2,147,458 | ) |  |   | (409,682   | )
|                                           |                                                                      |      |   |             |      |  |   |            |  
|                                           | Pro forma                                                            |      | $ | (17,514,667 | )    |  | $ | (7,908,384 | ) |  | $ | (8,052,112 | )
|                                           |                                                                      |      |   |             |      |  |   |            |  
|Basic and diluted loss per common share:   |                                                                      |      |   |             |      |  |   |            |   |  |   |           
|                                           | As reported                                                          |      | $ | (0.84       | )    |  | $ | (0.34      | ) |  | $ | (0.44      | )
|                                           | Pro forma                                                            |      | $ | (0.89       | )    |  | $ | (0.47      | ) |  | $ | (0.46      | )





F-11



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                       
| | ----------------------
| | Property and Equipment



|          |                                                                           |      |           |         |      |   |           |         | 
|--------- | ------------------------------------------------------------------------- | ---- | --------- | ------- | ---- | - | --------- | ------- | 
|          |                                                                           | 2004 |           |         | 2003 |  
|          |                                                                           |      |           |         |      |  
|Equipment |                                                                           | $    | 957,913   |         |      | $ | 1,004,891 |        
|          | Automobiles and trucks                                                    |      |           | 30,433  |      |   |           | 30,433  | 
|          | Furniture and fixtures                                                    |      |           | 152,704 |      |   |           | 145,260 | 
|          | Land and buildings                                                        |      |           | 99,237  |      |   |           | 119,736 | 
|          | Office equipment                                                          |      |           | 101,371 |      |   |           | 99,090  | 
|          |                                                                           |      |           |         |      |  
|          |                                                                           |      | 1,341,658 |         |      |   | 1,399,410 |        
|          | Less accumulated depreciation, depletion, amortization and
    impairment |      |           | 946,214 |      |   |           | 807,747 | 
|          |                                                                           |      |           |         |      |  
|          |                                                                           | $    | 395,444   |         |      | $ | 591,663   |        
|          |                                                                           |      |           |         |      |  



| |                                 
| | --------------------------------
| | Earnings (Loss) Per Common Share





|                                 |  |                         |           |  |      |  |           |      |  |  |           | 
|-------------------------------- |  | ----------------------- | --------- |  | ---- |  | --------- | ---- |  |  | --------- | 
|                                 |  | Year Ended December 31, |          
|                                 |  |                         |          
|                                 |  | 2004                    |           |  | 2003 |  |           | 2002 | 
|                                 |  |                         |           |  |      |  |           |      | 
|Employee stock options           |  |                         | 2,625,206 |  |      |  | 2,241,012 |      |  |  | 1,514,459 | 
|Convertible bonds and debentures |  |                         | 5,188,788 |  |      |  | 5,387,820 |      |  |  | 5,768,903 | 
|Preferred stock                  |  |                         | 6,560,809 |  |      |  | 6,507,729 |      |  |  | 1,784,197 | 
|Warrants                         |  |                         | 3,109,643 |  |      |  | 180,625   |      |  |  |          | 







| |         
| | --------
| | Goodwill

Goodwill and
Other Intangible Assets,




F-12



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                             
| | ----------------------------
| | Asset Retirement Obligations





|                                       |                 |              |         |         |      |   |           |         | 
|-------------------------------------- | --------------- | ------------ | ------- | ------- | ---- | - | --------- | ------- | 
|                                       |                 | December 31, |        
|                                       |                 |              |        
|                                       |                 | 2004         |         |         | 2003 |  
|                                       |                 |              |         |         |      |  
|Balance at beginning of year           |                 | $            | 896,448 |         |      | $ | 1,079,884 |        
|Liabilities incurred in current year   |                 |              | 7,904   |         |      |   | 8,358     |        
|Liabilities eliminated in current year |                 |              | (73,291 | )       |      |   | (254,246  | )      
|Accretion expense                      |                 |              | 52,771  |         |      |   | 62,452    |        
|                                       |                 |              |         |         |      |  
|                                       | Carrying Amount |              | $       | 883,832 |      |   | $         | 896,448 | 
|                                       |                 |              |         |         |      |  



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements



F-13



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


NOTE B  INVESTMENTS




|                                                                                                                                                |                        |                      |   |            |            |  |   |            |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | -------------------- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                                                                                                                |                        | December 31,         |  
|                                                                                                                                                |                        |                      |  
|                                                                                                                                                |                        | 2004                 |   |            | 2003       | 
|                                                                                                                                                |                        |                      |   |            |            | 
|U.S. Treasury Bonds, stripped of interest, maturing 2007
    through 2023, aggregate par value of $26,048,000 and
    $23,414,000, respectively |                        |                      |   |            |            |  |   |           
|                                                                                                                                                | Amortized cost         |                      | $ | 16,723,486 |            |  | $ | 13,920,985 |           
|                                                                                                                                                | Gross unrealized gains |                      |   | 1,438,567  |            |  |   | 1,290,150  |           
|                                                                                                                                                |                        |                      |   |            |            | 
|                                                                                                                                                |                        | Estimated fair value |   | $          | 18,162,053 |  |   | $          | 15,211,135 | 
|                                                                                                                                                |                        |                      |   |            |            | 







|                                       |       |           |           |            |            |   |           |            | 
|-------------------------------------- | ----- | --------- | --------- | ---------- | ---------- | - | --------- | ---------- | 
|                                       |       | Amortized |           |            | Estimated  |  
|                                       |       | Cost      |           |            | Fair Value |  
|                                       |       |           |           |            |            |  
|Due within one year                    |       | $         | 4,845,037 |            |            | $ | 4,883,480 |           
|Due after one year through five years  |       |           | 569,777   |            |            |   | 651,995   |           
|Due after five years through ten years |       |           | 6,682,788 |            |            |   | 7,168,344 |           
|Due after ten years                    |       |           | 4,625,884 |            |            |   | 5,458,234 |           
|                                       |       |           |           |            |            |  
|                                       | Total |           | $         | 16,723,486 |            |   | $         | 18,162,053 | 
|                                       |       |           |           |            |            |  

NOTE C  SALE OF ASSETS




| |                     
| | --------------------
| | Kirby Decker Acreage



F-14



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                     
| | --------------------
| | Atlantic Rim Project







NOTE D  LONG-TERM DEBT




|                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      |            |  |      |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- |  | ---- | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 2004 |            |  | 2003 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      |            |  |      |  
|Sinking Fund Debentures, due December 31, 2007,
    bearing interest at 12%, due in monthly payments. Annual sinking
    fund payments, based on 20% of total outstanding principal,
    commenced on December 31, 2002. As of December 31,
    2004 and 2003, principal collateralized by $4,518,000 and
    $3,206,000, respectively, principal amount of zero coupon
    U.S. Treasury Bonds due November 15, 2007.(1)                      |  | $    | 9,036,000  |  |      | $ | 9,616,000  | 
|Secured Convertible Debentures, due December 31, 2009,
    bearing interest at 12%, due in monthly payments. As of
    December 31, 2004 and 2003, principal collateralized by
    $770,000 and $790,000, respectively, principal amount of zero
    coupon U.S. Treasury Bonds due November 15, 2009.(2)                                                                                                                                      |  |      | 770,000    |  |      |   | 790,000    | 
|Secured Convertible Bonds, due December 31, 2010, bearing
    interest at 12%, due in monthly payments. As of
    December 31, 2004 and 2003, principal collateralized by
    $1,700,000 and $1,705,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15,
    2010.(2)                                                                                                                                   |  |      | 1,700,000  |  |      |   | 1,705,000  | 
|Sinking Fund Convertible Debentures, due December 31,
    2010, bearing interest at 13.02%, due in monthly payments.
    Annual Sinking Fund payments, based on 8.33% of total
    outstanding principal, commenced on December 31, 1999. As
    of December 31, 2004 and 2003, principal collateralized by
    $7,187,000 and $6,107,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15,
    2010.(2) |  |      | 14,372,200 |  |      |   | 14,655,200 | 

F-15



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         |                   |            |            |            |  |            |           |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----------------- | ---------- | ---------- | ---------- |  | ---------- | --------- | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         | 2004              |            |            | 2003       | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         |                   |            |            |            | 
|Sinking Fund Convertible Debentures, due December 31,
    2015, bearing interest at 13.02%, due in monthly payments.
    Annual Sinking Fund payments, based on 5.88% of total
    outstanding principal, commenced on December 31, 1999. As
    of December 31, 2004 and 2003, principal collateralized by
    $4,106,000 and $3,469,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15,
    2015.(3) |                         |                   | 11,632,500 |            |            |  | 11,792,500 |          
|Secured Convertible Bonds, due December 31, 2016, bearing
    interest at 12%, due in monthly payments. As of
    December 31, 2004 and 2003, principal collateralized by
    $1,305,000 and $1,365,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15,
    2016.(2)                                                                                                                                   |                         |                   | 1,305,000  |            |            |  | 1,365,000  |          
|Sinking Fund Convertible Debentures, due December 31,
    2017, bearing interest at 12%, due in monthly payments. Annual
    Sinking Fund payments, based on 5.56% of total outstanding
    principal, commenced on December 31, 1999. As of
    December 31, 2004 and 2003, principal collateralized by
    $1,407,000 and $1,223,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15,
    2017.(1)    |                         |                   | 5,040,000  |            |            |  | 5,500,000  |          
|Secured Convertible Bonds, due December 31, 2020, bearing
    interest at 12%, due in monthly payments. As of
    December 31, 2004 and 2003, principal collateralized by
    $1,485,000 and $1,485,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15,
    2020.(3)                                                                                                                                   |                         |                   | 1,485,000  |            |            |  | 1,485,000  |          
|Secured Convertible Bonds, due December 31, 2022, bearing
    interest at 12%, due in monthly payments. As of
    December 31, 2004 and 2003, principal collateralized by
    $1,136,000 and $1,186,000 respectively, principal amount of zero
    coupon U.S. Treasury Bonds due November 15, 2022.(3)                                                                                                                                        |                         |                   | 1,136,000  |            |            |  | 1,186,000  |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         |                   |            |            |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         |                   | 46,476,700 |            |            |  | 48,094,700 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                               | Less current maturities |                   |            | 17,316,070 |            |  |            | 4,809,470 |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         |                   |            |            |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         | Long-term portion |            | $          | 29,160,630 |  |            | $         | 43,285,230 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |                         |                   |            |            |            | 



|                                                                                                                                                              |                   |      |           |           |      |   |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ---- | --------- | --------- | ---- | - | --------- | --------- | 
|                                                                                                                                                              |                   | 2004 |           |           | 2003 |  
|                                                                                                                                                              |                   |      |           |           |      |  
|Other miscellaneous long-term liabilities, consisting of debt
    collateralized by treasury stock, asset retirement obligations
    and litigation provision |                   | $    | 3,561,325 |           |      | $ | 1,821,464 |          
|Less current maturities                                                                                                                                       |                   |      | 353,516   |           |      |   | 208,383   |          
|                                                                                                                                                              |                   |      |           |           |      |  
|                                                                                                                                                              | Long-term portion |      | $         | 3,207,809 |      |   | $         | 1,613,081 | 
|                                                                                                                                                              |                   |      |           |           |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In January 2005, the Company called for full redemption on
    March 31, 2005, certain sinking fund debentures. The 2007
    and 2017 bonds were called at a premium of 2% and 6%,
    respectively, which will result in an expense of approximately
    $483,000 in the first quarter of 2005 relating to retirement of
    this debt. Also in the first quarter of 2005, the Company will
    write off approximately $731,000 of deferred offering costs
    relating to these bonds. This redemption will result in a
    release of treasuries to the Company, having a fair market value
    of approximately $4,883,000 at December 31, 2004 (see
    Note B) and will decrease annual interest expense by
    approximately $1,689,000.

F-16



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Debentures can be called at a premium of 10%, if the
    Companys stock trades at or above 133% of the conversion
    price for a period of ninety consecutive trading days.
|   
|(3) | Debentures can be called at par, if the Companys stock
    trades at or above 133% of the conversion price for a period of
    ninety consecutive trading days.             







|                             |  |               |                   |             |        |   |            |       |  |               |              |  |  |  |           | 
|---------------------------- |  | ------------- | ----------------- | ----------- | ------ | - | ---------- | ----- |  | ------------- | ------------ |  |  |  | --------- | 
|                             |  |               |                   | Outstanding |        |   | Per Share  |       |  |              
|                             |  |               |                   | Principal   |        |   | Conversion |       |  | Common Shares |             
|2004                         |  | Maturity Date |                   |             | Amount |   |            | Price |  |               | if Converted | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 
|Sinking Fund 12% Bond        |  |               | December 31, 2007 |             |        | $ | 9,036,000  |       |  | $             |             |  |  |  |          | 
|Secured Convertible 12% Bond |  |               | December 31, 2009 |             |        |   | 770,000    |       |  |               | 9.00         |  |  |  | 85,556    | 
|Secured Convertible 12% Bond |  |               | December 31, 2010 |             |        |   | 1,700,000  |       |  |               | 9.00         |  |  |  | 188,889   | 
|Sinking Fund 13.02% Bond     |  |               | December 31, 2010 |             |        |   | 14,372,200 |       |  |               | 5.00         |  |  |  | 2,874,440 | 
|Sinking Fund 13.02% Bond     |  |               | December 31, 2015 |             |        |   | 11,632,500 |       |  |               | 8.00         |  |  |  | 1,454,063 | 
|Secured Convertible 12% Bond |  |               | December 31, 2016 |             |        |   | 1,305,000  |       |  |               | 9.00         |  |  |  | 145,000   | 
|Sinking Fund 12% Bond        |  |               | December 31, 2017 |             |        |   | 5,040,000  |       |  |               | 15.00        |  |  |  | 336,000   | 
|Secured Convertible 12% Bond |  |               | December 31, 2020 |             |        |   | 1,485,000  |       |  |               | 25.00        |  |  |  | 59,400    | 
|Secured Convertible 12% Bond |  |               | December 31, 2022 |             |        |   | 1,136,000  |       |  |               | 25.00        |  |  |  | 45,440    | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 
|                             |  |               |                   |             |        | $ | 46,476,700 |       |  |               |              |  |  |  | 5,188,788 | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 

F-17



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                             |  |               |                   |             |        |   |            |       |  |               |              |  |  |  |           | 
|---------------------------- |  | ------------- | ----------------- | ----------- | ------ | - | ---------- | ----- |  | ------------- | ------------ |  |  |  | --------- | 
|                             |  |               |                   | Outstanding |        |   | Per Share  |       |  |              
|                             |  |               |                   | Principal   |        |   | Conversion |       |  | Common Shares |             
|2003                         |  | Maturity Date |                   |             | Amount |   |            | Price |  |               | if Converted | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 
|Sinking Fund 12% Bond        |  |               | December 31, 2007 |             |        | $ | 9,616,000  |       |  | $             |             |  |  |  |          | 
|Secured Convertible 12% Bond |  |               | December 31, 2009 |             |        |   | 790,000    |       |  |               | 8.00         |  |  |  | 98,750    | 
|Secured Convertible 12% Bond |  |               | December 31, 2010 |             |        |   | 1,705,000  |       |  |               | 8.00         |  |  |  | 213,125   | 
|Sinking Fund 13.02% Bond     |  |               | December 31, 2010 |             |        |   | 14,655,200 |       |  |               | 5.00         |  |  |  | 2,931,040 | 
|Sinking Fund 13.02% Bond     |  |               | December 31, 2015 |             |        |   | 11,792,500 |       |  |               | 8.00         |  |  |  | 1,474,063 | 
|Secured Convertible 12% Bond |  |               | December 31, 2016 |             |        |   | 1,365,000  |       |  |               | 8.00         |  |  |  | 170,625   | 
|Sinking Fund 12% Bond        |  |               | December 31, 2017 |             |        |   | 5,500,000  |       |  |               | 15.00        |  |  |  | 366,667   | 
|Secured Convertible 12% Bond |  |               | December 31, 2020 |             |        |   | 1,485,000  |       |  |               | 20.00        |  |  |  | 74,250    | 
|Secured Convertible 12% Bond |  |               | December 31, 2022 |             |        |   | 1,186,000  |       |  |               | 20.00        |  |  |  | 59,300    | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 
|                             |  |               |                   |             |        | $ | 48,094,700 |       |  |               |              |  |  |  | 5,387,820 | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 

|                             |  |               |                   |             |        |   |            |       |  |               |              |  |  |  |           | 
|---------------------------- |  | ------------- | ----------------- | ----------- | ------ | - | ---------- | ----- |  | ------------- | ------------ |  |  |  | --------- | 
|                             |  |               |                   | Outstanding |        |   | Per Share  |       |  |              
|                             |  |               |                   | Principal   |        |   | Conversion |       |  | Common Shares |             
|2003                         |  | Maturity Date |                   |             | Amount |   |            | Price |  |               | if Converted | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 
|Sinking Fund 12% Bond        |  |               | December 31, 2007 |             |        | $ | 14,376,000 |       |  | $             |             |  |  |  |          | 
|Secured Convertible 12% Bond |  |               | December 31, 2009 |             |        |   | 790,000    |       |  |               | 8.00         |  |  |  | 98,750    | 
|Secured Convertible 12% Bond |  |               | December 31, 2010 |             |        |   | 1,715,000  |       |  |               | 8.00         |  |  |  | 214,375   | 
|Sinking Fund 13.02% Bond     |  |               | December 31, 2010 |             |        |   | 14,780,200 |       |  |               | 5.00         |  |  |  | 2,956,040 | 
|Sinking Fund 13.02% Bond     |  |               | December 31, 2015 |             |        |   | 12,137,500 |       |  |               | 8.00         |  |  |  | 1,517,188 | 
|Secured Convertible 12% Bond |  |               | December 31, 2016 |             |        |   | 1,460,000  |       |  |               | 8.00         |  |  |  | 182,500   | 
|Sinking Fund 12% Bond        |  |               | December 31, 2017 |             |        |   | 6,590,000  |       |  |               | 10.00        |  |  |  | 659,000   | 
|Secured Convertible 12% Bond |  |               | December 31, 2020 |             |        |   | 1,635,000  |       |  |               | 20.00        |  |  |  | 81,750    | 
|Secured Convertible 12% Bond |  |               | December 31, 2022 |             |        |   | 1,186,000  |       |  |               | 20.00        |  |  |  | 59,300    | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 
|                             |  |               |                   |             |        | $ | 54,669,700 |       |  |               |              |  |  |  | 5,768,903 | 
|                             |  |               |                   |             |        |   |            |       |  |               |              | 





|                               |            |   |            |            | 
|------------------------------ | ---------- | - | ---------- | ---------- | 
|Fiscal year ending December 31 |            |   |            |           
|                               | 2005       |   | $          | 17,316,070 | 
|                               | 2006       |   |            | 2,916,063  | 
|                               | 2007       |   |            | 2,624,457  | 
|                               | 2008       |   |            | 2,362,011  | 
|                               | 2009       |   |            | 2,580,487  | 
|                               | Thereafter |   |            | 18,677,612 | 
|                               |            |   |           
|                               |            | $ | 46,476,700 |           
|                               |            |   |           



F-18



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |            |   |            |           | 
|------------------------------ | ---------- | - | ---------- | --------- | 
|Fiscal year ending December 31 |            |   |            |          
|                               | 2005       |   | $          | 1,420,035 | 
|                               | 2006       |   |            | 1,521,984 | 
|                               | 2007       |   |            | 1,588,860 | 
|                               | 2008       |   |            | 1,653,299 | 
|                               | 2009       |   |            | 1,720,777 | 
|                               | Thereafter |   |            | 4,982,147 | 
|                               |            |   |           
|                               |            | $ | 12,887,102 |          
|                               |            |   |           

NOTE E  STOCKHOLDERS EQUITY












F-19



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|       |                                    |                     |  |          |    
|------ | ---------------------------------- | ------------------- |  | -------- | ---
|       |                                    | Preferred to Common | 
|       |                                    |                     | 
|Period |                                    |                     |  |         
|       | Until June 30, 2005                |                     |  | 1 to 1   | (1)
|       | July 1, 2005 through June 30, 2006 |                     |  | 1 to .75 |    
|       | July 1, 2006 through redemption    |                     |  | 1 to .50 |    






|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For 1,048,336 shares of preferred stock, this date has been
    extended to one year after the effective date of the
    registration statement with the SEC.









F-20



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                        |  |           |            |   |                  |   |       | 
|--------------------------------------- |  | --------- | ---------- | - | ---------------- | - | ----- | 
|                                        |  | Incentive |            |   | Weighted Average |  
|                                        |  | Options   |            |   | Exercise Price   |  
|                                        |  |           |            |   |                  |  
|Options outstanding  December 31, 2001 |  |           | 1,770,000  |   |                  | $ | 4.00  | 
|Issued                                  |  |           | 2,505,242  |   |                  | $ | 10.00 | 
|Exercised                               |  |           |           |   |                  |   |       | 
|Expired                                 |  |           |           |   |                  |   |       | 
|Forfeited                               |  |           | (2,760,783 | ) |                  | $ | 8.74  | 
|                                        |  |           |            |   |                  |  
|Options outstanding  December 31, 2002 |  |           | 1,514,459  |   |                  | $ | 5.29  | 
|Issued                                  |  |           | 1,374,553  |   |                  | $ | 4.05  | 
|Exercised                               |  |           |           |   |                  |   |       | 
|Expired                                 |  |           |           |   |                  |   |       | 
|Forfeited                               |  |           | (648,000   | ) |                  | $ | 4.00  | 
|                                        |  |           |            |   |                  |  
|Options outstanding  December 31, 2003 |  |           | 2,241,012  |   |                  | $ | 5.10  | 
|Issued                                  |  |           | 630,250    |   |                  | $ | 7.00  | 
|Exercised                               |  |           | (186,056   | ) |                  | $ | 4.00  | 
|Expired                                 |  |           |           |   |                  |   |       | 
|Forfeited                               |  |           | (60,000    | ) |                  | $ | 4.00  | 
|                                        |  |           |            |   |                  |  
|Options outstanding  December 31, 2004 |  |           | 2,625,206  |   |                  | $ | 5.66  | 
|                                        |  |           |            |   |                  |  





|               |       |                     |           |           |                           |  |      |                     |  |  |           |           | 
|-------------- | ----- | ------------------- | --------- | --------- | ------------------------- |  | ---- | ------------------- |  |  | --------- | --------- | 
|               |       | Options Outstanding |           |           | Weighted Average          |  |      | Options Exercisable | 
|Exercise Price |       | at Year End         |           |           | Remaining Life (In Years) |  |      | at Year End         | 
|               |       |                     |           |           |                           |  |      |                     | 
|$4.00          |       |                     | 1,571,757 |           |                           |  | 2.65 |                     |  |  | 1,545,007 |          
|$7.00          |       |                     | 655,250   |           |                           |  | 4.27 |                     |  |  | 330,125   |          
|$10.00         |       |                     | 398,199   |           |                           |  | 1.94 |                     |  |  | 398,199   |          
|               |       |                     |           |           |                           |  |      |                     | 
|               | Total |                     |           | 2,625,206 |                           |  |      | 2.95                |  |  |           | 2,273,331 | 
|               |       |                     |           |           |                           |  |      |                     | 

NOTE F  INCOME TAXES






|                                                           |  |      |            |   |      |   |          |      |  |   |            |  
|---------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                           |  | 2004 |            |   | 2003 |   |          | 2002 | 
|                                                           |  |      |            |   |      |   |          |      | 
|Income taxes at federal statutory rate (34%)               |  | $    | (3,335,385 | ) |      | $ | (295,767 | )    |  | $ | (2,753,056 | )
|Change in valuation allowance                              |  |      | 4,375,484  |   |      |   | 364,836  |      |  |   | 1,812,915  |  
|Nondeductible expenses                                     |  |      | 45,064     |   |      |   | 46,517   |      |  |   | 55,126     |  
|State income taxes at statutory rate                       |  |      | (588,597   | ) |      |   | (52,194  | )    |  |   | (485,833   | )
|Adjustment of estimated income tax provision of prior year |  |      | (482,418   | ) |      |   | 65,608   |      |  |   | 899,550    |  
|Other                                                      |  |      | (73,148    | ) |      |   |         |      |  |   | 298        |  
|                                                           |  |      |            |   |      |   |          |      | 
|                                                           |  | $    | (59,000    | ) |      | $ | 129,000  |      |  | $ | (471,000   | )
|                                                           |  |      |            |   |      |   |          |      | 

F-21



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                      |                                               |                          |                                |            |            |           |            |            |            |           | 
|------------------------------------- | --------------------------------------------- | ------------------------ | ------------------------------ | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | 
|                                      |                                               | 2004                     |                                |            | 2003       |          
|                                      |                                               |                          |                                |            |            |          
|Deferred tax assets relating to:      |                                               |                          |                                |            |            |           |            |           
|                                      | Net operating loss carryforward               |                          | $                              | 30,617,015 |            |           | $          | 25,977,793 |           
|                                      | Other                                         |                          |                                | 314,400    |            |           |            | 314,400    |           
|                                      |                                               |                          |                                |            |            |          
|                                      |                                               |                          | 30,931,415                     |            |            |           | 26,292,193 |           
|                                      |                                               | Less valuation allowance |                                |            | 28,696,007 |           |            |            | 24,320,523 |          
|                                      |                                               |                          |                                |            |            |          
|                                      |                                               |                          | Total deferred tax assets      |            |            | 2,235,408 |            |            |            | 1,971,670 | 
|                                      |                                               |                          |                                |            |            |          
|Deferred tax liabilities relating to: |                                               |                          |                                |            |            |           |            |           
|                                      | Capitalized intangible assets                 |                          |                                | 1,190,250  |            |           |            | 887,172    |           
|                                      | Oil and gas properties and tangible equipment |                          |                                | 184,286    |            |           |            | 570,706    |           
|                                      | Net unrealized gain on investments            |                          |                                | 860,872    |            |           |            | 513,792    |           
|                                      |                                               |                          |                                |            |            |          
|                                      |                                               |                          | Total deferred tax liabilities |            |            | 2,235,408 |            |            |            | 1,971,670 | 
|                                      |                                               |                          |                                |            |            |          
|Net deferred tax asset                |                                               | $                        |                               |            |            | $         |           |           
|                                      |                                               |                          |                                |            |            |          





NOTE G  COMMITMENTS AND CONTINGENCIES




| |                    
| | -------------------
| | General Commitments







| |                         
| | ------------------------
| | Oil and Gas Partnerships





F-22



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                      
| | ---------------------
| | Repurchase Agreements







| |                           
| | --------------------------
| | Trust Indenture Agreements





| |       
| | ------
| | Leases



F-23



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |      |   |         |         | 
|----------------------- | ---- | - | ------- | ------- | 
|Year ending December 31 |      |   |         |        
|                        | 2005 |   | $       | 160,186 | 
|                        | 2006 |   |         | 155,686 | 
|                        | 2007 |   |         | 155,686 | 
|                        | 2008 |   |         | 38,921  | 
|                        |      |   |        
|                        |      | $ | 510,479 |        
|                        |      |   |        





| |           
| | ----------
| | Litigation





NOTE H  EMPLOYEE BENEFIT PLANS




F-24



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                        
| | -----------------------
| | Affiliated Partnerships







| |                         
| | ------------------------
| | Joint Venture Agreements











| |             
| | ------------
| | Other Income



F-25



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




NOTE J  RECAPITALIZATION OFFERS




|                                        |                        |                            |   |            |            |  |   |            |            | 
|--------------------------------------- | ---------------------- | -------------------------- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                        |                        | 2003                       |   |            | 2002       | 
|                                        |                        |                            |   |            |            | 
|Estimated fair value of assets acquired |                        |                            |   |            |            |  |   |           
|                                        | Current assets         |                            | $ | 3,512      |            |  | $ | 4,350      |           
|                                        | Oil and gas properties |                            |   | 28,342,950 |            |  |   | 25,252,358 |           
|                                        |                        |                            |   |            |            | 
|                                        |                        | Total fair value of assets |   |            | 28,346,462 |  |   |            | 25,256,708 | 
|Liabilities assumed                     |                        |                            |   |            |            |  |   |           
|                                        | Accounts payable       |                            |   | 144,122    |            |  |   | 171,110    |           
|                                        | Minority interest      |                            |   | 8,502,804  |            |  |   | 8,970,078  |           
|                                        |                        |                            |   |            |            | 
|                                        |                        | Total liabilities assumed  |   |            | 8,646,926  |  |   |            | 9,141,188  | 
|                                        |                        |                            |   |            |            | 
|                                        |                        | Cost of acquisition        |   | $          | 19,699,536 |  |   | $          | 16,115,520 | 
|                                        |                        |                            |   |            |            | 



F-26



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |  |                         |            |   |      |   |             |  
|--------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ----------- | -
|                                  |  | Pro Forma (Unaudited)   |           
|                                  |  | Year Ended December 31, |           
|                                  |  |                         |           
|                                  |  | 2003                    |            |   | 2002 |  
|                                  |  |                         |            |   |      |  
|Revenues                          |  | $                       | 26,531,361 |   |      | $ | 33,960,704  |  
|                                  |  |                         |            |   |      |  
|Net loss                          |  | $                       | (658,131   | ) |      | $ | (10,333,144 | )
|                                  |  |                         |            |   |      |  
|Loss per share, basic and diluted |  | $                       | (0.31      | ) |      | $ | (0.60       | )
|                                  |  |                         |            |   |      |  



NOTE K  FAIR VALUE OF FINANCIAL INSTRUMENTS




Cash and Cash Equivalents.


U.S Treasury Bonds  Trading Securities and
Available-For-Sale.


Convertible Debentures.


Other Long-Term Liabilities.


|                          |                                                                    |       |            |             |          |   |            |             |   |   |            |             |   |   |            |             |  
|------------------------- | ------------------------------------------------------------------ | ----- | ---------- | ----------- | -------- | - | ---------- | ----------- | - | - | ---------- | ----------- | - | - | ---------- | ----------- | -
|                          |                                                                    | 2004  |            |             | 2003     |  
|                          |                                                                    |       |            |             |          |  
|                          |                                                                    | Fair  |            |             | Carrying |   |            | Fair        |   |   | Carrying   |            
|                          |                                                                    | Value |            |             | Amount   |   |            | Value       |   |   | Amount     |            
|                          |                                                                    |       |            |             |          |   |            |             |   |   |            |            
|Financial assets          |                                                                    |       |            |             |          |   |            |             |   |   |            |             |   |   |            |            
|Cash and cash equivalents |                                                                    | $     | 99,920,885 |             |          | $ | 99,920,885 |             |   | $ | 24,528,999 |             |   | $ | 24,528,999 |            
|                          | U.S. Treasury bonds and other investments 
    trading securities |       |            | 174,247     |          |   |            | 174,247     |   |   |            | 201,152     |   |   |            | 201,152     |  
|                          | U.S. Treasury bonds  available-for-sale                           |       |            | 18,162,053  |          |   |            | 18,162,053  |   |   |            | 15,211,135  |   |   |            | 15,211,135  |  
|Financial liabilities     |                                                                    |       |            |             |          |   |            |             |   |   |            |             |   |   |            |            
|                          | Fixed rate debentures                                              |       | $          | (49,460,549 | )        |   | $          | (46,476,700 | ) |   | $          | (53,169,798 | ) |   | $          | (48,094,700 | )
|                          | Other long-term liabilities                                        |       |            | (1,738,168  | )        |   |            | (1,738,168  | ) |   |            | (1,821,464  | ) |   |            | (1,821,464  | )

F-27



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


NOTE L  OIL AND GAS INFORMATION




|                                |  |      |            |  |      |   |            |      |  |   |            | 
|------------------------------- |  | ---- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                |  | 2004 |            |  | 2003 |   |            | 2002 | 
|                                |  |      |            |  |      |   |            |      | 
|Property acquisition  unproved |  | $    | 3,046,654  |  |      | $ | 9,967,002  |      |  | $ | 176,030    | 
|Property acquisition  proved   |  |      | 4,495,283  |  |      |   | 28,389,424 |      |  |   | 25,419,962 | 
|Exploration costs               |  |      | 902,564    |  |      |   | 525,098    |      |  |   | 471,948    | 
|Development costs               |  |      | 18,648,722 |  |      |   | 10,425,296 |      |  |   | 3,888,221  | 
|                                |  |      |            |  |      |   |            |      | 
|                                |  | $    | 27,093,223 |  |      | $ | 49,306,820 |      |  | $ | 29,956,161 | 
|                                |  |      |            |  |      |   |            |      | 







|                                |                                                                          |      |             |             |      |   |             |             | 
|------------------------------- | ------------------------------------------------------------------------ | ---- | ----------- | ----------- | ---- | - | ----------- | ----------- | 
|                                |                                                                          | 2004 |             |             | 2003 |  
|                                |                                                                          |      |             |             |      |  
|Unproved oil and gas properties |                                                                          | $    | 71,029,835  |             |      | $ | 50,738,040  |            
|                                | Proved oil and gas properties                                            |      |             | 108,618,748 |      |   |             | 103,423,818 | 
|                                |                                                                          |      |             |             |      |  
|                                |                                                                          |      | 179,648,583 |             |      |   | 154,161,858 |            
|                                | Less accumulated depreciation, depletion amortization and
    impairment |      |             | 63,053,277  |      |   |             | 59,212,313  | 
|                                |                                                                          |      |             |             |      |  
|                                |                                                                          | $    | 116,595,306 |             |      | $ | 94,949,545  |            
|                                |                                                                          |      |             |             |      |  



|                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                     |  | 2004 |            |   | 2003 |   |            | 2002 | 
|                                                     |  |      |            |   |      |   |            |      | 
|Revenues                                             |  | $    | 6,454,334  |   |      | $ | 5,717,814  |      |  | $ | 592,528    |  
|Production costs                                     |  |      | (3,792,002 | ) |      |   | (3,719,780 | )    |  |   | (294,520   | )
|Exploration costs                                    |  |      | (143,135   | ) |      |   | (91,815    | )    |  |   | (471,948   | )
|Accretion of asset retirement obligation             |  |      | (52,711    | ) |      |   | (62,452    | )    |  |   |           |  
|Depreciation, depletion, amortization and impairment |  |      | (3,840,781 | ) |      |   | (3,102,354 | )    |  |   | (9,606,606 | )
|                                                     |  |      |            |   |      |   |            |      | 
|Loss from oil and gas producing activities           |  | $    | (1,374,295 | ) |      | $ | (1,258,587 | )    |  | $ | (9,780,546 | )
|                                                     |  |      |            |   |      |   |            |      | 





F-28



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


NOTE M  OIL AND GAS RESERVE DATA (UNAUDITED)










Summary of Changes in Proved Reserves


|                                            |                                 |                         |     |        |      |  |       |        |     |  |      |        |     |       |       |        |      |  |   |        |     |  |       |        |    
|------------------------------------------- | ------------------------------- | ----------------------- | --- | ------ | ---- |  | ----- | ------ | --- |  | ---- | ------ | --- | ----- | ----- | ------ | ---- |  | - | ------ | --- |  | ----- | ------ | ---
|                                            |                                 | Year Ended December 31, |    
|                                            |                                 |                         |    
|                                            |                                 | 2004                    |     |        | 2003 |  |       | 2002   |    
|                                            |                                 |                         |     |        |      |  |       |        |    
|                                            |                                 | Mbbls                   |     |        | Mmcf |  |       | Mbbls  |     |  | Mmcf |        |     | Mbbls |       |        | Mmcf | 
|                                            |                                 |                         |     |        |      |  |       |        |     |  |      |        |     |       |       |        |      | 
|Proved reserves                             |                                 |                         |     |        |      |  |       |        |     |  |      |        |     |       |       |        |      |  |   |        |     |  |       |       
|                                            | Beginning of year               |                         |     | 15,124 |      |  |       | 15,448 |     |  |      | 12,324 |     |       |       | 8,502  |      |  |   | 8,478  |     |  |       | 2,495  |    
|                                            | Purchase of reserves in place   |                         |     |       |      |  |       |       |     |  |      | 2,688  |     |       |       | 4,218  |      |  |   | 3,538  |     |  |       | 1,770  |    
|                                            | Discoveries and extensions      |                         |     | 39     |      |  |       | 3,632  |     |  |      |       |     |       |       | 6,291  |      |  |   |       |     |  |       | 5,294  |    
|                                            | Revisions of previous estimates |                         |     | (918   | )    |  |       | 279    |     |  |      | 199    |     |       |       | (2,778 | )    |  |   | 312    |     |  |       | (1,002 | )  
|                                            | Production                      |                         |     | (68    | )    |  |       | (817   | )   |  |      | (87    | )   |       |       | (785   | )    |  |   | (4     | )   |  |       | (55    | )  
|                                            |                                 |                         |     |        |      |  |       |        |     |  |      |        |     |       |       |        |      | 
|                                            | End of year                     |                         |     | 14,177 | (1)  |  |       | 18,542 | (1) |  |      | 15,124 | (2) |       |       | 15,448 | (2)  |  |   | 12,324 | (3) |  |       | 8,502  | (3)
|                                            |                                 |                         |     |        |      |  |       |        |     |  |      |        |     |       |       |        |      | 
|Proved developed reserves Beginning of year |                                 |                         | 476 |        |      |  | 7,006 |        |     |  | 404  |        |     |       | 4,544 |        |      |  | 8 |        |     |  | 1,648 |       
|                                            | End of year                     |                         |     | 395    |      |  |       | 8,496  |     |  |      | 476    |     |       |       | 7,006  |      |  |   | 404    |     |  |       | 4,544  |    






|    |                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included in 2004 reserves, 2,142 Mbbls and 357 Mmcf is
    attributable to consolidated subsidiaries in which there is an
    average 23% minority interest.  
|   
|(2) | Included in 2003 reserves, 2,469 Mbbls and 1,028 Mmcf
    is attributable to consolidated subsidiaries in which there is
    an average 25% minority interest.

F-29



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Included in 2002 reserves, 1,195 Mbbls and 577 Mmcf is
    attributable to consolidated subsidiaries in which there is an
    average 34% minority interest

Standardized Measure of Discounted Future Net Cash Flows


Relating to Proved Oil and Gas Reserves


|                                                         |  |                        |          |     |      |   |          |      |  |   |          |    
|-------------------------------------------------------- |  | ---------------------- | -------- | --- | ---- | - | -------- | ---- |  | - | -------- | ---
|                                                         |  | December 31,           |         
|                                                         |  |                        |         
|                                                         |  | 2004                   |          |     | 2003 |   |          | 2002 | 
|                                                         |  |                        |          |     |      |   |          |      | 
|                                                         |  | (Amounts in thousands) |         
|Future cash inflows                                      |  | $                      | 631,190  |     |      | $ | 499,693  |      |  | $ | 362,982  |    
|Future production costs and taxes                        |  |                        | (106,363 | )   |      |   | (69,180  | )    |  |   | (47,661  | )  
|Future development costs                                 |  |                        | (59,541  | )   |      |   | (60,272  | )    |  |   | (43,003  | )  
|Future income tax expenses                               |  |                        | (110,161 | )   |      |   | (87,042  | )    |  |   | (110,939 | )  
|                                                         |  |                        |          |     |      |   |          |      | 
|Net future cash flows                                    |  |                        | 355,125  |     |      |   | 283,199  |      |  |   | 161,379  |    
|Discounted at 10% for estimated timing of cash flows     |  |                        | (162,480 | )   |      |   | (137,073 | )    |  |   | (89,961  | )  
|                                                         |  |                        |          |     |      |   |          |      | 
|Standardized measure of discounted future net cash flows |  | $                      | 192,645  | (1) |      | $ | 146,126  | (2)  |  | $ | 71,418   | (3)
|                                                         |  |                        |          |     |      |   |          |      | 






|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included in 2004 reserves, $26,054 is attributable to
    consolidated subsidiaries in which there is an average 23%
    minority interest.
|   
|(2) | Included in 2003 reserves, $23,017 is attributable to
    consolidated subsidiaries in which there is an average 25%
    minority interest.
|   
|(3) | Included in 2002 reserves, $10,462 is attributable to
    consolidated subsidiaries in which there is an average 34%
    minority interest.

Changes in Standardized Measure of Discounted Future Net Cash
Flows


Related to Proved Oil and Gas Reserves


|                                               |              |                         |         |        |      |   |         |        |  |   |         |        | 
|---------------------------------------------- | ------------ | ----------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                               |              | Year Ended December 31, |        
|                                               |              |                         |        
|                                               |              | 2004                    |         |        | 2003 |   |         | 2002   | 
|                                               |              |                         |         |        |      |   |         |        | 
|                                               |              | (Amounts in thousands)  |        
|Sales, net of production costs and taxes       |              | $                       | (2,519  | )      |      | $ | (1,934  | )      |  | $ | (298    | )     
|Discoveries and extensions                     |              |                         | 5,967   |        |      |   | 9,339   |        |  |   | 5,550   |       
|Purchases of reserves in place                 |              |                         |        |        |      |   | 30,875  |        |  |   | 30,944  |       
|Changes in prices and production costs         |              |                         | 55,595  |        |      |   | 7,624   |        |  |   | 46,531  |       
|Revisions of quantity estimates                |              |                         | (14,249 | )      |      |   | (2,882  | )      |  |   | 1,884   |       
|Net changes in development costs               |              |                         | (34     | )      |      |   | (13,341 | )      |  |   | (1,048  | )     
|Interest factor  accretion of discount        |              |                         | 18,299  |        |      |   | 11,396  |        |  |   | 2,047   |       
|Net change in income taxes                     |              |                         | (12,788 | )      |      |   | 5,677   |        |  |   | (41,566 | )     
|Changes in production rates (timing) and other |              |                         | (3,752  | )      |      |   | 27,954  |        |  |   | 7,862   |       
|                                               |              |                         |         |        |      |   |         |        | 
|                                               | Net increase |                         |         | 46,519 |      |   |         | 74,708 |  |   |         | 51,906 | 
|Balance at beginning of year                   |              |                         | 146,126 |        |      |   | 71,418  |        |  |   | 19,512  |       
|                                               |              |                         |         |        |      |   |         |        | 
|Balance at end of year                         |              | $                       | 192,645 |        |      | $ | 146,126 |        |  | $ | 71,418  |       
|                                               |              |                         |         |        |      |   |         |        | 



F-30



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










NOTE N  QUARTERLY INFORMATION (UNAUDITED)




|               |                   |         |            |       |        |   |            |       |   |   |            |       |   |      |            |       |   |   |            |       |  
|-------------- | ----------------- | ------- | ---------- | ----- | ------ | - | ---------- | ----- | - | - | ---------- | ----- | - | ---- | ---------- | ----- | - | - | ---------- | ----- | -
|               |                   | 2004    |           
|               |                   |         |           
|               |                   | Quarter |            |       |       
|               |                   |         |            |       |       
|               |                   | First   |            |       | Second |   |            | Third |   |   | Fourth     |       |   | Year |           
|               |                   |         |            |       |        |   |            |       |   |   |            |       |   |      |           
|Revenues       |                   | $       | 4,332,302  |       |        | $ | 6,030,246  |       |   | $ | 8,137,770  |       |   | $    | 7,891,512  |       |   | $ | 26,391,830 |      
|Gross profit   |                   |         | (142,365   | )     |        |   | 1,005,638  |       |   |   | (195,276   | )     |   |      | (11,359    | )     |   |   | 656,638    |      
|Net loss       |                   |         | (1,058,866 | )     |        |   | (1,259,315 | )     |   |   | (1,873,768 | )     |   |      | (5,768,349 | )     |   |   | (9,960,298 | )    
|Loss per share |                   |         |            |       |        |   |            |       |   |   |            |       |   |      |            |       |   |   |            |      
|               | Basic and diluted |         | $          | (0.15 | )      |   | $          | (0.15 | ) |   | $          | (0.18 | ) |      | $          | (0.33 | ) |   | $          | (0.84 | )

|                  |                   |         |            |       |        |   |           |       |   |   |           |       |   |      |            |       |   |   |            |       |  
|----------------- | ----------------- | ------- | ---------- | ----- | ------ | - | --------- | ----- | - | - | --------- | ----- | - | ---- | ---------- | ----- | - | - | ---------- | ----- | -
|                  |                   | 2003    |           
|                  |                   |         |           
|                  |                   | Quarter |            |       |       
|                  |                   |         |            |       |       
|                  |                   | First   |            |       | Second |   |           | Third |   |   | Fourth    |       |   | Year |           
|                  |                   |         |            |       |        |   |           |       |   |   |           |       |   |      |           
|Revenues          |                   | $       | 4,437,681  |       |        | $ | 4,441,003 |       |   | $ | 6,173,532 |       |   | $    | 10,610,647 |       |   | $ | 25,662,863 |      
|Gross profit      |                   |         | 634,381    |       |        |   | 1,117,818 |       |   |   | 1,383,088 |       |   |      | 3,412,457  |       |   |   | 6,547,744  |      
|Net income (loss) |                   |         | (1,234,322 | )     |        |   | (13,782   | )     |   |   | 664,966   |       |   |      | (616,245   | )     |   |   | (1,199,383 | )    
|Loss per share    |                   |         |            |       |        |   |           |       |   |   |           |       |   |      |            |       |   |   |            |      
|                  | Basic and diluted |         | $          | (0.12 | )      |   | $         | (0.06 | ) |   | $         | (0.02 | ) |      | $          | (0.14 | ) |   | $          | (0.34 | )







| |   |                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recorded a contingent liability for $1,800,000 relating to the
    Gotham litigation (see Note G).                                                                                                                                                                                                     
|
| |  | Recognized impairment on oil and gas properties of approximately
    $1,000,000, as a result of the expiration of certain unproved
    Washakie leases and net capitalized costs exceeding the expected
    future net cash flow based on engineering estimates on certain
    properties (see Note L).







| |   |                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recognized impairment on oil and gas properties of approximately
    $1,900,000 as a result of the expiration of certain unproved
    Washakie leases and net capitalized costs exceeding the expected
    future net cash flow based on engineering estimates on certain
    properties (see Note L).

F-31



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




NOTE O  SEGMENT INFORMATION




|                                 |                          |       |   |            |            |  |   |            |            |  |   |            |            | 
|-------------------------------- | ------------------------ | ----- | - | ---------- | ---------- |  | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                 |                          | 2004  |   |            | 2003       |  |   | 2002       |           
|                                 |                          |       |   |            |            |  |   |            |           
|Revenues from external customers |                          |       |   |            |            |  |   |            |            |  |   |           
|                                 | Turnkey contracts        |       | $ | 10,529,883 |            |  | $ | 11,300,646 |            |  | $ | 5,841,110  |           
|                                 | Oil and gas marketing    |       |   | 6,171,338  |            |  |   | 5,620,522  |            |  |   | 11,272,398 |           
|                                 | Oil and gas operations   |       |   | 6,574,527  |            |  |   | 6,212,311  |            |  |   | 4,879,302  |           
|                                 | Well services            |       |   | 1,070,004  |            |  |   | 1,167,564  |            |  |   | 1,895,453  |           
|                                 | Other                    |       |   | 2,046,078  |            |  |   | 1,361,820  |            |  |   | 5,722,027  |           
|                                 |                          |       |   |            |            |  |   |            |           
|                                 |                          | Total |   | $          | 26,391,830 |  |   | $          | 25,662,863 |  |   | $          | 29,610,290 | 
|                                 |                          |       |   |            |            |  |   |            |           
|Intersegment revenue             |                          |       |   |            |            |  |   |            |            |  |   |           
|                                 | Well services            |       | $ |           |            |  | $ |           |            |  | $ |           |           
|                                 | Other                    |       |   |           |            |  |   |           |            |  |   | 25,660     |           
|                                 |                          |       |   |            |            |  |   |            |           
|                                 |                          | Total |   | $          |           |  |   | $          |           |  |   | $          | 25,660     | 
|                                 |                          |       |   |            |            |  |   |            |           
|Interest and other income        |                          |       |   |            |            |  |   |            |            |  |   |           
|                                 | Turnkey contracts        |       | $ | 258        |            |  | $ | 4,246      |            |  | $ | 3,368      |           
|                                 | Oil and gas marketing    |       |   |           |            |  |   |           |            |  |   |           |           
|                                 | Oil and gas operations   |       |   | 1,996      |            |  |   | 6,586      |            |  |   | 31,439     |           
|                                 | Well services            |       |   |           |            |  |   |           |            |  |   | 2,540      |           
|                                 | Other                    |       |   | 2,086,740  |            |  |   | 1,329,227  |            |  |   | 5,246,155  |           
|                                 | Intersegment elimination |       |   |           |            |  |   |           |            |  |   | (25,660    | )         
|                                 |                          |       |   |            |            |  |   |            |           
|                                 |                          | Total |   | $          | 2,088,994  |  |   | $          | 1,340,059  |  |   | $          | 5,257,842  | 
|                                 |                          |       |   |            |            |  |   |            |           

F-32



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##### Table of Contents



Warren Resources, Inc. and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                     |                             |       |   |            |            |   |   |            |            |   |   |            |            |  
|---------------------------------------------------- | --------------------------- | ----- | - | ---------- | ---------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                     |                             | 2004  |   |            | 2003       |   |   | 2002       |           
|                                                     |                             |       |   |            |            |   |   |            |           
|Consolidated revenues                                |                             |       |   |            |            |   |   |            |            |   |   |           
|                                                     | Total segment revenue       |       | $ | 24,345,752 |            |   | $ | 24,301,043 |            |   | $ | 23,888,263 |           
|                                                     | Other                       |       |   | 2,046,078  |            |   |   | 1,361,820  |            |   |   | 5,747,687  |           
|                                                     | Intersegment elimination    |       |   |           |            |   |   |           |            |   |   | (25,660    | )         
|                                                     |                             |       |   |            |            |   |   |            |           
|                                                     |                             | Total |   | $          | 26,391,830 |   |   | $          | 25,662,863 |   |   | $          | 29,610,290 |  
|                                                     |                             |       |   |            |            |   |   |            |           
|Interest expense                                     |                             |       |   |            |            |   |   |            |            |   |   |           
|                                                     | Turnkey contracts           |       | $ | 735        |            |   | $ | 9,200      |            |   | $ | 5,577      |           
|                                                     | Oil and gas marketing       |       |   |           |            |   |   |           |            |   |   |           |           
|                                                     | Oil and gas operations      |       |   | 52,771     |            |   |   | 62,452     |            |   |   |            |           
|                                                     | Well services               |       |   |           |            |   |   |           |            |   |   | 28,957     |           
|                                                     | Other                       |       |   | 440,471    |            |   |   | 1,456,417  |            |   |   | 6,303,757  |           
|                                                     | Elimination of intersegment |       |   |           |            |   |   |           |            |   |   | (25,660    | )         
|                                                     |                             |       |   |            |            |   |   |            |           
|                                                     |                             | Total |   | $          | 493,977    |   |   | $          | 1,528,069  |   |   | $          | 6,312,631  |  
|                                                     |                             |       |   |            |            |   |   |            |           
|Depreciation, depletion, amortization and impairment |                             |       |   |            |            |   |   |            |            |   |   |           
|                                                     | Turnkey contracts           |       | $ | 103,216    |            |   | $ | 102,534    |            |   | $ | 102,942    |           
|                                                     | Oil and gas marketing       |       |   |           |            |   |   |           |            |   |   |           |           
|                                                     | Oil and gas operations      |       |   | 3,840,781  |            |   |   | 3,102,354  |            |   |   | 9,606,606  |           
|                                                     | Well services               |       |   |           |            |   |   |           |            |   |   | 47,643     |           
|                                                     | Other                       |       |   | 78,728     |            |   |   | 44,972     |            |   |   | 172,971    |           
|                                                     |                             |       |   |            |            |   |   |            |           
|                                                     |                             | Total |   | $          | 4,022,725  |   |   | $          | 3,249,860  |   |   | $          | 9,930,162  |  
|                                                     |                             |       |   |            |            |   |   |            |           
|Operating income (loss)                              |                             |       |   |            |            |   |   |            |            |   |   |           
|                                                     | Turnkey contracts           |       | $ | (2,505,934 | )          |   | $ | 3,908,505  |            |   | $ | 3,835,194  |           
|                                                     | Oil and gas marketing       |       |   | 142,611    |            |   |   | 120,096    |            |   |   | 150,876    |           
|                                                     | Oil and gas operations      |       |   | (1,252,166 | )          |   |   | (757,504   | )          |   |   | (6,021,629 | )         
|                                                     | Well services               |       |   | 397,071    |            |   |   | 505,436    |            |   |   | 982,515    |           
|                                                     | Other                       |       |   | (6,591,539 | )          |   |   | (4,646,435 | )          |   |   | (7,044,180 | )         
|                                                     |                             |       |   |            |            |   |   |            |           
|                                                     |                             | Total |   | $          | (9,809,957 | ) |   | $          | (869,902   | ) |   | $          | (8,097,224 | )
|                                                     |                             |       |   |            |            |   |   |            |           

|                     |                        |       |   |             |             |  |   |             |             |  |   |            |             | 
|-------------------- | ---------------------- | ----- | - | ----------- | ----------- |  | - | ----------- | ----------- |  | - | ---------- | ----------- | 
|                     |                        | 2004  |   |             | 2003        |  |   | 2002        |            
|                     |                        |       |   |             |             |  |   |             |            
|Assets               |                        |       |   |             |             |  |   |             |             |  |   |           
|                     | Turnkey contracts      |       | $ | 13,022,081  |             |  | $ | 23,625,826  |             |  | $ | 34,982,047 |            
|                     | Oil and gas marketing  |       |   | 192,642     |             |  |   | 192,642     |             |  |   | 192,642    |            
|                     | Oil and gas operations |       |   | 121,069,107 |             |  |   | 106,113,628 |             |  |   | 54,582,576 |            
|                     | Well services          |       |   |            |             |  |   |            |             |  |   | 94,338     |            
|                     | Other                  |       |   | 112,626,831 |             |  |   | 21,121,567  |             |  |   | 18,410,691 |            
|                     |                        |       |   |             |             |  |   |             |            
|                     |                        | Total |   | $           | 246,910,661 |  |   | $           | 151,053,663 |  |   | $          | 108,262,294 | 
|                     |                        |       |   |             |             |  |   |             |            
|Capital expenditures |                        |       |   |             |             |  |   |             |             |  |   |           
|                     | Turnkey contracts      |       | $ |            |             |  | $ |            |             |  | $ |           |            
|                     | Oil and gas marketing  |       |   |            |             |  |   |            |             |  |   |           |            
|                     | Oil and gas operations |       |   | 27,102,948  |             |  |   | 12,735,327  |             |  |   | 4,744,732  |            
|                     | Well services          |       |   |            |             |  |   |            |             |  |   |           |            
|                     | Other                  |       |   |             |             |  |   | 4,221       |             |  |   | 5,313      |            
|                     |                        |       |   |             |             |  |   |             |            
|                     |                        | Total |   | $           | 27,102,948  |  |   | $           | 12,739,548  |  |   | $          | 4,750,045   | 
|                     |                        |       |   |             |             |  |   |             |            

F-33



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##### Table of Contents






INDEX TO EXHIBITS


|        |    |         |             |                                                                                                                                                                                                                                  
|------- | -- | ------- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|No.     |    |         | Description
|        |    |         |            
|        | 2  | .1(1)   |             | Stock Exchange Agreement, dated September 1, 2000, by and
    among the Registrant, Petroleum Development Corporation, James
    C. Johnson, Jr. and Gregory S. Johnson.                                                         
|        | 3  | .1     |             | Articles of Incorporation of Registrant filed May 20, 2004
    (Maryland)                                                                                                                                                        
|       
|        | 3  | .2(10)  |             | Bylaws of the Registrant, dated June 2, 2004                                                                                                                                                                                     
|       
|        | 3  | .3(10)  |             | Articles Supplementary (Series A 8% Cumulative Convertible
    Preferred Stock ($.0001 Par Value) (Maryland)                                                                                                                     
|       
|        | 3  | .4(10)  |             | Certificate of Correction to Articles Supplementary
    (Series A 8% Cumulative Convertible Preferred Stock)
    (Maryland)                                                                                                      
|       
|        | 3  | .5(10)  |             | Articles Supplementary (Series A Institutional 8%
    Cumulative Convertible Preferred Stock ($.0001 Par Value)
    (Maryland)                                                                                                   
|       
|        | 3  | .6(10)  |             | Certificate of Correction to Articles Supplementary
    (Series A Institutional 8% Cumulative Convertible Preferred
    Stock) (Maryland)                                                                                        
|       
|        | 4  | .1     |             | Specimen Stock Certificate for Common Stock                                                                                                                                                                                      
|       
|        | 4  | .2(1)   |             | Indenture between the Registrant and Continental Stock Transfer
    and Trust Company, as Trustee, dated December 1, 2000
    regarding 12% debentures due December 31, 2007                                                     
|       
|        | 4  | .3(1)   |             | Form of Bond Certificate for 12% debentures due
    December 31, 2007                                                                                                                                                            
|       
|        | 4  | .4(1)   |             | Indenture between the Registrant and Continental Stock Transfer
    and Trust Company, as Trustee, dated February 1, 1999
    regarding 13.02% debentures due December 31, 2010 and
    December 31, 2015                        
|       
|        | 4  | .5(1)   |             | Form of Bond Certificate for 13.02% debentures due
    December 31, 2010                                                                                                                                                         
|       
|        | 4  | .6(1)   |             | Form of Bond Certificate for 13.02% debentures due
    December 31, 2015                                                                                                                                                         
|       
|        | 4  | .7(8)   |             | Form of Class A Common Stock Warrant                                                                                                                                                                                             
|       
|        | 4  | .8(8)   |             | Form of Class B Common Stock Warrant                                                                                                                                                                                             
|       
|        | 4  | .9(3)   |             | Form of Registration Rights Agreement made as of
    December 12, 2002, by and between Warren Resources the
    Investors in the Series A 8% Cumulative Convertible
    Preferred Stock.                                         
|       
|        | 4  | .10(6)  |             | Form of Subscription and Registration Rights Agreement dated
    February 3, 2004 by and between Warren Resources, Inc. and
    the Accredited Investors in Warren Resources, Inc.s
    private placement dated January 21, 2004
|       
|        | 4  | .11(10) |             | Form of Subscription and Registration Rights Agreement dated
    July 30, 2004 by and between Warren Resources, Inc. and the
    Accredited Investors in Warren Resources, Inc.s private
    placement dated July 9, 2004       
|       
|        | 4  | .12(5)  |             | Form of Contribution Agreement by and between Warren Resources,
    Inc., and various Delaware limited liability companies.                                                                                                      
|       
|        | 10 | .1(1)   |             | 2000 Equity Incentive Plan for Warren E&P Subsidiary                                                                                                                                                                             
|       
|        | 10 | .2(1)   |             | Amendment to 2000 Stock Incentive Plan for Warren E&P
    Subsidiary                                                                                                                                                             
|       
|        | 10 | .3(1)   |             | 2001 Stock Incentive Plan                                                                                                                                                                                                        
|       
|        | 10 | .4(1)   |             | 2001 Key Employee Stock Incentive Plan                                                                                                                                                                                           
|       
|        | 10 | .5(1)   |             | Employment Agreement dated January 1, 2001, between the
    Registrant and Norman F. Swanton                                                                                                                                     
|       
|        | 10 | .6(1)   |             | Employment Agreement dated January 1, 2001, between the
    Registrant and Timothy A. Larkin                                                                                                                                     
|       
|        | 10 | .7(9)   |             | Amendment to Employment Agreement dated January 1, 2004,
    between the Registrant and Norman F. Swanton                                                                                                                        
|       
|        | 10 | .8(9)   |             | Amendment to Employment Agreement dated January 1, 2004,
    between the Registrant and Timothy A. Larkin                                                                                                                        
|       
|        | 10 | .9(9)   |             | Employment Agreement dated March 1, 2004, between the
    Registrant and Lloyd Davies                                                                                                                                            
|       
|        | 10 | .10(9)  |             | Employment Agreement dated January 1, 2004, between the
    Registrant and David E. Fleming                                                                                                                                      
|       
|        | 10 | .11(10) |             | Employment Agreement dated January 1, 2004, between the
    Registrant and Ellis G. Vickers                                                                                                                                      
|       
|        | 10 | .12(1)  |             | Form of Indemnification Agreement                                                                                                                                                                                                
|       
|        | 10 | .13(1)  |             | Joint Venture Agreement dated May 24, 1999, by and between
    Warren Resources of California, Inc., Warren Development Corp.,
    Warren E&P and Magness Petroleum Company                                                      



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##### Table of Contents



|        |       |         |             |                                                                                                                                                                                                                                      
|------- | ----- | ------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |         |            
|No.     |       |         | Description
|        |       |         |            
|       
|        | 10    | .15(1)  |             | Gas Purchase Agreement dated January 28, 2000, by and
    between Western Gas Resources, Inc. and Big Basin Petroleum, LLC                                                                                                           
|       
|        | 10    | .16(1)  |             | December 20, 2000 Letter of Agreement to Amend the Gas
    Purchase Contract dated January 28, 2000, between Western
    Gas Resources Inc. and Petroleum Development Corp., as successor
    in interest to Big Basin Petroleum, LLC
|       
|        | 10    | .17(1)  |             | Gas Purchase and Sales Contract dated April 1, 2000,
    between the Registrant and Tenaska Marketing Ventures                                                                                                                       
|       
|        | 10    | .18(1)  |             | Form of Partnership Production Marketing Agreement                                                                                                                                                                                   
|       
|        | 10    | .19(4)  |             | Exchange Agreement dated as of the 11th day of December, 2002,
    between Anadarko E&P Company LP, and Warren Resources, Inc.                                                                                                       
|       
|        | 10    | .20(4)  |             | Joint Exploration Agreement, dated December 13, 2002
    between Warren Resources, Inc., Anadarko E&P                                                                                                                                
|       
|        |       |         |             | Company LP, and Anadarko Land Corp.                                                                                                                                                                                                  
|       
|        | 10    | .21(4)  |             | Form of Rocky Mountain Unit Operating Agreement Between Anadarko
    E&P Company, LP and Warren Resources, Inc.                                                                                                                      
|       
|        | 10    | .22(11) |             | Purchase and Sale Agreement dated November 24, 2004 by and
    among Warren Resources of California, Inc., Magness Petroleum
    Company and Next Generation Investments, LLC.                                                       
|       
|        | 10    | .23(11) |             | Settlement Agreement and Release dated November 24, 2004 by
    and among Warren Resources, Inc., Warren Resources of
    California, Inc., Warren E&P, Inc., Warren Development Corp.
    and Magness Petroleum Company.            
|       
|        | 11   |         |             | Statements regarding Computation of Per Share Earnings (Included
    in the Financial Statement in Part 4)                                                                                                                           
|        | 14(7) |         |             | Code of Ethics for Senior Financial Officers                                                                                                                                                                                         
|       
|        | 21    | .1(12)  |             | Subsidiaries of the Registrant                                                                                                                                                                                                       
|       
|        | 23    | .1     |             | Consent of Williamson Petroleum Consultants, Inc.                                                                                                                                                                                    
|       
|        | 23    | .2     |             | Consent of CBIZ Valuation Group, LLC                                                                                                                                                                                                 
|       
|        | 31    | .1     |             | Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                               
|       
|        | 31    | .2     |             | Certification of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                              
|        | 32   |         |             | Section 1350 Certification                                                                                                                                                                                                           






| |     |                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Companys Registration
    Statement on Form 10, Commission File No. 000-33275,
    filed on October 26, 2001.                   
|
| | (2) | Incorporated by reference to the Companys Amendment
    No. 1 to Registration Statement on Form 10/ A,
    Commission File No. 000-33275, filed on March 6, 2002.
|
| | (3) | Incorporated by reference to the Companys Current Report
    on Form 8-K filed on December 12, 2002.                                                             
|
| | (4) | Incorporated by reference to the Companys Current Report
    on Form 8-K filed on December 24, 2002.                                                             
|
| | (5) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2003.                                                 
|
| | (6) | Incorporated by reference to the Companys Current Report
    on Form 8-K, Commission File No. 000-33275, filed on
    February 11, 2004.                         
|
| | (7) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002, filed
    on March 31, 2003.                      
|
| | (8) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2003, filed
    on March 15, 2004.                      
|
| | (9) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2004,
    filed May 12, 2004.                        



|     |                                                                                                                                                
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2004,
    filed on August 13, 2003.



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##### Table of Contents





|     |                                                                                                                                                  
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Incorporated by reference to the Companys Current Report
    on Form 8-K, Commission File No. 000-33275, filed
    November 30, 2004.           
|    
|(12) | Incorporated by reference to the Companys Registration
    Statement on From S-1/ A, Commission File
    No. 333-118535, filed December 2, 2004.



| |   |                
| | - | ---------------
| |  | Filed herewith.