UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------- | ----------------------------------------------------------------------------------------
|For the Fiscal Year Ended December 31, 2007
|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)

1114 Ave of the Americas, New York, NY 10036(Address of principal executive offices)        (Zip Code)

Registrant's
telephone number, including area code:(212) 697-9660

(Former name or former address, if changed since last report): 489 Fifth Avenue, 32nd Floor, New York, NY 10017

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)

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
ý Yes    o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes    ý No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on June 30, 2007 was $607,520,460.

The
number of shares of registrant's common stock outstanding as of March 3, 2008 was 58,191,901 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later
than April 30, 2008, in connection with the registrant's 2008 Annual Meeting of Stockholders, are incorporated herein by reference into Part III of this Annual Report on
Form 10-K.



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WARREN RESOURCES, INC.

FORM 10-K

TABLE OF CONTENTS

|PART I         |  |                                                                                                             
|-------------- |  | ------------------------------------------------------------------------------------------------------------
|Items 1 and 2: |  | Business and Properties                                                                                     
|Item 1A:       |  | Risk Factors                                                                                                
|Item 1B:       |  | Unresolved Staff Comments                                                                                   
|Item 3:        |  | Legal Proceedings                                                                                           
|Item 4:        |  | Submission of Matters to a Vote of Security Holders                                                         
|PART II        |  |                                                                                                             
|Item 5:        |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|Item 6:        |  | Selected Consolidated Financial Data                                                                        
|Item 7:        |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                       
|Item 7A:       |  | Quantitative and Qualitative Disclosures About Market Risk                                                  
|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                                                                                     
|Item 9B:       |  | Other Information                                                                                           
|PART III       |  |                                                                                                             
|Item 10:       |  | Directors and Executive Officers and Corporate Governance                                                   
|Item 11:       |  | Executive Compensation                                                                                      
|Item 12:       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              
|Item 13:       |  | Certain Relationships and Related Transactions, and Director Independence                                   
|Item 14:       |  | Principal Accountant Fees and Services                                                                      
|PART IV        |  |                                                                                                             
|Item 15:       |  | Exhibits, Financial Statement Schedules                                                                     

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Warren's
logo is a trademark or service mark of Warren. Other trademarks or service marks appearing herein are the property of their respective holders.

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As
used in this document, "Warren", "the Company", "we", "us" and "our" refer to Warren Resources, Inc. and its subsidiaries. The term "Warren E&P" refers to our wholly owned subsidiary Warren
E&P, Inc.

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For
abbreviations or definitions of certain terms used in the oil and gas industry and in this annual report, please refer to the section entitled "Glossary of Abbreviations and Terms".

2

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PART I        CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this annual report on Form 10-K that are not historical are "forward-looking statements," as that term is defined
in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve a
number of risks and uncertainties.

These
forward-looking statements include, among others, the following:



These
statements may be found under "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operation", "Business and Properties" and other sections
of this annual report. Forward-looking statements are typically identified by use of terms such as "may", "will", "could", "should", "expect", "plan", "project", "intend", "anticipate", "believe",
"estimate", "predict", "potential", "pursue", "target" or "continue", the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently.

The
forward-looking statements contained in this annual report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and
assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain
and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that
the forward-looking statements contained in this annual report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking
events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to a number of factors, including:



3

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You
should also consider carefully the statements under "Risk Factors" and other sections of this annual report, which address additional factors that could cause our actual results to
differ from those set forth in the forward-looking statements.

All
forward-looking statements speak only as of the date of this annual report. We do not intend to publicly update or revise any forward-looking statements as a result of new
information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Items 1 and 2:    Business and Properties

Overview

We are a growing independent energy company engaged in the exploration and development of domestic onshore oil and gas reserves. We focus our efforts primarily on
the exploration and development of coalbed methane, or CBM, natural gas properties located in the Rocky Mountain region and on our horizontal drilling, waterflood and tertiary oil recovery programs in
the Wilmington field within the Los Angeles Basin of California.

As
of December 31, 2007, we owned natural gas and oil leasehold interests in approximately 230,738 gross (129,555 net) acres, approximately 90% of which are undeveloped.
Substantially all our undeveloped acreage is located in the Rocky Mountains. We have identified approximately 1,200 drilling locations on our acreage in the Rocky Mountains, primarily on
80-acre well spacing. Additionally, we have identified approximately 450 drilling locations in our Wilmington field units.

As
of December 31, 2007, we had estimated net proved reserves of 356 Bcfe, with a PV-10 value of $1.05 billion, based on a reserve report prepared by Williamson
Petroleum Consultants, Inc. These estimated net proved reserves include 318.6 Bcfe in our Wilmington units and 33.6 Bcfe in our emerging CBM program in the Washakie Basin. These net proved
reserves are located on approximately 10% of our total net acreage. Based on our preliminary results to date, we believe that a substantial amount of our remaining undeveloped CBM acreage in the Rocky
Mountain Region has commercial potential.

As
of December 31, 2007, we had interests in 393 gross (276 net) producing wells and are the operator of record or co-operator for 88% of these wells. Through our
joint venture agreements, we actively participate in operating activities for most of the wells for which we are not operator of record. For the month of December 2007, our average daily production
was 31.3 million cubic feet per day ("MMcfe/d") gross (19.0 MMcfe/d net). For 2008, we have a total capital expenditure budget of approximately $140 million.

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Business Strategy

The principal elements of our business strategy are designed to grow our oil and gas reserves, production volumes and cash flows at a positive return on invested
capital. We plan to focus on the following:



Competitive Strengths

As a result of the following strengths, we believe we are well positioned to execute our business strategy:



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Areas of Exploration and Development Activities

Our exploration and development activities are focused primarily on CBM projects in the Rocky Mountain region and also on waterflood oil recovery projects in the
Wilmington field in California. The table below highlights our main areas of activity:

Area

Gross Acres

Net Acres

Planned Gross Wells in 2008Atlantic Rim Project

196,893

104,991

245Wilmington Field

2,476

2,454

49Pacific Rim Project

20,885

17,207

Powder River Basin

3,110

2,238

Wilmington Field

2,476

2,454

49Other(1)

7,374

2,665

Total

230,738

129,555

294




California Projects



Our Wilmington Townlot Unit is located in the Wilmington field within the Los Angeles Basin of California. The Wilmington field has produced over
2.5 billion barrels of oil since its discovery in the 1930s. Since that time, the Wilmington Townlot Unit, a unitized oil field consisting of 1,440 gross (1,418 net) acres, has produced more
than 149 million barrels of oil from primary and secondary production. All the working interests in the Wilmington Townlot Unit are subject to the terms and provisions of a unit operating
agreement. We hold an approximate 98.5% undivided working interest in the Wilmington Townlot Unit.

Our
Wilmington Townlot Unit oil reserves are primarily proved undeveloped, or PUDs. We seek to develop these reserves using directional and horizontal drilling and secondary recovery
techniques, such as a waterflood and tertiary recovery program. As of December 31, 2007, we had 3,177 barrels of oil per day ("Bbls/d") gross, (2,579 Bbls/d net) production, compared to 1,613
Bbls/d gross (1,287 Bbls/d net) production as of December 31, 2006. In addition, estimated proved reserves as of December 31, 2007 were 41 MMbbls gross (34 MMbbls net), of which 70% are
PUDs and 30% are PDPs. Further, as of December 31, 2007, there were 94 gross (93 net) producing wells.

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The North Wilmington Unit is located in the Wilmington oil field adjacent to our existing Wilmington Townlot Unit. Since its discovery in the 1930s, this unitized
oil field consisting of approximately 1,036 gross and net acres has produced more than 37.6 million barrels of oil. All working interests in the North Wilmington Unit are subject to the terms
and provisions of a unit operating agreement. We own a 100% working interest and an approximate 84.5% net revenue interest in the North Wilmington Unit field, including existing wells, certain
equipment and certain surface properties.

The
North Wilmington Unit oil reserves are primarily PUDs. Based on a report of Williamson Petroleum Consultants as of December 31, 2007, the estimated net proved reserves
attributable to the North Wilmington Unit were 23 MMbbls gross (19 MMbbls net) of which 95% are PUDs and 5% are PDPs. We seek to develop these reserves using directional and horizontal drilling and
secondary recovery techniques, such as a waterflood and tertiary recovery program. As of December 31, 2007, production from the North Wilmington Unit was 401 Bbls/d gross (341 Bbls/d net).

Rocky Mountain Projects in the Washakie Basin



The Washakie Basin is located in the southeast one-third of the Greater Green River Basin in southwestern Wyoming and represents our largest acreage
position. As of December 31, 2007, we had assembled 217,778 gross (122,198 net) acres prospective for CBM development in this area, of which 112,557 net acres are undeveloped. This area
contains approximately 1,200 identified drilling locations primarily on 80-acre well spacing. The report prepared by Williamson Petroleum Consultants as of December 31, 2007
estimates that the gross recoverable proved reserves for the 91 CBM wells drilled and their 56 well offsets in our first three CBM pilot programs in this basin were 107 Bcf gross (33.6 Bcf net) on
80-acre well spacing. We own a 56% average working interest to the base of the Mesa Verde formation in this acreage.

In
addition to this acreage, we have the rights to drill and develop the deeper, conventional formations ("deep rights") in some, but not all, of the acreage in the Atlantic Rim Area. We
own approximately 87,570 gross (72,155) net) undeveloped acres of deep rights inside the area of mutual interest ("AMI") with Anadarko, and approximately 22,004 gross (19,475 net) undeveloped acres of
deep rights outside the AMI, for a total of 109,574 gross (91,630 net) undeveloped acres in the entire Atlantic Rim Area.

Commercial
CBM production in the Washakie Basin was initially established in 2002 on the eastern rim of the Washakie Basin by Warren and Double Eagle Petroleum Co., an independent
energy company. Current development in the Washakie Basin is targeting shallow Mesa Verde coalbeds. The Mesa Verde coalbeds in this area differ from those found in the Powder River Basin in that they
are thinner zones but have significantly higher gas content, much like the coalbeds found in the Drunkard's Wash field in the Uinta Basin of Utah. CBM field development in the Washakie Basin is
usually accomplished by grouping wells into "pods" of 10 to 24 wells, complete with associated infrastructure, including water disposal wells, gathering and compression. The productive pods are
typically grouped into individual federal units of up to 25,000 acres each, which facilitates development operations.



Our Atlantic Rim project comprises approximately 196,893 gross (104,991 net) acres on the eastern rim of the Washakie Basin. As of December 31, 2007, we
have drilled a total of 197 wells. Currently, we are jointly developing all of our Atlantic Rim projects within the area of mutual interest with Anadarko. Anadarko is the operator of record for the
Atlantic Rim project, and under the Anadarko

7

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agreements,
our personnel and Anadarko's personnel have equal input in decision-making for most decisions, including budgets and drilling.



Our initial pod, the Sun Dog unit, is a 10-well pilot program drilled in 2001 on 80-acre spacing. In 2004 we drilled an additional 2 CBM
gross (0.3 net) wells and a second water injection well. Production commenced from these additional wells in April 2005. The Sun Dog unit commenced production in April 2002 at a gross rate of
approximately 200 Mcf/d of gas and 6,000 Bbls/d of water. As of December 31, 2007, these wells were producing 4,891 Mcf/d of gas and 13,509 Bbls/d of water. As of December 31, 2007, we
were in the process of completing approximately 45 gross (27.5 net) wells, which we expect to commence production during the first half of the year. Based on a report from Williamson Petroleum
Consultants, as of December 31, 2007, estimated gross ultimate recoverable proved reserves for the 12 producing wells and 14 drilled but not competed offset locations in the Sun Dog unit
average 1.0 Bcfe per well. We currently own a working interest of approximately 61% in the wells drilled in the initial pod of the Sun Dog unit. Our working interest in the unit will be approximately
40% if the existing unit is fully drilled and developed.



The Blue Sky unit is a 23-well pilot program originally drilled on 160-acre spacing. This program commenced production in August 2003 and
as of December 31, 2007, was producing 485 Mcf/d of natural gas and approximately 28,000 Bbls/d of water. Based on prior desorption, permeability, pressure build-up and other tests,
we believe that as the wells dewater, the Blue Sky unit wells should exhibit daily production rates and a CBM production curve similar to other CBM wells in the Atlantic Rim project. During 2005, we
drilled 11 CBM wells in this unit to reduce the well spacing to 80-acres. Based on a report from Williamson Petroleum as of December 31, 2007, estimated gross ultimate recoverable
proved reserves for the 19 producing wells in the Blue Sky unit average 0.5 Bcfe per well. We currently own an approximate 50% working interest in the wells drilled in the initial pod of the Blue Sky
unit. Our working interest in the unit will be approximately 40% if the existing unit is fully drilled and developed.



The Doty Mountain unit consists of 46 wells on 80-acre spacing. In 2004, we drilled 24 wells and one water injection well. In 2006, we drilled and
completed an additional 22 wells. As of December 31, 2007 these wells were producing 1,790 Mcf/d of natural gas and approximately 13,000 Bbls/d of water. Based on a report from Williamson
Petroleum as of December 31, 2007, estimated proved reserves for the wells in the Doty Mountain unit were 61.7 gross (18.5 net) Bcfe. We currently
own an approximate 35% working interest in the wells drilled in the initial pod of the Doty Mountain unit. Because we have a larger working interest in the undrilled locations, our working interest in
the unit will be approximately 40% if the existing unit is fully drilled and developed.



This pod in located at the north end of the Atlantic Rim CBM project and consists of 16 wells on 160-acre spacing. We completed eight CBM wells and
one water injection well during 2003, another eight wells during 2004 and an injector well in 2005. The installation of a gathering system was completed in 2005. These 16 wells are currently in the
dewatering stage. We own a working interest of approximately 49% in the wells drilled in the initial pod of the Red Rim unit. Our working interest in the unit will be approximately 46% if the existing
unit is fully drilled and developed. Activity in the Red Rim has been suspended while development focuses on the central area of the play. We expect to further evaluate the northern area in 2009 or
2010.

8

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The Jolly Roger unit consists of 24 wells on 160-acre spacing. We drilled eight wells and one water injection well in 2002 and drilled 16 wells, one
water injection well and one monitor well in this unit in 2005. These wells are currently in the dewatering stage. We currently own a working interest of approximately 41% in the wells drilled in the
initial pod of the Jolly Roger unit. Because we have a larger working interest in the undrilled locations, our working interest in the unit will be approximately 43% if the existing unit is fully
drilled and developed.



Our Pacific Rim acreage is located on the western rim of the Washakie Basin, approximately 60 miles west of our Atlantic Rim project. At December 31, 2007,
this project comprised approximately 20,885 gross (17,207 net) acres. We are the operator of record for the Pacific Rim project, which is not subject to the AMI or joint venture agreements with
Anadarko.



This pod consists of seven wells, one of which we drilled in the second quarter of 2004, three of which we drilled in 2005 and three which were drilled in 2006.
As of December 31, 2007, the Chicken Springs wells were producing 768 Mcf/d of natural gas. We currently own an approximate 50% working interest in the wells drilled in the initial pod of the
Chicken Springs unit. Based on a report from Williamson Petroleum as of December 31, 2007, estimated proved reserves for the wells in the chicken Springs unit were 0.6 Bcf gross (0.3 Bcf net).



After extensive testing we have determined that these units are uneconomic for CBM production. Costs associated with the Pacific Isle Unit and the Rifes Rim Unit
were included in the Oil and Gas Property amortization base in the third and fourth quarters of 2007.



During 2007, Warren along with its 50% working interest partner Stone Energy completed the first exploratory well on this prospect. After it was determined that
this exploratory well was a dry hole, Warren sold its 50% interest in the well and this prospect to Stone Energy.



At December 31, 2007, we owned and operated interests in 89 gross (85 net) producing CBM wells in 3,110 gross (2,238 net) acres in the Powder River Basin
near Gillette, Wyoming. At December 31, 2007, this field was shut in for a planned compression swap, which should be completed during the first quarter of 2008. This swap is expected to improve
efficiency and cost structure in the field.

Natural Gas and Oil Reserves

The following table presents our estimated proved natural gas and oil reserves and the PV-10 value of our interests in net reserves in producing
properties as of December 31, 2007, 2006 and 2005 based on reserve reports prepared by Williamson Petroleum. The PV-10 values shown in the table are not intended to represent the
current market value of the estimated natural gas and oil reserves we own.

For
2006 and 2005, a portion of our proved developed reserves had been accumulated through our interests in the drilling programs for which we served as managing general partner. These
estimates of future net cash flows and their present values, based on period end prices, were based upon certain assumptions of the drilling programs in which we own interests will achieve payout
status in the future.

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During
2007, we acquired all oil and gas properties and associated reserves from the drilling partnerships.

Years Ended December 31,2007

2006

2005Estimated Proved Natural Gas and Oil Reserves:Net natural gas reserves (MMcf):Proved developed


21,852


9,264


10,829Proved undeveloped


15,916


15,561


13,524Total(1)


37,768


24,825


24,353Net oil reserves (MBbls):Proved developed


11,202


9,583


2,938Proved undeveloped


41,908


44,494


47,477Total(2)


53,110


54,077


50,415Total Net Proved Natural Gas & Oil Reserves (MMcfe)


356,428


349,290


326,845Estimated Present Value of Net Proved Reserves:PV-10 Value (in thousands)Proved developed

$
464,331

$
205,683

$
107,639Proved undeveloped


583,637


403,201


530,280Total(3)


1,047,968


608,884


637,919Less: future income taxes, discounted at 10%


228,817


196,308


175,139Standardized measure of discounted future net cash flows (in thousands)(4)

$
819,151

$
412,576

$
462,780Prices Used in Calculating Reserves:Natural Gas (per Mcf)

$
5.02

$
4.35

$
9.92Oil (per Bbl)

$
86.21

$
50.60

$
49.05Proved Developed Reserves (MMcfe)


89,062


66,763


28,461




10

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The
data in the above natural gas and oil reserves table represents estimates only. Oil and natural gas reserve engineering is inherently a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured exactly. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation
and judgment. Accordingly, reserve estimates may vary from the quantities of oil and natural gas that are ultimately recovered. See "Risk Factors".

PV-10
is equal to the future net cash flows from our proved reserves at December 31, 2007, excluding any future income taxes, discounted at 10% per annum
("PV-10"). Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are
proved reserves that are expected to be recovered from new wells drilled to known reservoirs on undrilled acreage for which the existence and recoverability of such reserves can be estimated with
reasonable certainty, or from existing wells on which a relatively major expenditure is required to establish production. PV-10 may be considered a non-GAAP financial measure
as defined by Item 10(e) of Regulation S-K and is derived from the standardized measure of discounted future net cash flows which is the most directly comparable GAAP
financial measure. PV-10 is a computation of the standardized measure of discounted future net cash flows
on a pre-tax basis. We believe that the presentation of the PV-10 is relevant and useful to investors because it presents the discounted future net cash flows attributable to
our proved reserves prior to taking into account corporate future income taxes and it is a useful measure for evaluating the relative monetary significance of our oil and natural gas properties.
Further, investors may utilize the measure as a basis for comparison of the relative size and value of our reserves to other companies. We use this measure when assessing the potential return on
investment related to our oil and natural gas properties. However, PV-10 is not a substitute for the standardized measure of discounted future net cash flows.

Due
to the volatility of commodity prices, the oil and gas prices on the last day of the period significantly impact the calculation of the PV-10 and the standardized measure
of discounted future net cash flows. The present value of future net cash flows does not purport to be an estimate of the fair market value of the Company's proved reserves. An estimate of fair value
would also take into account, among other things, anticipated changes in future prices and costs, the expected recovery of reserves in excess of proved reserves and a discount factor more
representative of the time value of money and the risks inherent in producing oil and gas. Future prices received for production and costs may vary, perhaps significantly, from the prices and costs
assumed for purposes of these estimates. The 10% discount factor used to calculate present value, which is required by Financial Accounting Standard Board pronouncements, may not necessarily be the
most appropriate discount rate. The present value, no matter what discount rate is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate.

There
are numerous uncertainties in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many
factors beyond our control. The reserve data set forth in this annual report are only estimates. Although we believe these estimates to be reasonable, reserve estimates are imprecise and may be
expected to change as additional information becomes available. Estimates of natural gas and oil reserves, of necessity, are projections based on engineering data and there are uncertainties inherent
in the interpretation of this

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data,
as well as the projection of future rates of production and the timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of
natural gas and oil that cannot be exactly measured. Therefore, estimates of the economically recoverable quantities of natural gas and oil attributable to any particular group of properties,
classifications of the reserves based on risk of recovery and the estimates are a function of the quality of available data and of engineering and geological interpretation and judgment and the future
net cash flows expected there from, prepared by different engineers or by the same engineers at different times, may vary substantially. There also can be no assurance that the reserves set forth
herein will ultimately be produced or that the proved undeveloped reserves will be developed within the periods anticipated. Actual production, revenues and expenditures with respect to our reserves
will likely vary from estimates, and such variances may be material. In addition, the estimates of future net revenues from our proved reserves and the present value thereof are based upon certain
assumptions about future production levels, prices and costs that may not be correct.

With
respect to the estimates prepared by Williamson Petroleum, PV-10 value should not be construed as representative of the fair market value of our proved natural gas and
oil properties since discounted future net cash flows are based upon projected cash flows which do not provide for changes in natural gas and oil prices or for the escalation of expenses and capital
costs. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Actual future prices and costs may differ materially from those
estimated. You are cautioned not to place undue reliance on the reserve data included in this annual report. Under SEC guidelines, estimates of the PV-10 value of proved reserves must be
made using oil and gas sales prices at the date for the valuation, which prices are held constant throughout the life of the properties.

Productive Wells

The following table sets forth our gross and net productive wells as of December 31, 2007:

Natural Gas Wells

Oil Wells

TotalGross

Net

Gross

Net

Gross

NetCalifornia





148

147.0

148

147.0New Mexico

20

1.4

3

0.1

23

1.5Texas

13

3.3





13

3.3Wyoming

205

123.2





205

123.2Other

2

1.1

2

0.1

4

1.2Total

240

129.0

153

147.2

393

276.2


Gross
wells represent all wells in which we have an interest. Net wells represent the total of our fractional undivided working interest in those wells.

Drilling Activity

The following table sets forth the number of gross exploratory and gross development wells drilled in which we participated during the last three fiscal years.
The number of wells drilled refers to the number of wells commenced at any time during the respective fiscal year. Productive wells are either producing wells or wells capable of commercial
production. At December 31, 2007, we were in the

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process
of completing 45 gross Sundog wells in the Atlantic Rim in Wyoming. The following table sets forth our drilling activities:

Years Ended December 31,2007

2006

2005Gross

Net

Gross

Net

Gross

NetExploratory Wells(1)Productive(2)

27

16.5

37

20.0

21

2.4Nonproductive(3)

1

0.5

2

0.7



Development Wells(1)Productive(2)

53

45.9

28

27.9

27

13.3Nonproductive(3)











Total

81

62.9

67

48.6

48

15.7




Natural Gas and Oil Acreage

The following table sets forth our acreage position as of December 31, 2007:

Developed

Undeveloped

TotalGross

Net

Gross

Net

Gross

NetCalifornia

1,073

1,061

1,403

1,393

2,476

2,454New Mexico

1,066

98

2,924

350

3,990

448Texas

704

176





704

176Wyoming

25,985

11,741

194,903

112,694

220,888

124,435Other

948

442

1,732

1,600

2,680

2,042Total

29,776

13,518

200,962

116,037

230,738

129,555


Production Volumes, Sales Prices and Production Costs

The following table summarizes our net natural gas and oil production volumes, our average sales prices and expenses for the periods indicated. Our production is
attributable to our direct interests in producing properties. For these purposes, our net production will be production that is owned by us, after deducting royalty, limited partner and other similar
interests. The lease operating expenses shown

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relates
to our net production. Prior to our acquisition of the investors' drilling program interests in 2006 and 2007 the majority of our production was received from our interest in the drilling
programs.

Years Ended December 31,2007

2006

2005Production:Natural gas (MMcf)


1,255.4


1,052.1


1,073.5Oil (MBbls)


824.5


455.8


147.6Total equivalents (MMcfe)


6,202.5


3,787.2


1,958.9Average Sales Price Per Unit:Natural gas (per Mcf)

$
4.81

$
5.73

$
6.71Oil (per Bbl)

$
64.96

$
55.36

$
45.75Effects of derivative instrument


(0.36
)




Realized price (per Bbl)

$
64.60

$
55.36

$
45.75Weighted average sales price (per Mcfe)

$
9.56

$
8.25

$
7.13Expenses (per Mcfe):Lease operating expense(1)

$
3.69

$
3.44

$
3.64




Purchasers and Marketing

We sell our natural gas and oil production to various purchasers in the areas where the oil and natural gas is produced. The natural gas is delivered into natural
gas pipelines for transportation and is sold to various purchasers for later re-marketing or end use. Our oil is sold to purchasers who take delivery from storage tanks that are located on
our property. The majority of all of this natural gas and oil is sold under monthly contracts that allow for periodic adjustments in pricing according to market demands.

We
sell our natural gas at market price. The marketing of natural gas and oil can be affected by factors beyond our control, the effects of which cannot be predicted. For more
information about the risks to our business posed by our marketing activities see "Risk Factors".

For
2007, the largest purchasers and marketers for our production primarily included Conoco Phillips, Inc., Anadarko Energy Services and ABQ Energy Group, and which accounted for
80%, 13%
and 6%, respectively, of the total natural gas and oil sold by us. We believe that the loss of any of these purchasers would not have a material adverse effect on our operations, as we believe there
are a significant number of readily available purchasers in the market.

Our Service and Operational Activities

Our drilling, completion, production, re-entry and land operations are conducted, managed and supervised for us and our drilling programs through
Warren E&P, Inc., our wholly owned subsidiary. Through Warren E&P, we employ petroleum engineers, drilling supervisors, landmen and field supervisors. Warren E&P also employs geologists and
other personnel on a contract basis. As of December 31, 2007, Warren E&P was the operator or co-operator of approximately 88% of the wells in which we had interests.

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Competition

We compete with a number of other potential purchasers of natural gas and oil leases and producing properties, many of which have greater financial resources than
we do. In general, the bidding for natural gas and oil leases has become particularly intense in the Powder River and Washakie Basins with bidders evaluating potential acquisitions with varying
product pricing parameters and other criteria that result in widely divergent bid prices. The presence of bidders willing to pay prices higher than are supported by our evaluation criteria could
further limit our ability to acquire natural gas and oil leases. In addition, low or uncertain prices for properties can cause potential sellers to withhold or withdraw properties from the market. In
this environment, we cannot guarantee that there will be a sufficient number of suitable natural gas and oil leases available for acquisition; that we can sell interests in natural gas and oil leases;
or that we can obtain financing for, or locate participants to join in the development of prospects.

Regulations and Environmental Matters

General.Our operations are subject to stringent federal, state and local laws and regulations
governing the discharge of materials into the environment or otherwise relating to environmental protection. Our operations are subject to the same environmental laws and regulations as other
companies in the oil and gas exploration and production industry. These laws and regulations:



These
laws, rules and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. The regulatory burden on the oil and gas
industry increases the cost of doing business in the industry and consequently affects profitability. Additionally, Congress, State Legislatures and federal and state agencies frequently revise
environmental laws and regulations, and any changes that result in delay or more stringent and costly waste handling, disposal and clean-up requirements for the oil and gas industry could
have a significant impact on our operating costs. We believe that we substantially comply with all current applicable environmental laws and regulations and that our continued compliance with existing
requirements will not have a material adverse impact on our financial condition and results of operations. However, we cannot predict the passage of or quantify the potential impact of more stringent
future laws and regulations at this time. For the year ended December 31, 2007, we did not incur any material capital expenditures for remediation of pollution control equipment at any of our
facilities.

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The environmental laws and regulations which could have a material impact on the oil and natural gas exploration and production industry are as follows:

National Environmental Policy Act.Oil and natural gas exploration and production activities on
federal lands are subject to the National Environmental Policy Act, or NEPA. NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having the potential
to significantly impact the environment. In the course of such evaluations, an agency will have an environmental assessment, or EA, prepared that assesses the potential direct, indirect and cumulative
impacts of a proposed project. If impacts are considered significant, the agency will prepare a more detailed environmental impact statement, or EIS, that may be made available for public review and
comment. All of our current and proposed exploration, production and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the
potential to delay the development of oil and natural gas projects. Authorizations under NEPA also are subject to protest, appeal or litigation, which can delay or halt projects.

Some
of our exploration and production activities occur on federal leases. This is particularly true of our CBM operations. Exploration and production operations on federal leases are
generally performed in accordance with a record of decision issued by the Bureau of Land Management ("BLM") after preparation of an environmental assessment or an environmental impact statement. A
record of decision typically includes environmental and land use provisions that restrict and limit exploration and production activities on federal leases. Much of our CBM operations are subject to
records of decision and we have not experienced any material difficulty in complying with their terms and conditions.

Waste Handling.The Resource Conservation and Recovery Act, or RCRA, and comparable state statutes,
affect oil and gas exploration and production activities by imposing regulations on the generation, transportation, treatment, storage, disposal and cleanup of "hazardous wastes" and on the disposal
of non-hazardous wastes. Under the auspices of the Environmental Protection Agency, or EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction
with their own, more stringent requirements. Drilling fluids, produced waters, and most of the other wastes associated with the exploration, development, and production of crude oil, natural gas, or
geothermal energy constitute "solid wastes", which are regulated under the less stringent non-hazardous waste provisions, but there is no guarantee that the EPA or the individual states
will not adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed,
legislation has been proposed from time to time in Congress to re-categorize certain oil and gas exploration and production wastes as "hazardous wastes".

We
believe that we are in substantial compliance with the requirements of RCRA and related state and local laws and regulations, and that we hold all necessary and
up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we believe that the current
costs of managing our wastes as they are presently classified are reflected in our budget, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could
increase our costs of managing and disposing of such wastes.

Comprehensive Environmental Response, Compensation and Liability Act.The Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), also known as the "superfund" law, imposes joint and several liabilities, without regard to fault or legality of conduct, on classes of persons who
are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site, or site where the release occurred,
and companies that disposed or arranged for the disposal of the hazardous substance. Under CERCLA, such persons may be subject to joint and several liabilities for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring

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landowners
and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations,
we use materials that, if released, would be subject to CERCLA. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA for all or part of the costs to clean up
sites at which such "hazardous substances" have been deposited.

Water Discharges.The Federal Water Pollution Control Act, also known as the Clean Water Act, and
analogous state laws impose restrictions and strict controls regarding the discharge of pollutants, including produced waters and other oil and gas wastes, into waters of the United States. The
discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the applicable state agency. These prescriptions also prohibit the
discharge of dredge and fill material in regulated waters, including wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers. Federal and state regulatory agencies can
impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the federal Clean Water Act and analogous state laws and regulations.
Response costs could be high and may have a material adverse effect on our operations. We may not be fully insured for these costs. We maintain all required discharge permits necessary to conduct our
operations, and we believe we are substantially compliant with the terms thereof. Obtaining permits has the potential to delay the development of oil and natural gas projects. We anticipate that total
maximum daily load water quality standards established under Clean Water Act delegated programs may be promulgated for surface water bodies in areas where we operate, including the Powder River Basin.
However, we do not expect that any total maximum daily load regulations, or standards promulgated in any area where we operate, will result in a material increase in our produced water disposal costs,
as we already inject much of our produced water in disposal wells, rather than discharging into surface water bodies, and would be able to cost-effectively drill and operate additional
disposal wells as needed.

Air Emissions.The Federal Clean Air Act and associated state laws and regulations, regulate
emissions of various air pollutants through the issuance of permits and the imposition of other requirements. In addition, the EPA has developed, and continues to develop, stringent regulations
governing emissions of toxic air pollutants at specified sources. Some of our new facilities will be required to obtain permits before work can begin, and existing facilities may be required to incur
capital costs in order to remain in compliance. These regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose
administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe
that we are in substantial compliance with all air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining permits has the
potential to delay the development of oil and natural gas projects.

Other Environmental Laws and Regulation.The Kyoto Protocol to the United Nations Framework
Convention on Climate Change went into effect in February 2005 and requires all industrialized nations that ratified the Protocol to reduce or limit greenhouse gas emissions to a specified
level by 2012. The United States has not ratified the Protocol, and the U.S. Congress has resisted recent proposed legislation directed at reducing greenhouse gas emissions. However, there is
increasing public pressure from environmental groups and some Northeastern and West Coast states for the United States to develop a national program for regulating greenhouse gas emissions, and
several states have already adopted regulations or announced initiatives focused on decreasing or stabilizing greenhouse gas emissions associated with industrial activity, primarily carbon dioxide
emissions from power plants, equipment and vehicles. The oil and natural gas exploration and production industry is a direct source of certain greenhouse gas emissions, namely carbon dioxide and
methane, and future restrictions on the combustion of fossil fuels or the venting of natural gas could impact our future operations. Our operations are not adversely impacted by current state and
local climate change initiatives and, at this

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time,
it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.

Operating Regulation of the Oil and Gas Industry

In addition to environmental laws and regulations, exploration, production and operations in the oil and gas industry are extensively regulated by numerous
federal, state and local authorities. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous
departments and agencies, both federal and state, are authorized by statute to issue rules and regulations binding on the oil and gas industry and its individual members, some of which carry
substantial penalties for failure to comply. Although the regulatory burden on the oil and gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens
generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production.

Drilling and Production.Our operations are subject to various types of regulation at federal, state, and local levels. These
types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. Most states and some counties and municipalities in which we operate also
regulate one or more of the following:



State
laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or
integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties
and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or
flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of natural gas and oil we can produce from our wells or limit the
number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas
liquids within its jurisdiction.

Natural Gas Sales Transportation.Historically, federal legislation and regulatory controls have affected the price of the
natural gas we produce and the manner in which we market our production. The Federal Energy Regulatory Commission, or FERC, has jurisdiction over the transportation and sale or resale of natural gas
in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the
complete removal of all price and non-price controls for sales of domestic natural gas sold in "first sales", which include all of our sales of our own production.

FERC
also regulates interstate natural gas transportation rates and service conditions, which affects the marketing of natural gas that we produce, as well as the revenues we receive for
sales of our natural gas. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing
gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to

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producers,
marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive,
unregulated, open access market for gas purchases and sales that permits all purchasers of gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry
historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach recently pursued by FERC and Congress will continue indefinitely into the
future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities.

Under
FERC's current regulatory regime, transmission services must be provided on an open-access, non-discriminatory basis at cost-based rates or at
market-based rates if the transportation market at issue is sufficiently competitive. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by state agencies.
Although its policy is still in flux, FERC recently has reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to
increase our costs of transporting gas to point-of-sale locations.



We conduct a sizeable portion of our operations on federal oil and natural gas leases which are administered by the BLM and the Minerals Management Service
("MMS"). Federal leases contain relatively standard terms and require compliance with detailed BLM and MMS regulations and orders, which are subject to change. Under certain circumstances, the BLM may
require any of our operations on federal leases to be suspended or terminated. Any such suspension or termination could have a material adverse effect on our business, financial condition and results
of operations. The MMS issued a final rule that amended its regulations governing the valuation of oil and gas produced from federal leases. This rule, which became effective June 1, 2000,
provides that the MMS will collect royalties based on the market value of oil and gas produced from federal leases.



Our operations are also subject to regulation at the state, and in some cases, county, municipal and local governmental levels. Such regulation includes
requirements concerning permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the plugging and abandonment of wells and requiring the disposal of fluids used and produced in connection with operations. Our
operations are also subject to various conservation laws and regulations pertaining to the size of drilling, spacing and proration units and the unitization or pooling of oil and gas properties.

In
addition, state conservation laws, which frequently establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain
requirements regarding the rates of production. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take
requirements, but, except as noted above, does not generally entail rate regulation. These regulatory burdens may affect our profitability, and we are unable to predict the future cost or impact of
complying with such regulations.

Future Regulations

Proposals and proceedings that may affect the oil and gas industry are pending before Congress, the BLM, FERC, MMS, state legislatures and commissions and the
courts. We cannot predict when or whether any such proposals may become effective. In the past, the natural gas industry has been heavily regulated. There is no assurance that the regulatory approach
currently pursued by various agencies will continue indefinitely. Notwithstanding the foregoing, we do not anticipate that compliance with existing federal, state and local laws, rules and regulations
will have a material adverse effect upon our capital expenditures, earnings or competitive position.

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Failure
to comply with environmental regulations may result in the imposition of substantial administrative, civil or criminal penalties, or restrict or prohibit our desired business
activities. Environmental laws and regulations impose liability, sometimes strict liability, for environmental cleanup costs and other damages. Other environmental laws and regulations may delay or
prohibit
exploration and production activities in environmentally sensitive areas or impose additional costs on these activities.

We
believe we are in compliance with current applicable environmental laws and regulations. We believe that the existence and enforcement of such laws and regulations have no more
restrictive an effect on our operations than on other similar companies in the energy industry. Costs associated with responding to a major spill of crude oil or produced water, or costs associated
with remediation of environmental contamination, are the most likely occurrences that could result in a material adverse effect on our business, financial condition and results of operations. There
are no pending or threatened claims for any such environmental cleanup costs, and we operate our producing properties in a prudent manner in order to avoid or minimize liability related to any such
claims.

In
addition, changes in applicable federal, state and local environmental laws and regulations potentially could have a material adverse effect on our business, financial condition and
results of operations. In this regard, our CBM drilling and production operations are subject to ongoing BLM oversight, EIS development and recurring BLM approvals, and could be affected by changes in
BLM regulations or policies.

We
anticipate no material estimated capital expenditures to comply with federal and state environmental requirements. In addition, state-wide reclamation bonds and our
$50 million casualty and environmental insurance policy have been adequate to meet the applicable bonding and insurance requirements to date. Finally, we have deposited $3.1 million in
money market securities as of December 31, 2007, as collateral for a $3.4 million reclamation bond for the Wilmington Townlot Unit.



The majority of our gas production is from CBM operations that generate water discharges and air emissions that are subject to significant regulatory control.
Naturally occurring groundwater is produced by our CBM operations. This produced water is disposed of by re-injection into the subsurface through disposal wells, and, in some cases,
discharge to the surface or in evaporation ponds. Whichever disposal method is used, produced water must be disposed of in compliance with permits issued by state regulatory agencies, and in
compliance with applicable state and local environmental regulations. To date, we have been able to obtain necessary surface discharge or disposal well permits and we have been able to discharge
produced water and operate our produced water disposal wells in compliance with our permits and applicable federal, state and local laws and regulations without undue cost or burden to our business
activities.

Our
CBM operations involve the use of gas-fired generators and compressors to transport gas that we produce. Emissions of nitrogen oxides and other combustion
by-products from individual or multiple generators and compressors at one location may be great enough to subject the compressors to state air quality requirements for
pre-construction and operating permits. To date, we have not experienced significant delays or problems in obtaining the required air permits and have been able to operate these
compressors in compliance with our permits and applicable federal, state and local laws and regulations without undue cost or burden to our business activities. Another air emission associated with
our coalbed methane operations that may be subject to regulation and permitting requirements is particulate matter resulting from construction activities and vehicle traffic. To date, we have not
experienced any difficulty complying with environmental requirements related to particulate matter and have not needed to obtain permits relating to particulate matter.

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After almost seven years, in May 2007 the BLM issued its Record of Decision for the Atlantic Rim EIS that allows the development of the Atlantic Rim project by
drilling up to 2,000 wells of which 1,800 would be CBM wells and 200 deeper conventional wells. Based on the current knowledge of geologic formations, the BLM's minimum well spacing will be 80 acres
per CBM well. Several environmental groups, however, filed appeals against the Department of Interior of the BLM's decision approving the EIS to the Interior Board of Land Appeals (IBLA), and in the
Federal District Court for the District of Columbia. These appeals contain claims ranging from the EIS does not consider enough alternatives to that it does not allow enough hunting in the Atlantic
Rim. The IBLA and Federal Courts have refused to grant injunctions for stays of drilling activities requested by the environmental groups; however, there can be no assurance that the IBLA or courts
will not determine that the BLM should modify some portion of their final EIS.

Our
Washakie Basin CBM production operations are also subject to Wyoming DEQ regulations and permit requirements. Permits required from the Wyoming DEQ include air emission and produced
water discharge permits. To date, we have not experienced any difficulties in obtaining any air permits needed for our Washakie Basin operations from the Wyoming DEQ. Disposal of produced water will
be limited to subsurface injection in the portion of the Washakie Basin within the Colorado River drainage area. We have received permits for nine produced water injection wells in the Atlantic Rim
project. We will need to obtain permits for additional injection wells, in the event that we need additional subsurface disposal capacity.



The Powder River Basin is currently the subject of an EIS that was updated in May 2003. Drilling and production operations on our Powder River Basin leases in
Wyoming are subject to environmental rules, requirements and permits issued by federal, state and local regulatory agencies, including the BLM and the Wyoming DEQ. The BLM has imposed environmental
limitations and conditions on CBM drilling, production and related construction activities on federal leases in certain specific areas of the Powder River Basin. These conditions and requirements are
imposed through a record of decision issued pursuant to an EIS. The BLM may also impose site-specific conditions on development activities, such as drilling and construction of
rights-of-way, before it approves required applications for permits to drill and plans of development. We believe we have operated our Powder River Basin federal leases in
compliance with the BLM's current requirements.

Our
Powder River Basin CBM production operations are also subject to Wyoming DEQ environmental regulations and permit requirements. Permits required from the Wyoming DEQ include air
emission and produced water discharge permits. To date, we have not experienced any difficulty in obtaining air quality permits from the Wyoming DEQ. Injection wells are used to dispose of produced
water when surface discharge permits cannot be obtained from the Wyoming DEQ. We have three permitted injection wells for our Powder River Basin operations. We may need to permit, drill and operate
additional injection wells in the event additional subsurface disposal capacity is needed.



The Wilmington Townlot Unit and the North Wilmington Unit are located in a mixed industrial and residential area near the Port of Los Angeles. Field activities
include drilling wells to develop our lease acreage and operating a waterflood to maximize crude oil production. Stringent environmental regulations, restrictive permit conditions and the possibility
of permit denials from a multiplicity of state, regional and local regulatory agencies may inhibit or add cost to future Wilmington field development activities. Despite prudent operation and
preventative measures, drilling and waterflooding production operations may result in spills and other accidental releases of produced water and injection fluids. Remediation and associated costs from
a release of produced water or injection fluids in an

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urban
environment could be significant. This potential liability is accentuated by the location of our Wilmington Townlot Unit and North Wilmington Unit leases near residential areas.

While
Warren's cellar construction and drilling activities were at their peak during the fourth quarter of 2007, some residents adjacent to the WTU backed by a community activist group
complained of noise, dust and traffic from the WTU. As a result, the Chief Zoning Administrator for the City of Los Angeles intends to review the terms and conditions of construction and operations
set forth in the Zoning Administrator's 2006 Zoning Order, which allows the construction and operation of the drilling cellars at the WTU central facility. This review by the Zoning Administrator
could entail a lengthy process of six months or more, limit our ability to further construct and develop facilities and conduct operations while the review is pending and, despite Warren's strong
belief that it meets or exceeds the requirements of the existing Zoning Order, the review could result in additional environmental studies, restrictions or costs for the Company's activities in the
WTU.

Because
the gas volume was historically too low to justify gas sales equipment, the gas has been flared for many years under a permit from the South Coast Air Quality Management District
("SCAQMD"). On October 28, 2007, Warren entered into an agreement with the SCAQMD which allowed Warren to commission six microturbines to generate electrical power from the otherwise flared gas
and resume full production. As oil production grew during the fourth quarter, the excess gas produced but not consumed by our microturbines would have exceeded our gas flare limitation. As a result,
wells producing approximately 300 barrels of oil per day were taken off production during December 2007. Consequently, estimated production levels in the WTU will not exceed approximately 3,000 gross
BOPD during at least the first quarter of 2008. Further, based upon input from a community activist group, the SCAQMD is requesting that Warren install additional microturbines and limit use of the
gas flare to a smaller amount of excess gas that cannot be handled by the microturbines. In March 2008, the Company will present its plan to the SCAQMD which will include seeking approvals from
regulatory authorities dispose of our produced gas by injection or sell it directly into a nearby public utility pipeline or to a third party user. As another part of our plan, in October 2007, Warren
applied to the SCAQMD for a permit to construct a new high efficiency gas flare. Although we anticipate delivery of the new flare in April 2008, if the SCAQMD does not issue the necessary permits, the
implementation of the new flare, or other methods of handling the produced gas could be delayed to mid-2008 or later.

Additionally,
on January 30, 2008, the Los Angeles city attorney filed a complaint against Warren E&P, Inc., a subsidiary of the Company, and six of its individual
employees and independent contractors in the Superior Court of California, County of Los Angeles. The complaint alleges eight misdemeanor violations concerning four alleged events in Wilmington,
California during 2007. The complaint asserts one count of failing to report the discharge or threatened discharge of oil into marine waters for an event occurring on or about March 7, 2007;
one count of failing to prepare and implement an oil spill contingency plan; four counts of violating the California Fish and Game Code by placing petroleum or its by-products in or at a
place where they can pass into waters of the state; and two similar violations of the California Clean Water Act. The complaint alleges all eight counts against Warren E&P, Inc. and one to four
counts against each of the individuals. See "Legal Proceedings".

Operating Hazards And Insurance

The oil and natural gas business involves a variety of operating risks, including fires, explosions, blowouts, environmental hazards, spills or releases of crude
oil, produced water and injection fluids,
and other potential events which could have a material adverse effect on our business, financial condition and results of operations. Any of these problems could adversely affect our ability to
conduct operations and cause us to incur substantial losses. Such losses could reduce or eliminate the funds available for exploration, production or leasehold acquisitions, or result in loss of
certain properties.

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In
accordance with industry practice, we maintain insurance against some, but not all, potential risks and losses. We do not carry business interruption insurance. For some risks, we may
elect not to obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully
insurable at a reasonable cost. If a significant accident or other event occurs and is not fully covered by insurance, it could have a material adverse effect on our business, financial condition and
results of operations.

Title to Properties

In most situations, as is customary in the oil and gas industry, only a preliminary title examination is conducted at the time we acquire oil and gas leases
covering properties for possible drilling operations. Prior to the commencement of drilling operations, a more complete title examination of the drill site tract often is conducted by independent
attorneys or landmen. Once production from a given well is established, we prepare a division order title report indicating the proper parties and percentages for payment of production proceeds,
including royalties. The level of title examination often differs from property to property. Our properties are subject to customary royalty interests, liens incident to operating agreements, liens
for current taxes and other burdens which we believe do not materially interfere with the use of or affect the carrying value of our properties.

Employees

At December 31, 2007, we had 65 full-time employees. We believe that our relationships with our employees are good. None of our employees are
covered by a collective bargaining agreement. From time to time, we use the services of independent consultants to perform various professional services, particularly in the areas of geological,
permitting and environmental assessment activities. Independent contractors often perform well drilling and production operations, including pumping, maintenance, dispatching, inspection and testing.

Facilities

Our principal executive offices are located at 1114 Avenue of the Americas, 34th Floor, New York, NY 10036, and our telephone number is
(212) 697-9660. We lease approximately 4,178 square feet of office space for our New York office under a lease that expires in March 2013. Our oil and gas operations office in
Casper, Wyoming occupies 5,554 square feet under a lease that expires in July 2012. Our oil and gas operations office in Long Beach, California occupies 6,903 square feet of space under a lease that
was entered into in October 2007, which expires in April 2015. In May 2007, we entered into an office lease in Roswell, New Mexico, which expires in May 2010. We believe that suitable additional space
to accommodate our anticipated growth will be available in the future on commercially reasonable terms.

Website and Code of Business Conduct and Ethics

Our website address ishttp://www.warrenresources.com. We make available free of charge through our website our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or furnished to the SEC athttp://www.sec.gov. Additionally, our Code of
Business Conduct and Ethics, which includes our code of ethics for senior financial management, Corporate Governance Guidelines and the charters of our Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee are posted on our website and are available in print free of charge to any stockholder who requests them. Requests should be sent by mail to our corporate
secretary at our principal office at 1114 Avenue of the Americas, 34th floor, New York, NY 10036.

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Glossary of Abbreviations and Terms

The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and this annual report:

Adsorption.The attachment, through physical or chemical-bonding, of gas molecules to the coal surface. The adsorbed gas
molecules are trapped within the coal, the stability of which are strongly affected by changes in temperature and pressure.

AMI.Area of mutual interest.

Bbl.One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.

Bbl/d.One Bbl per day.

Bcf.One billion cubic feet of natural gas at standard atmospheric conditions.

Bcfe.One billion cubic feet equivalent of natural gas, calculated by converting oil to equivalent Mcf at a ratio of 6 Mcf to
1 Bbl of oil.

Boe.Barrels of oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of oil.

Btu or British thermal unit.The quantity of heat required to raise the temperature of one pound of water by one degree
Fahrenheit.

Coalbed methane (CBM).Natural gas formed as a byproduct of the coal formation process, which is trapped in coal seams and
produced by non-traditional means.

Completion.The installation of permanent equipment for the production of oil or natural gas.

Condensate.Liquid hydrocarbons associated with the production of a primarily natural gas reserve.

Desorption.The detachment of adsorbed gas molecules from the coal surface. See "Adsorption".

Developed Acreage.The number of acres which are allocated or assignable to producing wells or wells capable of production.

Development well.A well drilled into a proved natural gas or oil reservoir to the depth of a stratigraphic horizon known to
be productive.

Dewatering.A coalbed methane well typically begins dewatering with almost all water production and little, or no, natural
gas production. The continuous production of water from a well that is dewatering reduces the water reservoir pressure on the coals. The reduced reservoir pressure enables the release of the gas
within the coal to the wellbore. This results in an increase in the amount of gas production relative to the amount of water production. Dewatering ceases when peak gas production is reached.

Down-dip.The occurrence of a formation at a lower elevation than a nearby area.

Drill-to-earn.The process of earning an interest in leasehold acreage by drilling a well pursuant to
a farm-in or exploration agreement.

Dry hole.A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of
such production exceed production expenses and taxes.

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Environmental assessment (EA).A public document that analyzes a proposed federal action for the possibility of significant
environmental impacts. The analysis is required by the National Environmental Policy Act. If the environmental impacts will be significant, the federal agency must then prepare an environmental impact
statement.

Environmental impact statement (EIS).A detailed statement of the environmental effects of a proposed action and of
alternative actions that is required for all major federal actions.

Exploitation.The continuing development of a known producing formation in a previously discovered field. To make complete or
maximize the ultimate recovery of oil or natural gas from the field by work including development wells, secondary recovery equipment or other suitable processes and technology.

Exploration.The search for natural accumulations of oil and natural gas by any geological, geophysical or other suitable
means.

Exploratory well.A well drilled to find and produce natural gas or oil reserves not classified as proved, to find a new
reservoir in a field previously found to be productive of natural gas or oil in another reservoir or to extend a known reservoir.

Farmout or Farm-in.An agreement where the owner of a working interest in an oil and gas lease assigns the
working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the
acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a farm-in while the interest transferred by the assignor is a
farm-out.

Field.An area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same
individual geological structural feature and/or stratigraphic condition.

Finding and Development Costs.Capital costs incurred in the acquisition, exploitation and exploration of proved oil and
natural gas reserves divided by proved reserve additions and revisions to proved reserves.

Fracturing.The technique of improving a well's production or injection rates by pumping a mixture of fluids into the
formation and rupturing the rock, creating an artificial channel. As part of this technique, sand or other material may also be injected into the formation to keep the channel open, so that fluids or
gases may more easily flow through the formation.

Gross Acres.The total acres in which we own any amount of working interest.

Gross Wells.The total number of producing wells in which we own any amount of working interest.

Horizontal Drilling.A drilling operation in which a portion of the well is drilled horizontally or laterally within a
productive or potentially productive formation.

Identified drilling locations.Total gross locations specifically identified and scheduled by management as an estimation of
our multi-year drilling activities on existing acreage. Our actual drilling activities may change depending on the availability of capital, regulatory approvals, seasonal restrictions,
natural gas and oil prices, costs, drilling results and other factors.

Infill Drilling.The drilling of wells between established producing wells on a lease to increase reserves or productive
capacity from the reservoir.

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Injection Well or Injector.A well which is used to place water, liquids or gases into an underground zone to assist in
maintaining reservoir pressure, enhancing recoveries from the field, or disposal of produced water.

Intangible Drilling Costs.Expenditures made for wages, fuel, repairs, hauling and supplies necessary for the drilling or
recompletion of an oil or gas well and the preparation of such well for the production of oil or gas, but without any salvage value, which expenditures are generally accepted in the oil and gas
industry as being currently deductible for federal income tax purposes. Examples of such costs include:



Lease.An instrument which grants to another (the lessee) the exclusive right to enter and explore for, drill for, produce,
store and remove oil and natural gas from the mineral interest, in consideration for which the lessor is entitled to certain rents and royalties payable under the terms of the lease. Typically, the
duration of the lessee's authorization is for a stated term of years and "for so long thereafter" as minerals are producing.

MBbl.One thousand barrels of oil or other liquid hydrocarbons.

Mcf.One thousand cubic feet of natural gas at standard atmospheric conditions.

Mcf/d.One Mcf per day.

Mcfe.One thousand cubic feet equivalent of natural gas, calculated by converting oil to equivalent Mcf at a ratio of 6 Mcf
to 1 Bbl of oil.

MMbbl.One million barrels of oil or other liquid hydrocarbons.

MMBoe.One million barrels of oil equivalent.

MMBtu.One million British thermal units.

MMcf.One million cubic feet of natural gas at standard atmospheric conditions.

MMcf/d.One MMcf per day.

MMcfe.One million cubic feet equivalent of natural gas, calculated by converting oil to equivalent Mcf at a ratio of 6 Mcf
to 1 Bbl of oil.

MMcfe/d.One MMcfe per day.

Net acres.Gross acres multiplied by the percentage working interest owned by Warren.

Net production.Production that is owned by Warren less royalties and production due others.

Net Revenue Interest.An owner's interest in the revenues of a well after deducting proceeds allocated to royalty and
overriding interests.

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Net wells.The sum of all of Warren's full and partial well ownership interests (i.e., if we own 25% percent of 100%
working interest in eight producing wells, the total net producing well count would be two net producing wells).

NYMEX.New York Mercantile Exchange.

Operator.The individual or company responsible for the exploration, exploitation and production of an oil or natural gas
well or lease.

Overpressured.A subsurface formation that exerts an abnormally high formation pressure on a well before it is drilled into.

PDNP.Proved developed nonproducing.

PDP.Proved developed producing.

Permeability.A measure of the resistance or capacity of a geologic formation to allow water, natural gas or oil to pass
through it.

Plugging and abandonment.Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one
stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells.

Pod.A grouping of 5 to 24 wells complete with associated infrastructure, including water disposal wells, gathering and
compression.

Porosity.The ratio of the volume of all the pore spaces in a geologic formation to the volume of the whole formation.

PUD.Proved undeveloped.

Productive well.A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds
from the sale of the production exceed operating and production expenses and taxes.

Prospect.A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary
economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved developed reserves (PDP).Reserves that can be expected to be recovered through existing wells with existing equipment
and operating methods.

Proved reserves.The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

Proved undeveloped reserves (PUD).Proved reserves that are expected to be recovered from new wells on undrilled acreage or
from existing wells where a relatively major expenditure is required for recompletion.

PV-10 Value.The present value of estimated future revenues to be generated from the production of proved
reserves calculated in accordance with SEC guidelines, net of estimated lease operating expense, production taxes and future development costs, using prices and costs as of the date of estimation
without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization or
federal income taxes, and discounted using an annual discount rate of 10%.

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Recompletion.The process of re-entering an existing wellbore that is either producing or not producing and
completing new reservoirs in an attempt to establish or increase existing production.

Re-entry.Entering an existing well bore to redrill or repair.

Reservoir.A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or
oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Royalty.An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of
the production from the leased acreage, or of the proceeds of the sale thereof, but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the
leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually
reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.

Secondary Recovery.An artificial method or process used to restore or increase production from a reservoir after the primary
production by the natural producing mechanism and reservoir pressure has experienced partial depletion. Gas injection and water flooding are examples of this technique.

Standardized Measure of Discounted Future Net Cash Flows.The present value of future discounted net cash flows attributed to
proved oil and gas properties made by applying year end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures (based on year end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax
expenses (based on year end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows; less tax basis of the properties and available
credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10% per year to reflect the estimated timing of the future
cash flows.

Stratigraphic Play.An oil or natural gas formation contained within an area created by permeability and porosity changes
characteristic of the alternating rock layer that result from the sedimentation process.

Structural Play.An oil or natural gas formation contained within an area created by earth movements that deform or rupture
(such as folding or faulting) rock strata.

Tangible Drilling Costs.Expenditures necessary to develop oil or gas wells, including acquisition, transportation and
storage costs, which typically are capitalized and depreciated for federal income tax purposes. Examples of such expenditures include:



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3-D Seismic.The method by which a three dimensional image of the earth's subsurface is created through the
interpretation of reflection seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and
contribute significantly to field appraisal, exploitation and production.

Tight gas sands.A formation with low permeability that produces natural gas with very low flow rates for long periods of
time.

Undeveloped acreage.Lease acreage on which wells have been not drilled or completed to a point that would permit the
production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves.

Ultimate recovery.The total expected recovery of oil and gas from a producing well, leasehold, pool or field.

Waterflood.A secondary recovery operation in which water is injected into the producing formation in order to maintain
reservoir pressure and force oil toward and into the producing wells.

Working Interest.An interest in an oil and natural gas lease that gives the owner of the interest the right to drill for and
produce oil and natural gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations.

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Item 1A:    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 proved reserves are estimates. Any material inaccuracies in our reserve estimates or assumptions underlying our reserve estimates could cause the quantities and net present
value of our reserves to be overstated or understated.

This annual report contains estimates of our proved natural gas and oil reserves and the estimated future net revenues from these reserves. There are numerous
uncertainties inherent in estimating quantities of proved reserves, including many factors beyond our control that could cause the quantities and net present value of our reserves to be overstated.
These estimates are based upon various assumptions, including assumptions relating to natural gas and oil prices, drilling and operating expenses, capital expenditures, ownership and title, taxes and
the availability of funds. The process of estimating natural gas and oil reserves is complex and is not an exact science. It requires interpretations of available geological, geophysical, engineering
and economic data for each reservoir. Therefore, these estimates are inherently imprecise. Estimates of reserves based on risk of recovery and estimates of
expected future net cash flows prepared or audited by different engineers, or by the same engineers at different times, may vary substantially. Further, the potential for future reserve revisions,
either upward or downward, is significantly greater than normal because most of our reserves are undeveloped.

Actual
natural gas and oil prices, future production, revenues, operating expenses, taxes, development expenditures and quantities of recoverable natural gas and oil reserves will most
likely vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of future net revenues set forth in this annual report. A reduction in
natural gas and oil prices, for example, would reduce the value of proved reserves and reduce the amount of natural gas and oil that could be economically produced, thereby reducing the quantity of
reserves. We may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing natural gas and oil prices and other factors, many of which are
beyond our control.

As
of December 31, 2007, approximately 75% of our estimated net proved reserves were undeveloped. Undeveloped reserves, by their nature, are less certain. Recovery of undeveloped
reserves requires significant capital expenditures and successful drilling operations. The reserve data assumes that we will make significant capital expenditures to develop our reserves. We have
prepared estimates of our natural gas and oil reserves and the costs associated with these reserves in accordance with industry standards. However, the estimated costs may not be accurate, development
may not occur as scheduled, or the actual results may not be as estimated. We may not have or be able to obtain the capital we need to develop these proved reserves.

You
should not assume that the present value of future net revenues referred to in this annual report is the current market value of our estimated natural gas and oil reserves. In
accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate. Actual future prices and
costs may be

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materially
higher or lower than the prices and costs as of the date of the estimate. Any change in consumption by natural gas and oil purchasers or in governmental regulations or taxation will also
affect actual future net cash flows. The timing of both the production and the expenses for the development and production of our natural gas and oil properties will affect the timing of actual future
net cash flows from proved reserves and their present value. In addition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor, nor does it reflect discount factors used in the marketplace for the purchase and sale of oil and gas properties. Conditions in the
oil and gas industry and oil and gas prices will affect whether the 10% discount factor accurately reflects the market value of our estimated reserves.

We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of doing business.

Our exploration, development, production and marketing operations are regulated extensively at the federal, state and local levels. Under these laws and
regulations, we could be held liable for personal injuries, property damage (including site clean-up and restoration costs), and other damages. Failure to comply with these laws and
regulations may also result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties, including the assessment of natural resources damages.
Environmental and other governmental laws and regulations also increase the costs to plan, design, drill, install, operate and abandon oil and natural gas wells. Moreover, public interest in
environmental protection has increased in recent years, and environmental organizations have opposed, with some success, certain drilling projects.

Part
of the regulatory environment in which we operate includes, in some cases, federal requirements for performing or preparing environmental assessments, environmental impact
statements, studies, reports and/or plans of development before commencing exploration and production activities. These regulations affect our operations and limit the quantity of oil and natural gas
we may be able to produce and sell.

A
major risk inherent in our drilling plans is the need to obtain drilling permits from applicable federal, state and local authorities. Delays in obtaining regulatory approvals or
drilling permits, the failure to obtain a drilling permit for a well, or the receipt of a permit with excessive conditions or costs could have a material adverse effect on our ability to explore on or
develop our properties. Additionally, the oil and natural gas regulatory environment could change in ways that might substantially increase the financial and managerial costs to comply with the
requirements of these laws and regulations and, consequently, adversely affect our profitability. Furthermore, we may be put at a competitive disadvantage to larger companies in our industry that can
spread these additional costs over a greater number of wells and larger operating area. Any or all of these contingencies could delay or halt our drilling activities or the construction of ancillary
facilities necessary for production, which would prevent us from developing our property interests as planned. Conditions, delays or restrictions imposed on the drilling or the management of
groundwater produced during drilling could severely limit our operations there or make them uneconomic. Any unfavorable developments in the Washakie Basin could impede our growth, as we intend to
undertake significant activity in order to increase our production and reserves in this area.

While
Warren's cellar construction and drilling activities were at their peak during the fourth quarter of 2007, some residents adjacent to the WTU backed by a community activist group
complained of noise, dust and traffic from the WTU. As a result, the Chief Zoning Administrator for the City of Los Angeles intends to review the terms and conditions of construction and operations
set forth in the Zoning Administrator's 2006 Zoning Order, which allows the construction and operation of the drilling cellars at the WTU central facility. This review by the Zoning Administrator
could entail a lengthy process of six months or more, limit our ability to further construct and develop facilities and

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conduct
operations while the review is pending and, despite Warren's strong belief that it meets or exceeds the requirements of the existing Zoning Order, the review could result in additional
environmental studies, restrictions or costs for the Company's activities in the WTU.

See
"Items 1 and 2: Business and PropertiesRegulations and Environmental Matters" and "Future Regulations".

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

The Wyoming Department of Environmental Quality, or Wyoming DEQ, has restrictive regulations applicable to the surface disposal of water produced from our CBM
drilling operations. We typically obtain Clean Water Act, Safe Drinking Water Act and analogous state and local permits to use surface discharge methods, such as settling ponds, to dispose of water
when the groundwater produced from the coal seams will not exceed surface discharge permit limitations. Surface disposal options have volumetric limitations and require an extensive third-party water
sampling and laboratory analysis program to ensure compliance with state permit standards. Alternative methods to surface disposal of water are more expensive. These alternatives include installing
and operating treatment facilities or drilling disposal wells to inject the produced water into the underground rock formations adjacent to the coal seams or lower sandstone horizons. Injection wells
are regulated by the Wyoming DEQ and the Wyoming Oil & Gas Conservation Commission, and permits to drill these wells are obtained from these agencies. Based on our experience with CBM
production in the Powder River Basin, we believe that permits for surface discharge of produced water in that basin, as well as the Washakie Basin, will become more difficult to obtain. In Wyoming,
our produced water is currently re-injected into water disposal wells. We expect the costs to dispose of produced water to increase significantly, which could have a material adverse
effect on our business, financial condition and results of operations.

We face significantly increasing natural gas disposal regulations and costs in our Wilmington oil drilling operations that could limit our oil production.

The State of California and the EPA have restrictive regulations applying to the disposition of natural gas produced from our Wilmington oil drilling operations.
Natural gas production has continued to grow with the oil production, particularly at the WTU. Because the gas volume was historically too low to justify gas sales equipment, the gas has been flared
for many years under a permit from the South Coast Air Quality Management District ("SCAQMD"). On October 28, 2007, Warren entered into an agreement with the SCAQMD which allowed Warren to
commission six microturbines to generate electrical power from the otherwise flared gas and resume full production. As oil production grew during the fourth quarter, the excess gas produced but not
consumed by our microturbines would have exceeded our gas flare limitation. As a result, wells producing approximately 300 barrels of oil per day were taken off production during December 2007.
Consequently, estimated production levels in the WTU will not exceed approximately 3,000 gross BOPD during at least the first quarter of 2008.

Based
upon input from a community activist group, the SCAQMD is requesting that Warren install additional microturbines and limit use of the gas flare to a smaller amount of excess gas
that cannot be handled by the microturbines. In March 2008, the Company will present its plan to the SCAQMD which will include seeking approvals from regulatory authorities to dispose of our produced
gas by injection or sell it directly into a nearby public utility pipeline or to a third party user. As another part of our plan, in October 2007, Warren applied to the SCAQMD for a permit to
construct a new high efficiency gas flare. Although we anticipate delivery of the new flare in April 2008, if the SCAQMD does not issue the necessary permits, the implementation of the new flare could
be delayed to mid-2008 or later. Delays by regulatory agencies in approving our permits to dispose of the natural gas could limit our oil production levels until the permits are issued.

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See
"Items 1 and 2: Business and PropertiesFuture RegulationsWilmington Field".

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

The marketability of our production depends in part upon the availability, proximity and capacity of pipelines, natural gas gathering systems and processing
facilities. This dependence is heightened in our CBM operations where this infrastructure is less developed than in our traditional oil and gas operations. For example, there is limited pipeline
capacity in the southern portion of the Washakie
Basin. Also, as production volumes grow in the Atlantic Rim, additional pipeline capacity and gas compression will be required. If needed, this additional infrastructure will cost approximately
$20 million, our portion of which would be approximately $10 million.

We
deliver natural gas and oil through gathering systems and pipelines that we do not own. These facilities may not be available to us in the future. Our ability to produce and market
natural gas and oil is affected and may be harmed by:



In
2003, we entered into an agreement with Anadarko to jointly construct compression facilities and a pipeline in the Washakie Basin. Any significant change in our arrangement with
Anadarko or other market factors affecting our overall infrastructure facilities could adversely impact our ability to deliver the natural gas we produce to market in an efficient manner, or obtain
adequate prices for our gas. In some cases, we may be required to shut-in wells, at least temporarily, for lack of a market or because of the inadequacy or unavailability of transportation
facilities. If that were to occur, we would be unable to realize revenue from those wells until arrangements could be made to deliver our production to market.

We may not adhere to our proposed drilling schedule.

Our final determination of whether to drill any scheduled or budgeted wells will depend on a number of factors, including:



Although
we have identified or budgeted for numerous drilling prospects, we may not be able to lease or drill those prospects within our expected time frame or at all. In addition, our
drilling schedule may vary from our expectations because of future uncertainties.

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

Our future growth depends on our ability to make large capital expenditures for the exploration and development of our natural gas and oil properties and to
acquire additional properties. We have

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projected
these capital expenditures to be approximately $140 million in 2008. In the future, we intend to finance these capital expenditures through the proceeds of public offerings, debt
placements and from cash flow from operations, or a combination of these methods. Future cash flows and the availability of financing will be subject to a number of variables, such as:



Additional
financing sources may be required in the future to fund our developmental and exploratory drilling. Issuing equity securities to satisfy our financing requirements could cause
substantial dilution to our existing stockholders. Additional debt financing could lead to:



Financing
may not be available in the future under existing or new financing arrangements, or we may not be able to obtain necessary financing on acceptable terms, if at all. If
sufficient capital resources are not available, we may be forced to curtail our drilling, acquisition and other activities, or be forced
to sell some of our assets on an untimely or unfavorable basis, which would have an adverse affect on our business, financial condition and results of operations.

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

At December 31, 2007, we had an accumulated deficit of $77.3 million and total stockholders' equity of $349.5 million. We have recognized a
significant amount of annual net losses in the past. See "Selected Consolidated Financial Data". We may not achieve or sustain profitability or positive cash flows from operating activities in the
future.

Our credit facility contains operating restrictions and financial covenants, and we may have difficulty obtaining additional credit.

We will depend on our revolving credit facility for a portion of our future capital needs. Our current revolving credit facility restricts our ability to obtain
additional financing, make investments, lease equipment, sell assets and engage in business combinations. We also are, and expect to continue to be, required to comply with certain financial covenants
and ratios. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances
beyond our control. Our failure to comply with any of the restrictions and covenants under the revolving credit facility could result in a default under the facility, which could cause all of our
existing indebtedness to be immediately due and payable.

Our
current revolving credit facility limits the amounts we can borrow to a borrowing base amount, determined by the lenders in their sole discretion, based upon projected revenues from
the oil and natural gas properties securing our loan. The lenders can unilaterally adjust the borrowing base and the borrowings permitted to be outstanding under the revolving credit facility. Any
increase in the

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borrowing
base requires the consent of the lenders holding 2/3rds of the commitments. If the required lenders do not agree on an increase, then the borrowing base will be the lowest borrowing base
acceptable to the required number of lenders.

Our
credit facility is secured by a pledge of substantially all of our producing natural gas and oil properties and assets, is guaranteed by our subsidiaries and contains covenants that
limit additional borrowings, dividends to nonpreferred shareholders, the incurrence of liens, investments, sales or pledges of assets, changes in control, repurchases or redemptions for cash of our
common or preferred stock, speculative commodity transactions and other matters. We may not be able to refinance our debt or obtain additional financing, particularly in view of our credit facility's
restrictions on our ability to
incur additional debt and the fact that substantially all of our assets are currently pledged to secure obligations under the credit facility. The restrictions of our credit facility and our
difficulty in obtaining additional debt financing may have adverse consequences on our operations and financial results including:



We
may incur additional debt in order to fund our exploration and development activities. A higher level of indebtedness increases the risk that we may default on our debt obligations.
Our ability to meet our debt obligations and reduce our level of indebtedness depends on future performance. General economic conditions, natural gas and oil prices and financial, business and other
factors, many of which are beyond our control, affect our operations and our future performance. Our senior subordinated notes and senior subordinated secured notes contain restrictive covenants
similar to those under our credit facility.

In
addition, under the terms of our credit facility, our borrowing base is subject to redeterminations at least semiannually based in part on prevailing natural gas and oil prices. In
the event the amount outstanding exceeds the redetermined borrowing base, we could be forced to repay a portion of our borrowings. We may not have sufficient funds to make any required repayment. If
we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell a portion of our assets.

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

In addition to our credit facility, we may incur additional debt in order to make future acquisitions or develop our properties. A higher level of indebtedness
increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations and reduce our level of indebtedness depends on future performance. General economic
conditions, oil and gas prices and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate
sufficient cash flow to pay the interest on our debt or pay our debt at maturity. In addition, if we are unable to repay our debt at maturity with existing cash on hand, we could attempt to refinance
the debt or repay the debt with the proceeds of a debt or equity offering. We may be unable to sell public debt or equity securities or do so on acceptable terms to pay or refinance the debt. Factors
that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, and our market value and operations performance at
the time of the offering or other financing. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell
significant assets. Any such sale could have a material adverse effect on our business and financial results.

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.

One of our growth strategies is to pursue selective acquisitions of natural gas and oil reserves. We perform a review of the target properties that we believe is
consistent with industry practices. However, these reviews are inherently incomplete. It generally is not feasible to review in depth every individual property involved in each acquisition. Even a
detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to fully assess
their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an
inspection is undertaken. Even when problems are identified, a seller may be unwilling or unable to provide effective contractual protection against all or part of those problems, and we often assume
environmental and other risks and liabilities in connection with the acquired properties.

Seasonal weather conditions and lease stipulations adversely affect our ability to conduct drilling activities in some of the areas where we operate.

Oil and natural gas operations in the Rocky Mountains can be adversely affected by seasonal weather conditions and lease stipulations designed to protect various
wildlife. Our operations in Wyoming are conducted in areas subject to extreme weather conditions and often in difficult terrain. Primarily in the winter and spring, our operations are often curtailed
because of cold, snow and wet conditions and lease stipulations in some of the areas where we operate. In certain areas on federal lands, drilling and other oil and natural gas activities can only be
conducted during limited times of the year. This limits our ability to operate in those areas and can intensify competition during those times for drilling rigs, oil field equipment, services,
supplies and qualified personnel, which may lead to periodic shortages. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and
capital costs, and could have a material adverse effect on our business, financial condition and results of operations.

36

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As co-venturer in joint ventures, we are liable for various obligations of those joint ventures.

As a co-venturer, we are contingently liable for the obligations of the joint venture, as applicable, including responsibility for their
day-to-day operations and liabilities which cannot be repaid from joint venture assets, insurance proceeds or indemnification by others. In the future, we might be exposed to
litigation in connection with or joint venture activities or find it necessary to advance funds on behalf of joint ventures to protect the value of the natural gas and oil properties by drilling wells
to produce undeveloped reserves or to pay lease operating expenses in excess of production. These activities may have a material adverse effect on our business, financial condition and results of
operations.

Our role as 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.

Our role as co-venturer in joint ventures may result in conflicts of interest between the interests of those entities and our stockholders. Any
resolution of these conflicts may not always be in our best interests.

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 depend to a large extent on the efforts and continued employment of Norman F. Swanton, our chief executive officer and chairman, Timothy A.
Larkin, our executive vice president and chief financial officer, Kenneth A. Gobble, our senior vice president of exploration and production, and other key management and technical personnel.
The loss of the services of Messrs. Swanton, Larkin, Gobble or other key management and technical personnel could adversely affect our business operations. We maintain key person life insurance
on Messrs. Swanton, Larkin and Gobble but not on other key management and technical personnel.

The
success of our development, exploration and production activities depends, in part, on our ability to attract and retain experienced petroleum engineers, geologists and other key
personnel. From time to time, competition for experienced engineers and geologists is intense. If we cannot retain these personnel or attract additional experienced personnel, our ability to compete
in the geographic regions in which we conduct our operations could be harmed.

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.

We are not insured against all risks. We ordinarily maintain insurance against various losses and liabilities arising from our operations in accordance with
customary industry practices and in amounts that management believe to be prudent. Losses and liabilities arising from uninsured and underinsured events or in amounts in excess of existing insurance
coverage could have a material adverse effect on our business, financial condition or results of operations. Our natural gas and oil exploration and production activities are subject to hazards and
risks associated with drilling for, producing and transporting natural gas and oil, and any of these risks can cause substantial losses resulting from:



37

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Any
of these risks could have a material adverse effect on our ability to conduct operations or result in substantial losses to us. We may elect not to obtain insurance if we believe
that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other
event occurs and is not fully covered by insurance, it could have a material adverse effect on our business, financial condition and results of operations. See "Business and
PropertiesOperating Hazards And Insurance".

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

A substantial amount of our business activities are conducted through joint operating agreements under which we own partial interests in natural gas and oil
properties. We do not operate all of the properties in which we have an interest and in many cases we do not have the ability to remove the operator in the event of poor performance. As a result, we
have a limited ability to exercise influence over normal operating procedures, expenditures or future development of underlying properties and their associated costs. The failure of an operator of our
wells to adequately perform operations, or an operator's breach of the applicable agreements, could reduce our revenues and production. Therefore, the success and timing of our drilling and
development activities on properties operated by others depends upon a number of factors outside of our and the operator's control, including:



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.

We obtain interests in natural gas and oil properties with varying degrees of warranty of title such as general, special, quitclaim or without any warranty. We
acquired our interest in the Wilmington Townlot Unit in 1999 and 2005 with no title opinion as to the interests acquired, which may ultimately prove to be less than the interests we believe we own.
The prior owner had acquired its interests from a third party that, in turn, had acquired its interest from Exxon Corporation with no warranty of title. Exxon had owned the Wilmington Townlot Unit for
over 25 years before its sale in 1997. Similarly, when we acquired our interest in the North Wilmington Unit in December 2005, we had no title opinion prepared as to the interests acquired. The
prior owner had owned the North Wilmington Unit for over 15 years, acquired the North Wilmington Unit from Sun Oil Corporation with warranty of title, which had owned unit for over
20 years before its sale in 1990. Losses of title to the Wilmington Townlot Unit and North Wilmington Units may result from title defects or from ownership of a lesser interest than we believe
we acquired. In other instances, title opinions may not be obtained if in our discretion it would be uneconomical or impractical to do so. This increases the possible risk of loss and could result in
total loss of some or all of properties purchased. Furthermore, in certain instances we may determine to purchase properties even though certain technical title defects exist if we believe it to be an
acceptable risk under the circumstances.

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Our commodity price risk management and trading activities may prevent us from benefiting fully from price increases and may expose us to other risks.

To the extent that we engage in price risk management activities to endeavor to protect ourselves from commodity price declines, the Company could incur losses on
such derivative instruments or be prevented from realizing the full benefits of price increases above the levels of the derivative instruments used to manage price risk.

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.

Our revenues, operating results and future rate of growth are substantially dependent upon the prevailing prices of, and demand for, natural gas and oil. Declines
in the prices of, or demand for, natural gas and oil may adversely affect our financial condition, liquidity, ability to finance planned capital expenditures, and results of operations. Lower natural
gas and oil prices may also reduce the amount of natural gas and oil that we can produce economically. Historically, natural gas and oil prices have been volatile, and they are likely to continue to
be volatile in the future. A decrease in natural gas or oil prices will not only reduce revenues and profits, but may also reduce the quantities of reserves that are commercially recoverable and may
result in charges to earnings for impairment of the value of these assets. If natural gas or oil prices decline significantly for extended periods of time in the future, we might not be able to
generate enough cash flow from operations to meet our obligations and make planned capital expenditures. Natural gas and oil prices are subject to wide fluctuations in response to relatively minor
changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond our control.

Some
of the factors that cause this fluctuation are:



Lower
natural gas and oil prices may not only decrease our revenues, but also may reduce the amount of natural gas and oil that we can produce economically. A substantial or extended
decline in natural gas and oil prices may have a material adverse effect on our business, financial condition and results of operations.

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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.

Our future success depends largely on the success of our exploration, exploitation, development and production activities. These activities are subject to
numerous risks beyond our control, including the risk that we will not find any commercially productive natural gas or oil reservoirs. Our decisions to purchase, explore, develop or otherwise exploit
prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data, and engineering studies, the results of which are often
inconclusive or subject to varying interpretations. See "Risks Related to Our BusinessOur reserve estimates depend on many assumptions that may turn out to be inconclusive,
subject to varying interpretations or inaccurate" for a discussion of the uncertainty involved in these processes. Our costs of drilling, completing and operating wells is often uncertain before
drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or prevent drilling operations,
including:



Our
future drilling activities may not be successful. Our drilling success rate, overall and within a particular area, could decline. We could incur losses by drilling unproductive
wells. Also, we may not be able to obtain any contracts covering our lease rights in potential drilling locations. We cannot be sure that we will ever drill our identified potential drilling
locations, or that we will produce natural gas or oil from them or from any other potential drilling locations. Shut-in wells, curtailed
production and other production interruptions may negatively impact our business and result in decreased revenues.

Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, financial condition and results of
operations.

Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other
factors. Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves generally decline when
reserves are produced, unless we conduct successful exploration or development activities or acquire properties containing proved reserves, or

40

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both.
We may not be able to find, develop or acquire additional reserves on an economic basis. Furthermore, if oil and natural gas prices increase, our costs for additional reserves could also
increase. Thus, our future oil and natural gas reserves and production and, therefore, our cash flow and income are highly dependent on our success in efficiently developing and exploiting our current
reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, find or acquire additional reserves to replace our current and future production at
acceptable costs.

Prospects that we decide to drill may not yield natural gas or oil in commercially viable quantities.

We describe some of our current prospects and our plans to explore those prospects in this annual report. A prospect is a property on which we have identified
what our geoscientists believe, based on available seismic and geological information, to be indications of natural gas or oil. Our prospects are in various stages of evaluation, ranging from a
prospect that is ready to drill to a prospect that will require substantial additional seismic data processing and interpretation. However, the use of seismic data and other technologies and the study
of producing fields in the same area will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present or, if present, whether natural gas or oil will be
present in sufficient quantities to recover drilling or completion costs or to be economically viable. If we drill wells in our current and future prospects that are identified as
non-economic or dry holes, our drilling success rate may decline and materially harm our business. In sum, the cost of drilling, completing and operating any wells is often uncertain and
new wells may not be productive.

Our identified drilling location inventories are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing
of their drilling.

Our management has specifically identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our
existing acreage. These identified drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties,
including the availability of capital, seasonal conditions, regulatory approvals, oil and natural gas prices, costs and drilling results. Because of these uncertainties, we do not know if the numerous
potential drilling locations we have identified will ever be drilled or if we will be able to produce natural gas or oil from these or any other potential drilling locations. As such, our actual
drilling activities may materially differ from those presently identified, which could adversely affect our business.

We are subject to the full cost ceiling limitation which may result in a write-down of our estimated net reserves.

Under the full cost method, we are subject to quarterly calculations of a "ceiling" or limitation on the amount of our oil and gas properties that can be
capitalized on our balance sheet. If the net capitalized costs of our oil and gas properties exceed the cost center ceiling, we are subject to a ceiling test write-down of our estimated
net reserves to the extent of such excess. If required, it would reduce earnings and impact stockholders' equity in the period of occurrence and result in lower amortization expense in future periods.
The discounted present value of our proved reserves is a major component of the ceiling calculation and represents the component that requires the most subjective judgments. However, we may not be
subject to a write-down if prices increase subsequent to the end of a quarter in which a write-down might otherwise be required. The risk that we will be required to write down
the carrying value of oil and natural gas properties increases when natural gas and crude oil prices are depressed or volatile. In addition, write-down of proved oil and natural gas
properties may occur if we experience substantial downward adjustments to our estimated proved reserves or if purchasers cancel long-term contracts for our natural gas production. As
expense recorded in one period may not be

41

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reversed
in a subsequent period event though higher natural gas and crude oil prices may have increased the ceiling applicable in the subsequent period.

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.

We operate in the highly competitive areas of oil and gas exploration, development and acquisition with a substantial number of other companies. We face intense
competition from independent, technology-driven companies, as well as from both major and other independent oil and gas companies, in each of the following areas:



Many
of our competitors have financial, managerial, technological and other resources substantially greater than ours. These companies may be able to pay more for exploratory prospects
and productive oil and gas properties, and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. To the
extent our competitors are able to pay more for properties than we are, we will be at a competitive disadvantage. Further, many of our competitors may enjoy technological advantages and may be able to
implement new technologies more rapidly than we can. Our ability to explore for natural gas and oil prospects and to acquire additional properties in the future will depend upon our ability to
successfully conduct operations, implement advanced technologies, evaluate and select suitable properties, and consummate transactions in this highly competitive environment.

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.

Exploration for and the production and sale of oil and gas in the United States is subject to extensive federal, state and local laws and regulations, including
complex tax and environmental laws and regulations, and requires various permits and approvals from a variety of federal, state and local agencies. If these permits are not issued, or if unfavorable
restrictions or conditions are imposed on our drilling activities, we may not be able to conduct our operations as planned. Alternatively, failure to comply with these laws and regulations, including
the requirements of any permits, may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Compliance costs are significant. The
exploration and production of oil and gas involves many risks of equipment and human operational problems that could lead to leaks or spills of petroleum products. These laws and regulations,
particularly in the Rocky Mountain and California regions, are extensive and involve severe penalties and could change in ways that substantially increase our costs and associated liabilities. We
cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations will not harm our business, results of operations and
financial condition. For example, matters subject to regulation and the types of permits required include:



42

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Under
these laws and regulations, we could be liable for:



See
"Item 1 and 2: Business and PropertiesRegulations and Environmental Matters" and "Item 3: Legal Proceedings" for a more detailed discussion of
laws affecting our operations.

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.

If domestic drilling activity continues to increase, particularly in the fields in which we operate, a general shortage of drilling and completion rigs, field
equipment and qualified personnel could develop. As a result, the costs and delivery times of rigs, equipment and personnel could be substantially greater than in previous years. From time to time,
including the present, these costs have sharply increased and could do so again. For example, throughout 2007 and 2006, as energy prices increased significantly, we experienced higher costs for
drilling rigs, equipment and personnel. The demand for and wage rates of qualified drilling rig crews generally rises in response to the increasing number of active rigs in service and could increase
sharply in the event of a shortage. Shortages of drilling and completion rigs, field equipment or qualified personnel could delay, restrict or curtail our exploration and development operations, which
could in turn harm our operating results.

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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.

Sales of substantial amounts of previously restricted shares of our common stock in the public market, or the perception that these sales may occur, could cause
the market price of our common stock to decline, or could impair our ability to raise capital through the sale of additional common or preferred stock.

As
of December 31, 2007, we had 58,191,901 shares of common stock outstanding, 183,071 shares of common stock were issuable upon conversion of our convertible debt and convertible
preferred stock, 5,579,101 shares of common stock were issuable upon exercise of outstanding options and warrants and 58,330 shares of restricted stock were issued. Our directors and executive
officers, hold approximately 4% of the outstanding shares of our common stock.

If
our stockholders sell significant amounts of common stock in any public market that develops or exercise their registration rights and sell a large number of shares, the price of our
common stock could be negatively affected. If we were to include shares held by those holders in a registration statement pursuant to the exercise of their registration rights, those sales could
impair our ability to raise needed capital by depressing the price at which we could sell our common stock or impede such an offering altogether.

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

In recent years, the stock market has experienced significant price and volume fluctuations. Our common stock may also experience volatility unrelated to our own
operating performance for reasons that include:



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

As of March 3, 2008, our executive officers and directors beneficially owned approximately 4% of our common stock. These stockholders, if acting together,
would be able to influence significantly all matters requiring approval by our stockholders, including the election of our board of directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discourage a potential acquirer from attempting to obtain control of
us, which in turn could have an adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market price for their shares of our common stock.

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.

Provisions of our articles of incorporation, bylaws and Maryland law could make it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this
preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock and potentially
prevent the payment of a premium to stockholders in an acquisition.

Our
articles of incorporation and bylaws contain provisions that could delay, defer or prevent a change in control of us or our management. These provisions include:



These
provisions also could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions. As a result, these provisions
could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, and may limit the price that investors are willing to pay in the future for shares of our
common stock.

We
are also subject to provisions of the Maryland General Corporation Law that prohibit business combinations with persons owning 10% or more of the voting shares of a corporation's
outstanding stock, unless the combination is approved by the board of directors prior to the person owning 10% or more of the stock, for a period of five years, after which the business combination
would be subject to

45

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special
stockholder approval requirements. This provision could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, or may
otherwise discourage a potential acquirer from attempting to obtain control from us, which in turn could have a material adverse effect on the market price of our common stock. See "Description of
Capital Stock".

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.

Under the terms of our convertible preferred stock, we may not pay dividends on our common stock unless all accrued dividends on our convertible preferred stock
have been paid. We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. Accordingly, we do not intend to declare or pay
any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including
our operating results, financial conditions, current and anticipated cash needs and plans for expansion.

Failure of the Company's internal control over financial reporting could harm its business and financial results.

The management of Warren is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United
States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the Company's transactions; providing reasonable
assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management
authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of the Company assets that could have a material effect on the financial statements would be
prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the
Company's financial statements would be prevented or detected. Failure to maintain an effective system of internal control over financial reporting could limit the Company's ability to report its
financial results accurately and timely or to detect and prevent fraud.

Item 1B:    Unresolved Staff Comments.

The Company has no outstanding or unresolved SEC staff comments.

Item 3:    Legal Proceedings

State of California v. Warren E&P, Inc., et al.On January 30, 2008, the Los Angeles city attorney filed a
complaint against Warren E&P, Inc., a subsidiary of the Company, and six of its individual employees and independent contractors in the Superior Court of California, County of Los Angeles. The
complaint alleges eight misdemeanor violations concerning four alleged events in Wilmington, California during 2007. The complaint asserts one count of failing to report the discharge or threatened
discharge of oil into marine waters for an event occurring on or about March 7, 2007; one count of failing to prepare and implement an oil spill contingency plan; four counts of violating the
California Fish and Game Code by placing petroleum or its by-products in or at a place where they can pass into waters of the state; and two similar violations of the California Clean
Water Act. The complaint alleges all eight counts against Warren E&P, Inc. and one to four counts against each of the individuals.

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Warren
believes the actions by the city attorney are unwarranted. Contrary to the claims made in the complaint, Warren follows an existing regulatory-approved contingency plan, which is
maintained on site at the WTU and NWU. With respect to the alleged event on March 7, 2007 at the NWU, substantially all of the oil was captured within a surrounding concrete retainer wall and
pumped to a nearby NWU oil storage tank and sold in the ordinary course of business. None of the alleged events occurred at the WTU central facility.

Our
Company policy is to follow the law of the jurisdiction in which we operate and to comply with environmental protection principles. In connection with these alleged events, we
believe we have followed and complied with applicable laws and regulations. We believe that we are given an opportunity to present the facts regarding these alleged events, the outcome will be
favorable to our Company, our employees and our independent contractors. Conversely, we do not believe an unfavorable outcome will have a material adverse effect on our business, financial condition
or results of operation.

Except
for the foregoing, we are not a party to any material pending legal or governmental proceedings, other than ordinary routine litigation incidental to our business. While the
ultimate outcome and impact of any proceeding cannot be predicted with certainty, our management believes that the resolution of any proceeding will not have a material adverse effect on our financial
condition or results of operations.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2007.

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PART II

Item 5:    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information.

Our common stock is listed on the Nasdaq Global Market under the symbol "WRES".

The
following table sets forth, for the period indicated, the high and low sales prices for our common stock as reported by the Nasdaq Global Market:

Common Stock PriceHigh

LowYear Ended December 31, 2007First Quarter

$
13.47

$
9.56Second Quarter


14.24


11.59Third Quarter


14.27


10.32Fourth Quarter


15.39


12.45Year Ended December 31, 2006First Quarter

$
18.68

$
13.49Second Quarter


15.94


11.07Third Quarter


15.00


11.73Fourth Quarter


15.18


11.04


On
March 3, 2008, the closing sales price for our common stock as reported by NASDAQ was $13.71 per share.

Holders

As of March 3, 2008 there were approximately 3,000 holders of our common stock.

Dividend Policy

We have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of
our business and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

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Stockholder Return Performance Presentation

The following performance graph compares the performance of the Company's common stock to the S&P 500 Index, and to the Dow Jones U.S. Oil & Gas
Index for the last two years, which is a composite index consisting of 77 U.S. oil and gas companies that includes integrated major oil and gas companies as well as smaller independent U.S. companies.
The graph also shows the performance of the Company's stock for the same two-year period to our peer group of companies consisting of Quicksilver Resources, Inc., Bill Barrett
Corp., St. Mary Land & Exploration, Berry Petroleum, Petroleum Development Corporation and Brigham Exploration, which companies have market capitalizations similar to Warren and are
primarily involved in domestic U.S. exploration and production. The graph assumes that the value of the investment in the Company's common stock and each index was $100 at December 31, 2004,
and that all dividends were reinvested.

GRAPHIC

Fiscal Year Ended December 31

|                             |  | 2004 |  | 2005 |  | 2006 |  | 2007
|---------------------------- |  | ---- |  | ---- |  | ---- |  | ----
|Warren Resources, Inc.       |  | 100  |  | 174  |  | 129  |  | 155 
|S&P 500 Index                |  | 100  |  | 103  |  | 117  |  | 121 
|Dow Jones US Oil & Gas Index |  | 100  |  | 141  |  | 171  |  | 212 
|Peer Group                   |  | 100  |  | 109  |  | 104  |  | 160 

Total
Return Data Provided by S&P's Institutional Market Services and Dow Jones & Company, Inc.

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Securities Authorized for Issuance Under Compensation Plans

The table below includes information about our equity compensation plans as of December 31, 2007:

|                                       |  | Number of Shares
Authorized for
Issuance under plan |  | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and
restricted stock |  | Weighted-average
exercise price of
outstanding options,
warrants and
restricted stock |       | Number of securities
remaining available
for future issuance
under equity
compensation plans
|-------------------------------------- |  | --------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------
|2000 Equity Incentive Plan             |  | 1,975,000                                           |  | 1,219,259                                                                                             |  | $                                                                                     | 10.80 |                                                                                             
|2001 Stock Incentive Plan              |  | 2,500,000                                           |  | 424,455                                                                                               |  |                                                                                       | 8.78  |                                                                                             
|2001 Key Employee Stock Incentive Plan |  | 2,500,000                                           |  | 1,190,366                                                                                             |  |                                                                                       | 7.02  |                                                                                             
|Total                                  |  | 6,975,000                                           |  | 2,834,080                                                                                             |  | $                                                                                     | 8.91  |                                                                                             

Issuer Purchases of Equity Securities

The Company did not repurchase any of its equity securities in the fourth quarter of 2007.

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Item 6:    Selected Consolidated Financial Data

The following tables present selected financial and operating data for Warren and its subsidiaries as of and for the periods indicated. You should read the
following selected data along with "Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations," our financial statements and the related notes and
other information included in this annual report. The selected financial data as of December 31, 2007, 2006, 2005, 2004 and 2003 has been derived from our financial statements, which were
audited by Grant Thornton LLP, independent auditors, and were prepared in accordance with accounting principles generally accepted in the United States of America. The historical results
presented below are not necessarily indicative of the results to be expected for any future period. The financial data for 2006 and prior has been restated to conform to the full cost method of
accounting

|                                                                                        |                                          | Year ended December 31,            |                                                    
|--------------------------------------------------------------------------------------- | ---------------------------------------- | ---------------------------------- | ---------------------------------------------------
|
|
|Consolidated Statement of Operations Data:                                              |                                          |                                    |                                                    
|Revenues:                                                                               |                                          |                                    |                                                    
|                                                                                        | Oil & gas sales                          |                                    | $                                                  
|Costs and operating expenses:                                                           |                                          |                                    |                                                    
|                                                                                        | Production and exploration               |                                    |                                                    
|                                                                                        | Depreciation, depletion and amortization |                                    |                                                    
|                                                                                        |                                          | General and administrative         |                                                    
|                                                                                        | Retirement of debt expense               |                                    |                                                    
|                                                                                        |                                          |                                    |                                                    
|                                                                                        |                                          | Total costs and operating expenses |                                                    
|                                                                                        |                                          | Income (loss) from operations      |                                                    
|Other income:                                                                           |                                          |                                    |                                                    
|                                                                                        | Interest and other income                |                                    |                                                    
|                                                                                        | Interest expense                         |                                    |                                                    
|                                                                                        | Net gain (loss) on investment            |                                    |                                                    
|                                                                                        |                                          |                                    |                                                    
|                                                                                        |                                          | Total other income                 |                                                    
|Income (loss) before income taxes, minority interest and change in accounting principle |                                          |                                    | 11,389                                             
|                                                                                        |                                          | Income tax expense (benefit)       |                                                    
|                                                                                        |                                          |                                    |                                                    
|Income (loss) before minority interest and cumulative change in accounting principle    |                                          |                                    | 11,405                                             
|                                                                                        |                                          | Minority interest                  |                                                    
|                                                                                        |                                          |                                    |                                                    
|Net income (loss) before change in accounting principle                                 |                                          |                                    | 11,405                                             
|Cumulative effect of change in accounting principle                                     |                                          |                                    |                                                   
|                                                                                        |                                          |                                    |                                                    
|Net income (loss)                                                                       |                                          |                                    | 11,405                                             
|Preferred dividends and accretion                                                       |                                          |                                    | 267                                                
|                                                                                        |                                          |                                    |                                                    
|                                                                                        |                                          |                                    | Net income (loss) applicable to common stockholders
|                                                                                        |                                          |                                    |                                                    
|Earnings (loss) per shareBasic                                                         |                                          | $                                  | 0.20                                               
|Earnings (loss) per shareDiluted                                                       |                                          | $                                  | 0.20                                               
|Weighted average shares outstandingBasic                                               |                                          |                                    | 55,892,536                                         
|Weighted average shares outstandingDiluted                                             |                                          |                                    | 56,978,948                                         
|Consolidated Statement of Cash Flows Data:                                              |                                          |                                    |                                                    
|Net cash provided by (used in):                                                         |                                          |                                    |                                                    
|Operating activities                                                                    |                                          | $                                  | 27,819                                             
|Investing activities                                                                    |                                          |                                    | (104,561                                           
|Financing activities                                                                    |                                          |                                    | 46,535                                             

|
|

|                                                    |  | As of December 31,
|--------------------------------------------------- |  | ------------------
|
|Balance Sheet Data:                                 |  |                   
|Cash and cash equivalents                           |  | 12,815            
|Total assets                                        |  | 440,506           
|Total long-term debt (including current maturities) |  | 56,633            
|Stockholders' equity                                |  | 349,529           

51

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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

We are a growing independent energy company engaged in the exploration and development of domestic onshore oil and natural gas reserves. We focus our efforts
primarily on our waterflood oil recovery programs and horizontal drilling in the Wilmington field within the Los Angeles Basin of California and on the exploration and development of coalbed methane
("CBM") properties located in the Rocky Mountain region. As of December 31, 2007, we owned natural gas and oil leasehold interests in approximately 230,738 gross (129,555 net) acres, 90% of
which are undeveloped. Substantially all our undeveloped acreage is located in the Rocky Mountains. Our total net proved reserves are located on less than 10% of our net acreage.

From
our inception in 1990 through 2003, we functioned principally as the sponsor of privately placed drilling programs and joint ventures. Under these programs, we contributed drilling
locations, paid tangible drilling costs and provided turnkey drilling services, natural gas marketing services and well services to the drilling programs and retained an interest in the wells.
Historically, a substantial portion of our revenue was attributable to these turnkey drilling services. After our initial public offering in 2004, the Company has transitioned from being the sponsor
of privately placed drilling programs to become a more traditional exploration and development company. During the second quarter of 2007, the Company changed its accounting method for oil and gas
properties from the successful efforts method to the full cost method. As a result of this accounting change, turnkey profit, well services profit and marketing profit are not recognized on the
statement of operations but are recorded as
reductions to the full cost pool. All historical information included in this Form 10-K has been retroactively restated to give effect to the change in accounting method.

Liquidity and Capital Resources

Our cash and cash equivalents decreased $30.2 million during 2007. This resulted from cash used in investing activities of $104.6 million. This was
partially offset by cash provided by operating activities of $27.8 million and cash provided by financing activities of $46.5 million.

Cash
used in investing activities primarily results from expenditures on oil and gas properties and equipment. Cash provided by operating activities primarily relates to oil and gas
operations. Cash provided by financing activities primarily results from proceeds received from our Credit Facility as discussed in more detail below.

During
June 2007, Warren acquired the interests in five drilling partnerships formed from 2000 to 2003 in which we served as managing general partner and turnkey contract driller.
The independently evaluated December 31, 2006 PV-10 attributable to the aggregate proved oil and gas reserves of the five drilling partnerships was $33.2 million
(approximately 9.9 Bcfe of proved developed producing

52

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reserves)
as of December 31, 2006. Additionally, the estimated fair market value for related water injection wells was $4.4 million. The purchase price was paid in the form of restricted
shares of Warren's common stock calculated at a discount of 20% from the average publicly traded share price from April 1, 2007 to May 31, 2007. The Company issued 3.4 million
restricted shares to these drilling partnerships.

Also,
as part of contractual commitments, Warren was obligated to accept requests for repurchase from the partners in two drilling partnerships formed in 1999. The aggregate purchase
price for the interests tendered was $1.7 million plus 0.4 million restricted shares. Through these purchases the Company acquired $3.9 million of PV-10 as of
December 31, 2006 (approximately 1.2 Bcfe of proved developed producing reserves) and water injection wells having an estimated fair market value of $0.9 million.

On
November 19, 2007, Warren entered into a five year, $250 million credit agreement with Merrill Lynch Capital on behalf of a syndicate of five participating banks (the
"Credit Facility"). The Credit Facility provides for a revolving credit facility up to the lesser of (i) the borrowing base (ii) $250 million or (iii) the draw limit
requested by the Company. The Credit Facility matures on November 19, 2012. It is secured by substantially all of our assets. The borrowing base will be determined by the lenders at
least semi-annually on each April 1 and October 1, and is based in part on the proved reserves of the Company. Interest payments are made quarterly in arrears. The current
borrowing base is $110 million and the overadvance is $15 million, representing an immediate availability of $125 million. The Company is subject to certain covenants under the
terms of the Credit Facility which include, but are not limited to the maintenance of the following financial ratios (1) minimum current ratio (including unused borrowing base in current
assets) of 1.0 to 1.0 and (2) a minimum annualized consolidated EBITDAX (as defined by the Credit Facility) to net interest expense to of 2.5 to 1.0. As of December 31, 2007, the Company
has borrowed $46.2 million under the Credit Facility and was in compliance with all covenants.

Depending
on the current level of borrowing base usage, the annual interest rate on each base rate borrowing under the Credit Facility will be at our option either: (a) the higher
of (i) the Agent's prime rate of interest announced from time to time, or (ii) the Federal Funds rate most recently determined by the Agent, plus 0.5% per annum, plus an applicable
margin that ranges from 0.25% to 1.0%, or (b) Eurodollar Loan rate plus an applicable margin that ranges from 1.25% to 2.0%. Credit line interest of approximately $0.3 million was
accrued for as of December 31, 2007.

During
2007, the Company had net income of $11.1 million as compared to net income of $6.1 million for 2006 and a net loss of $7.2 million for 2005. At
December 31, 2007, current liabilities exceeded current assets by approximately $12.1 million.

We
believe cash on hand together with cash flows from operations and our Credit Line will be sufficient to fund 2008 capital expenditures and other operating needs for the next twelve
months.

2008 Capital Expenditure Program

Our capital expenditure budget for 2008 is $140 million, which includes participation in the drilling of 294 gross (130 net) wells. At the present time, we
are concentrating our drilling activities in California and Wyoming. We have two California projects in the Wilmington field, the Wilmington Townlot Unit and the North Wilmington Unit. Additionally,
we have an exploratory project in Wyoming referred to as the Atlantic Rim Project. We are planning to drill 49 gross (48.5 net) producing and injecting wells in California with capital expenditures
estimated at $75 million. We plan to drill 36 gross (35.5 net) wells in the WTU with estimated capital expenditures of $58 million. We plan to recomplete or drill 13 gross (13 net) wells
in the NWU with estimated capital expenditures of $17 million. Also, we plan to drill 245 gross (82 net) producing and injecting wells in the Atlantic Rim Project in Wyoming

53

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with
estimated capital expenditures of $65 million. The final determination regarding whether to drill the budgeted wells referred to above is dependent upon many factors including:



Our
estimated total proved reserves as of December 31, 2007 are approximately 356 Bcfe with a PV-10 value of $1.05 billion using December 31, 2007
oil and gas pricing. Approximately 75% of our estimated net proved reserves are undeveloped.

Compared
with the development of our CBM properties, we anticipate that development of our oil properties in California could have a more immediate impact on our cash flows. We also
anticipate that we will be able to conduct drilling operations in California on a year-round basis without weather, environmental or other drilling delays as may occur in the Rocky
Mountain areas where our CBM properties are located.

A
substantial portion of our economic success depends on factors over which we have no control, including natural gas and oil prices, operating costs, and environmental and other
regulatory matters. In our planning process, we focus on maintaining financial flexibility together with a low cost structure in order to reduce our vulnerability to these uncontrollable factors.

Stock based Equity Compensation Plan Information

At December 31, 2007, we had approximately 1.9 million vested outstanding stock options issued under our stock based equity compensation plans. Of
the total 1.9 million outstanding vested options, 20,000 had exercise prices above the closing market price $14.13 of our common stock on December 31, 2007. If options with exercise
prices below the closing market price on December 31, 2007 are exercised by the holders, we will receive the exercise price in cash. The following table provides information with respect to
shares of our common stock that may be issued under vested stock options whose exercise price was less than our closing stock price on December 31, 2007.

Exercise Price of Outstanding Vested Options

Number of Securities
to be Issued Upon
Exercise of Vested
Outstanding Options

Proceeds to be
Received
Upon Exercise of
Vested
Outstanding Options$4.00

496,450

$
1,985,800$7.00

564,300


3,950,100$9.05

679,000


6,144,950$11.00

10,000


110,000$12.53

16,665


208,812$13.85

124,750


1,727,7881,891,165

$
14,127,450


For
additional detail about our stock based equity compensation plans, see "Executive CompensationEmployee Benefit Plans" under Item 11 and as incorporated by
reference from our Proxy Statement on Form 14A.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles

54

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generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that
materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our
estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial
statements. Below, we provide expanded discussion of our more significant accounting policies, estimates and judgments. We believe these accounting policies reflect our more significant estimates and
assumptions used in preparation of our consolidated financial statements. See Notes to the Consolidated Financial Statements for a discussion of additional accounting policies and estimates made by
management.

Oil and Gas Producing Activities

Effective April 1, 2007, the Company adopted the full cost method of accounting for its oil and gas properties. Previously, the Company followed the
successful efforts method of accounting for its oil and gas activities. Warren believes that the full cost method is preferable for a company that is actively involved in the exploration and
development of oil and gas reserves. Additionally, the full cost method is used by the majority of Warren's peers and management believes the change will improve the comparability of Warren's
financial statements with its peer group. Warren's financial results have been retroactively restated to reflect the full cost method of accounting.

As
prescribed by full cost accounting rules, all costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs
include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves.
Salaries and benefits paid to employees directly involved in the exploration and development of oil and gas properties as well as other internal costs that can be specifically identified with
acquisition, exploration and development activities are also capitalized. Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal
of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement
costs are depleted on the equivalent unit-of-production method, based on proved oil and gas reserves as determined by independent petroleum engineers.

In
accordance with full cost accounting rules, Warren is subject to a limitation on capitalized costs. The capitalized cost of oil and gas properties, net of accumulated depreciation,
depletion and amortization, may not exceed the estimated future net cash flows from proved oil and gas reserves discounted at 10 percent, plus the lower of cost or fair market value of unproved
properties as adjusted for related tax effects. If capitalized costs exceed this limit (the "ceiling limitation"), the excess must be charged to expense. Warren did not have any adjustment to earnings
due to the ceiling limitation for the periods presented herein.

The
costs of certain unevaluated oil and gas properties and exploratory wells being drilled are not included in the costs subject to amortization. Warren assesses costs not being
amortized for possible impairments or reductions in value and if a reduction in value has occurred, the portion of the carrying cost in excess of the current value is transferred to costs subject to
amortization.

55

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As a result of the change in accounting principle, our accumulated deficit as of January 1, 2006 increased from $82,861,220 as originally reported using the successful efforts
method to $95,164,632 using the full cost method. There was no change in cash flows from operations during these periods presented below.

Our
estimate of proved reserves is based on the quantities of oil and gas that engineering and geological analysis demonstrate, with reasonable certainty, to be recoverable from
established reservoirs in the future under current operating and economic parameters. Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations.
As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows are derived from these reserve
estimates, in accordance with SEC guidelines by an independent engineering firm based in part on data provided by us. The accuracy of our reserve estimates depends in part on the quality and quantity
of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the estimates.



Oil and gas sales result from undivided interests held by us in various oil and gas properties. Sales of natural gas and oil produced are recognized when
delivered to or picked up by the purchaser.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes("FIN 48"). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement of Financial Accounting
Standards No. 109,Accounting for Income Taxes. The interpretation is effective for fiscal years beginning after December 15, 2006. The
adoption of FIN 48 did not have a material impact on the Company's consolidated financial position or results of operations.

In
September 2006, the FASB finalized SFAS No. 157,Fair Value Measurementswhich will become effective in 2008. This
Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The
provisions of SFAS No. 157 will be applied prospectively to fair value measurements and disclosures in the Company's consolidated financial statements beginning in the first quarter of 2008.
The adoption of SFAS No. 157 is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In
February 2007, the FASB issued SFAS No. 159,Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment
of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for us January 1, 2008. The
adoption of SFAS No. 159 will not have a material impact on the Company's consolidated financial position or results of operations.

In
December 2007, the FASB issued SFAS No. 141R,Business Combinations("SFAS 141R"). SFAS 141R replaces
SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. This standard is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect if any that SFAS No. 141R will have on
the financial statements.

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In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements("SFAS 160"). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect, if any, that SFAS No. 160
will have on the financial statements.

Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Oil and gas sales.Revenue from oil and gas sales increased $28.0 million in 2007 to $59.3 million, a 90%
increase compared to 2006. This increase resulted from significantly increasing our drilling activity in the WTU. Net oil production for 2007 and 2006 was 825 thousand barrels of oil (Mbbls)
and 456 Mbbls, respectively. Net gas production for 2007 and 2006 was 1.3 billion cubic feet of natural gas (Bcf) and 1.1 Bcf, respectively. The average realized price per barrel
of oil for 2007 and 2006 was $64.60 and $55.36, respectively. Additionally, the average realized price per Mcf of gas for 2007 and 2006 was $4.81 and $5.73, respectively.

Production & exploration.Production and exploration expense increased $9.9 million in 2007 to
$22.9 million, a 76% increase compared to 2006. Primarily, this increase resulted from an increase in oil production. Production increased to 6.2 Bcfe for 2007 compared to
3.8 Bcfe for 2006, an increase of 64%. Production and exploration expense was $18.84 per barrel of oil in 2007 compared to $19.68 per barrel of oil in 2005. Production and exploration expense
was $5.91 per mcf of gas in 2007 compared to $4.76 per mcf of gas in 2006. Production and exploration expense per barrel of oil decreased due to higher levels of oil production. Production and
exploration expense per mcf of gas increased due to workovers associated with dewatering CBM wells.

Interest and other income.Interest and other income decreased $2.4 million in 2007 to $2.4 million, a 50%
decrease compared to 2006. This represents a decrease in interest earned due to lower cash and cash equivalents during the period as compared to last year.

Depreciation, depletion and amortization.Depreciation, depletion and amortization expense increased $5.1 million in
2007 to $11.4 million, an 81% increase compared to last year. This increase results from increased production and increased capitalized costs during 2007 compared to 2006. Production increased
64% during this period.

General and administrative expenses.General and administrative expenses increased $3.9 million in 2007 to
$13.8 million, a 39% increase compared to last year. This reflects an increase in personnel as a result of increased drilling operations. Also, this reflects an increase in stock option expense
of $1.0 million.

Interest expense.Interest expense increased $1.8 million in 2007 to $2.2 million compared to last year. The
increase results from interest expense relating to the drawdown of $46.2 million under our Credit Facility, as previously discussed.

Income Taxes.We follow the provisions of Statements of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which provides for recognition of a deferred tax liability or asset for temporary differences, operating loss carryforwards, statutory depletion carryforwards and tax credit carryforwards net
of a valuation allowance. The temporary differences consist primarily of depreciation,

57

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depletion
and amortization of intangible drilling costs, unrealized gains on investments and our investment basis in oil and gas partnerships.

As
of December 31, 2007, we had a net operating loss carryforward of approximately $109 million. As of December 31, 2007, we have provided a 100% valuation allowance
on our net deferred tax assets. Our net operating loss carryforwards expire in 2012 and subsequent years.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Oil and gas sales.Revenue from oil and gas sales increased $17.3 million to $31.3 million during 2006, a 124%
increase compared to 2005. This increase in production resulted from significantly increasing our drilling activity in the WTU in southern California. Additionally, this increase results from
acquiring the NWU which is adjacent to the WTU. Prior to July 2005, all wells were syndicated to our drilling partnerships which resulted in lower working interest percentages allocated us. Net
oil production for 2006 and 2005 was 456 Mbbls and 148 Mbbls, respectively. Net gas production for 2006 and 2005 was 1.1 Bcf for both periods. The average realized price per
barrel of oil for 2006 and 2005 was $55.36 and $45.75, respectively. Additionally, the average realized price per Mcf of gas for 2006 and 2005 was $5.73 and $6.71, respectively.

Production & exploration.Production and exploration expense increased $5.9 million during 2006 to
$13.0 million, an 83% increase compared to 2005. This increase resulted from a 83% increase in production. Production and exploration expense was $19.68 per barrel of oil in 2006 compared to
$25.56 per barrel of oil in 2005. Production and exploration expense was $4.76 per mcf of gas in 2006 compared to $3.13 per mcf of gas in 2005. Production and exploration expense per barrel of oil
decreased during 2006 because of higher production levels and a reduction in repair and maintenance
costs during 2006. Production and exploration expense per mcf of gas increased during 2006 because of operating expenses relating to CBM wells that were drilled or acquired during the year.

Net gain on investments.Net gain on investments was $0.1 million for 2006. Net gain on investments was
$1.0 million for 2005. Primarily, investments represent zero coupon U.S. treasury bonds. Fluctuations in net gain or loss on investments resulted from a decrease in invested assets during 2006.

Interest and other income.Interest and other income increased $1.5 million in 2006 to $4.8 million, a 46%
increase compared to 2005. This represents an increase in interest earned on idle cash balances.

Depreciation, Depletion, Amortization and Impairment.Depreciation, depletion, amortization and impairment expense increased
$3.4 million for 2006 to $6.3 million, a 125% increase compared to last year. This increase results from increased production and increased capitalized costs during 2006 compared to
2005. Production increased 93% during this period.

General and administrative expenses.General and administrative expenses increased $2.4 million during 2006 to
$9.9 million, a 32% increase compared to last year. This reflects a decrease in the allocation of certain general and administrative expenses to turnkey operations during 2006. Additionally,
this results from an increase in personnel as a result of increased oil and gas operations. Lastly, compensation expense relating to the issuance and vesting of stock options were $0.6 million
in 2006 compared to $-0- in 2005.

Interest expense.Interest expense decreased $1.4 million during 2006 to $0.4 million, a 78% decrease compared
to last year. The Company reduced long-term debt by approximately $44 million during 2005. As a result, interest expense decreased significantly.

58

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Income Taxes.We follow the provisions of Statements of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which provides for recognition of a deferred tax liability or asset for temporary differences, operating loss carryforwards, statutory depletion carryforwards and tax credit carryforwards net
of a valuation allowance. The temporary differences consist primarily of depreciation, depletion and amortization of intangible drilling costs, unrealized gains on investments and our investment basis
in oil and gas partnerships.

As
of December 31, 2006, we had a net operating loss carryforward of approximately $99 million. As of December 31, 2006, we have provided a 100% valuation allowance
on our net deferred tax assets. Our net operating loss carryforwards expire in 2012 and subsequent years.



As of December 31, 2007, we had $2.5 million of convertible secured debentures that are convertible into our common shares. Further, all convertible
secured debentures are callable by us if the average bid price of our public traded common shares traded at 133% or greater of the respective conversion price of the debentures for at least 90
consecutive trading days. In such an event, debentures not converted may be called by us upon 60 days notice at a price of 100% of par value plus accrued interest.

The
principal of the convertible secured debentures is secured at maturity by zero coupon U.S. treasury bonds previously deposited into an escrow account equaling the par value of the
debentures maturing on or before the due date of the debentures. The fair market value of these securities at December 31, 2007 was $1,316,254.

The
table below reflects the outstanding convertible secured debentures by issue, the fair market value of the zero coupon U.S. treasury bonds held in escrow on behalf of the debentures
holders and the estimated cash outlay for the payment of debenture interest for 2008. The conversion prices listed below will increase in the future.

|Debentures                                        |  | Outstanding at
December 31,
2007 |           | Conversion
Price as of
December 31,
2007 |   | Fair Market
Value of
U.S. Treasuries |  | Estimated
Debenture
Interest
for 2008
|------------------------------------------------- |  | -------------------------------- | --------- | ---------------------------------------- | - | ------------------------------------ |  | -------------------------------------
|12% Secured Fund Debentures due December 31, 2020 |  | $                                | 1,375,000 |                                          | $ | 35.00                                |  | $                                    
|12% Secured Fund Debentures due December 31, 2022 |  |                                  | 1,106,000 |                                          |   | 35.00                                |  |                                      
|                                                  |  |                                  |           |                                          |   |                                      |  |                                      
|                                                  |  | $                                | 2,481,000 |                                          |   |                                      |  | $                                    
|                                                  |  |                                  |           |                                          |   |                                      |  |                                      



As of December 31, 2007, we had 224,370 shares of convertible preferred stock issued and outstanding. During 2007, 1,734 shares of our convertible
preferred stock converted into common shares on a 1 to 0.5 basis. Dividends and accretion on preferred shares totaled $0.3 million and $0.4 million for the years ended
December 31, 2007 and 2006, respectively.

All
of our outstanding preferred stock has a dividend equal to 8% per annum, payable to the extent legally available quarterly in arrears, and has a liquidation preference of $12.00 per
share. Any accrued but unpaid dividends shall be cumulative and paid upon liquidation, optional redemption or conditional repurchase. No dividends may be paid on the common stock as long as there are
any accrued and unpaid dividends on the preferred stock. Commencing July 1, 2006 and thereafter, at the election of the holder of our convertible preferred stock, each share of preferred stock
is convertible into 0.50 share of common stock.

59

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The
conversion rate for our convertible preferred stock is subject to adjustment in the event of:



Commencing
seven years after their respective date of issuance, the preferred stock may be redeemed by the holders at a redemption price equal to the liquidation value of $12.00 per
share, plus accrued but unpaid dividends, if any. At December 31, 2007, there were 224,370 preferred shares outstanding that the Company may be required to redeem commencing in 2010.

Upon
receipt of a redemption election, we, at our option, shall either:



If
we are not listed on an exchange or our common stock has no trading volume, upon redemption the Board shall determine the fair market value of the common stock.

If
the closing sale price of our publicly traded common stock as reported by the Nasdaq Stock Market, or any exchange or electronic OTC listing service on which the shares of common
stock are then traded, exceeds 133% of the conversion price then in effect for the preferred stock for at least 10 trading days during any 30-day period, we, at our option, may either:



In
addition, the preferred stock, plus accrued and unpaid dividends, shall be converted into common stock at the then applicable conversion rate upon the vote or written consent of the
holders of 662/3% of the then outstanding preferred stock, voting together as a class.

Accordingly,
if the holders of any of the then-remaining outstanding shares of our preferred stock request redemption commencing in 2009 and thereafter and we elect to pay
the Redemption Price for the preferred stock in cash, we would need capital of $12.00 per share, plus the amount of any accrued but unpaid dividends, which funds may not be available and the payment
of which could have a

60

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material
adverse effect on our financial liquidity and results of operation. Alternatively, if we elect to pay the Redemption Price for the preferred stock commencing in 2009 and thereafter with
shares of our common stock, such issuance could materially increase the number of our shares of common stock then outstanding and be dilutive to our earnings per share, if any.

Contractual Obligations

The contractual obligations table below assumes the maximum amount is tendered each year. The table does not give effect to the conversion of any bonds to common
stock which would reduce payments due. All bonds are secured at maturity by zero coupon U.S. treasury bonds deposited into an escrow account equaling the par value of the bonds maturing on or before
the maturity of the bonds. Such
U.S. treasury bonds had a fair market value of $1.3 million at December 31, 2007. The table below does not reflect the release of escrowed U.S. treasury bonds to us upon redemption.

|      |                      | Payments due by period
|----- | -------------------- | ----------------------
|
|      | Line of credit       |                       
|      | Bonds                |                       
|      | Drilling commitments |                       
|      | Leases               |                       
|      |                      |                       
|Total |                      | $                     
|      |                      |                       

The
Company has a contract with Ensign United States Drilling California, Inc. for drilling wells in California that expires April 30, 2008. The contract provides for an
operating rate of $12,010 per day. In the event of early termination, the Company will incur early termination fees and expenses, demobilization costs in the amount of $23,000 and the actual costs
incurred by the contractor for removing and returning the rigs to the contractor's yard for a total amount of approximately $1.5 million.

The
Company has also entered into a contract with Voorhees Thomas, LLC for drilling wells in California. The contract provides for mobilization and assembly costs of approximately
$400,000 and an operating rate of $22,150 per day for two years. The Company expects delivery of the rig during the second quarter of 2008. In the event of early termination, the Company will incur
the mobilization costs of $400,000, demobilization fees of $400,000, and lesser of actual expenses to terminate the contract or the operating rate for five days, for a total amount of approximately
$910,750.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Item 7A:    Quantitative and Qualitative Disclosures About Market Risk



In 2007 we entered into a financial derivative put contract to hedge our exposure to commodity price risk associated with anticipated future crude oil production.
Currently, we have used floor price put agreements to hedge approximately 700 barrels per day of crude oil. We believe we will have more predictability of our crude oil revenues as a result of these
financial derivative contracts.

61

---



The
following table summarizes our open financial derivative positions as of December 31, 2007 related to natural gas and crude oil production.

|Product |       | Type |  | Remaining
Contract Period |  | Volume   |  | Price per
Mcf or Bbl |       | Fair Value
|------- | ----- | ---- |  | ------------------------- |  | -------- |  | -------------------- | ----- | ----------
|Oil     |       | Put  |  | March 2008-Dec 2008       |  | 700 Bbld |  | $                    | 70.00 |           
|        | Total |      |  |                           |  |          |  |                      |       |           
|        |       |      |  |                           |  |          |  |                      |       |           

The
Company has not elected to designate the aforementioned derivative as a hedge. The change in fair value resulted in $300,767 of net losses recorded to oil and gas revenue for 2007.
Our remaining anticipated production for 2008 and beyond is subject to commodity price fluctuations.



We hold investments in U.S. treasury bonds available for sale, which represents securities held in escrow accounts on behalf of the drilling programs and
purchasers of certain debentures. Additionally, we hold U.S. treasury bonds trading securities, which predominantly represent U.S. treasury bonds released from escrow accounts. The fair market value
of these securities will generally increase if the federal discount rate decreases and decrease if the federal discount rate increases. All of our convertible debt has fixed interest rates, so
consequently we are not exposed to cash flow or fair value risk from market interest rate changes on this debt.



Our financial instruments consist of cash and cash equivalents, U.S. treasury bonds and other long-term liabilities. The carrying amounts of cash and
cash equivalents, U.S. treasury bonds and other long-term liabilities, approximate fair market value due to the highly liquid nature of these short-term instruments or they are
reported at fair value.



The general level of inflation affects our costs. Salaries and other general and administrative expenses are impacted by inflationary trends and the supply and
demand of qualified professionals and professional services. Inflation and price fluctuations affect the costs associated with exploring for and producing natural gas and oil, which have a material
impact on our financial performance.

Item 8:    Financial Statements and Supplementary Data

See Report of independent Registered Public Accounting Firm and Audited Financial Statements at Item 15.

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

None.

Item 9A:    Controls and Procedures

Disclosure Controls and Procedures.

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Evaluations have been performed under the supervision and with
the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and

62

---



operation
of our disclosure controls and procedures (as such terms are defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon those evaluations,
management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were adequate and effective as of December 31, 2007 to
provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms.

Our
management does not expect that our disclosure controls and procedures will prevent all errors and all fraud. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Based on the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realties that judgments in decision-making can be faulty
and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the
controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events. Therefore, a control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable
assurances of achieving our desired control objectives and the Chief Executive Officer and the Chief Financial Officer, as of December 31, 2007, have concluded that our disclosure controls and
procedures are effective in achieving that level of reasonable assurance.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act
Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected
by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.

Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2007 based on the criteria in "Internal ControlIntegrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Based upon this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

Grant
Thornton LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on
Form 10-K, has also audited the effectiveness of the Company's internal control over financial reporting as of December 31, 2007 as stated in their report included herein.

Changes in Internal Control over Financial Reporting.

There were no changes in internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting

Item 9B:    Other Information.

Not applicable.

63

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PART III

Item 10:    Directors, Executive Officers and Corporate Governance

See "Executive Officers, Board of Directors, Committees of the Board and Section 16(a) Beneficial Ownership Reporting Compliance" in the Warren
Resources, Inc. Proxy Statement ("Proxy Statement"), for the Annual Meeting of Stockholders of Warren Resources, Inc. to be held on May 21, 2008 (to be filed with the SEC within
120 days after the end of the Company's fiscal year ended December 31, 2007) which is incorporated herein by reference.

The
Company's Code of Business Conduct and Ethics and the Code of Ethics for the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer (Code of Ethics) can be
found on the Company's internet website located at www.warrenresources.com. If the Company amends the Code of Ethics or grants a waiver, including an implicit waiver, from the Code of Ethics, the
Company intends to disclose the information on its internet website. This information will remain on the website for at least 12 months.

Item 11:    Executive Compensation

Information required by this item will be contained in the Proxy Statement under the caption "Executive Compensation," and is hereby incorporated by reference
thereto.

Item 12:    Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item will be contained in the Proxy Statement under the caption "Securities Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters" and is incorporated herein by reference.

Item 13:    Certain Relationships and Related Transactions, and Director Independence

Information required by this item will be contained in the Proxy Statement under the caption "Certain Transactions" and "Corporate Governance" and is hereby
incorporated by reference herein.

Item 14:    Principal Accountant Fees and Services

Information required by this item will be contained in the Proxy Statement under the caption "Auditors' Fees," and is hereby incorporated by reference herein.

64

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PART IV

Item 15:    Exhibits, Financial Statement Schedules

(a)(1)  Financial
Statements

Form 10-K PagesReports of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets, December 31, 2007 and 2006

F-4Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005

F-5Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2007, 2006 and 2005

F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005

F-7Notes to Consolidated Financial Statements

F-8


(a)(2)  All
other schedules have been omitted because the required information is inapplicable or is shown in the Notes to the Consolidated Financial Statements.

(a)(3)  Exhibits
required to be filed by Item 601 of Regulation S-K.

|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(11)     |  | Articles of Incorporation of Registrant filed May 20, 2004 (Maryland)                                                                                                       
|3.2(8)      |  | Bylaws of the Registrant, dated June 2, 2004                                                                                                                                
|3.3(8)      |  | Articles Supplementary (Series A 8% Cumulative Convertible Preferred Stock ($.0001 Par Value) (Maryland)                                                                    
|3.4(8)      |  | Certificate of Correction to Articles Supplementary (Series A 8% Cumulative Convertible Preferred Stock) (Maryland)                                                         
|3.5(8)      |  | Articles Supplementary (Series A Institutional 8% Cumulative Convertible Preferred Stock ($.0001 Par Value) (Maryland)                                                      
|3.6(8)      |  | Certificate of Correction to Articles Supplementary (Series A Institutional 8% Cumulative Convertible Preferred Stock) (Maryland)                                           
|4.1(11)     |  | Specimen Stock Certificate for Common Stock (Maryland)                                                                                                                      
|4.2(6)      |  | Form of Class A Common Stock Warrant                                                                                                                                        
|4.3(6)      |  | Form of Class B Common Stock Warrant                                                                                                                                        
|4.4(2)      |  | 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.

65

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|4.5(4)     |  | 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
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.6(8)     |  | 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       
|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(7)*   |  | Amendment to Employment Agreement dated January 1, 2004, between the Registrant and Norman F. Swanton                                                                                                                
|10.8(13)*  |  | Second Amendment to Employment Agreement dated June 17, 2005, between the Registrant and Norman F. Swanton                                                                                                           
|10.9(7)*   |  | Amendment to Employment Agreement dated January 1, 2004, between the Registrant and Timothy A. Larkin                                                                                                                
|10.10(13)* |  | Second Amendment to Employment Agreement dated June 17, 2005, between the Registrant and Timothy A. Larkin                                                                                                           
|10.11(13)* |  | Employment Agreement dated as of July 1, 2005, between the Registrant and Lloyd Davies                                                                                                                               
|10.12(13)* |  | Employment Agreement executed on June 17, 2005, between the Registrant and David E. Fleming                                                                                                                          
|10.13(8)*  |  | Employment Agreement dated January 1, 2004, between the Registrant and Ellis G. Vickers                                                                                                                              
|10.14(1)*  |  | Form of Indemnification Agreement                                                                                                                                                                                    
|10.15(1)   |  | Form of Partnership Production Marketing Agreement                                                                                                                                                                   
|10.16(3)   |  | Exchange Agreement dated as of the 11th day of December, 2002, between Anadarko E&P Company LP, and Warren Resources, Inc.                                                                                           
|10.17(3)   |  | Joint Exploration Agreement, dated December 13, 2002 between Warren Resources, Inc., Anadarko E&P Company LP, and Anadarko Land Corp.                                                                                
|10.18(3)   |  | Form of Rocky Mountain Unit Operating Agreement Between Anadarko E&P Company, LP and Warren Resources, Inc.                                                                                                          
|10.19(9)   |  | Purchase and Sale Agreement dated November 24, 2004 by and among Warren Resources of California, Inc., Magness Petroleum Company and Next Generation Investments, LLC.                                               

66

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|10.20(9)  |  | 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.                                                                                                                                                                    
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21(12) |  | Asset Purchase Agreement dated December 9, 2005 by and among Warren Resources, Inc., Warren Resources of California, Inc., Warren E&P, Inc. and Global Oil Production, LLC and Wilmington Management, LLC                                                                                                                                                                        
|10.22(14) |  | Form of Asset Purchase Agreement                                                                                                                                                                                                                                                                                                                                                 
|10.23(15) |  | First Amendment to Credit Agreement dated as of August 9, 2007 among Warren Resources, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A.                                                                                                                                                                                                                             
|10.24(16) |  | Amended and Restated Credit Agreement dated as of November 19, 2007 among Warren Resources, Inc., as Borrower, Certain Subsidiaries of Borrower, as Guarantors, Merrill Lynch Capital, a Division of Merrill Lynch Business Financial
Services Inc., as Administrative Agent, as a Lender and as Sole Bookrunner and Sole Lead Arranger, and the additional Lenders party thereto
|11       |  | Statements regarding Computation of Per Share Earnings (Included in the Financial Statement in Part 4)                                                                                                                                                                                                                                                                           
|14(5)     |  | Code of Ethics for Senior Financial Officers                                                                                                                                                                                                                                                                                                                                     
|21.1(10)  |  | Subsidiaries of the Registrant [confirm up-to-date]                                                                                                                                                                                                                                                                                                                              
|23.1     |  | Consent of Williamson Petroleum Consultants, Inc.                                                                                                                                                                                                                                                                                                                                
|23.2     |  | Consent of Grant Thornton LLP                                                                                                                                                                                                                                                                                                                                                    
|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       |  | Certification of CEO and CFO pursuant to Section 1350                                                                                                                                                                                                                                                                                                                            

---

67

---



68

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

WARREN RESOURCES, INC.By

/s/NORMAN F. SWANTONNorman F. Swanton

President, Chief Executive Officer, Director and ChairmanBy

/s/TIMOTHY A. LARKINTimothy A. Larkin

Executive Vice President, Chief Financial Officer, and Principal Accounting Officer


Dated:
March 4, 2008

Pursuant
to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

|Signature                               |  | Title (Principal Function)                                                         |  | Date         
|--------------------------------------- |  | ---------------------------------------------------------------------------------- |  | -------------
|                                        |  |                                                                                    |  |              
|/s/NORMAN F. SWANTONNorman F. Swanton   |  | President, Chief Executive Officer, Director and Chairman                          |  | March 3, 2008
|/s/TIMOTHY A. LARKINTimothy A. Larkin   |  | Executive Vice President, Chief Financial Officer and Principal Accounting Officer |  | March 3, 2008
|/s/ANTHONY COELHOAnthony Coelho         |  | Director                                                                           |  | March 3, 2008
|/s/LLOYD DAVIESLloyd Davies             |  | Director                                                                           |  | March 3, 2008
|/s/DOMINICK D'ALLEVADominick D'Alleva   |  | Director                                                                           |  | March 3, 2008
|/s/THOMAS NOONANThomas Noonan           |  | Director                                                                           |  | March 3, 2008
|/s/MICHAEL R. QUINLANMichael R. Quinlan |  | Director                                                                           |  | March 3, 2008

69

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|/s/CHET BORGIDAChet Borgida           |  | Director |  | March 3, 2008
|------------------------------------- |  | -------- |  | -------------
|/s/LEONARD DECECCHISLeonard Dececchis |  | Director |  | March 3, 2008
|/s/ESPY PRICEEspy Price               |  | Director |  | March 3, 2008
|/s/JAMES MCCONNELLJames McConnell     |  | Director |  | March 3, 2008

70

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INDEX TO FINANCIAL STATEMENTS

|                                                                                                    |  | Page
|--------------------------------------------------------------------------------------------------- |  | ----
|Reports of Independent Registered Public Accounting Firm                                            |  | F-2 
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                        |  | F-4 
|Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005          |  | F-5 
|Consolidated Statement of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005 |  | F-6 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005          |  | F-7 
|Notes to Consolidated Financial Statements                                                          |  | F-8 

F-1

---





Report of Independent Registered Public Accounting Firm

Board
of Directors and Stockholders
Warren Resources, Inc.

We
have audited Warren Resources, Inc. and subsidiaries (the "Company") internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated
Frameworkissued by COSO.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of
December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2007
and our report dated March 4, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/
GRANT THORNTON LLP

Oklahoma
City, Oklahoma
March 4, 2008

F-2

---



Report of Independent Registered Public Accounting Firm

Board
of Directors and Stockholders
Warren Resources, Inc.

We
have audited the accompanying consolidated balance sheets of Warren Resources, Inc. and Subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Warren Resources, Inc. and Subsidiaries
as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of America.

As
discussed in Note A to the consolidated financial statements, effective April 1, 2007, the Company changed its method of accounting for oil and gas properties to the
full cost method from the successful efforts method. Also discussed in Note A, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R),Accounting for Stock-Based Compensation.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2007, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 4, 2008 expressed an unqualified opinion.

/s/
GRANT THORNTON LLP

Oklahoma
City, Oklahoma
March 4, 2008

F-3

---





Warren Resources, Inc. and Subsidiaries        CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                                                                                        | December 31,                                                           |                           
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | --------------------------
|
|
|ASSETS                               |                                                                                                                                                                                                                                        |                                                                        |                           
|Current Assets                       |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     | Cash and cash equivalents                                                                                                                                                                                                              |                                                                        | $                         
|                                     | Accounts receivabletrade                                                                                                                                                                                                              |                                                                        |                           
|                                     | Restricted investments in U.S. Treasury bondsavailable for sale, at fair value (amortized cost of $104,669 in 2007 and $98,884 in 2006)                                                                                               |                                                                        |                           
|                                     | Other current assets                                                                                                                                                                                                                   |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        | Total current assets      
|Other Assets                         |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     | Oil and gas propertiesat cost, based on full cost method of accounting, net of accumulated depreciation, depletion and amortization (includes unproved properties of $66,240,101 and $57,101,675 as of December 31,
2007 and 2006)    |                                                                        |                           
|                                     | Property and equipmentat cost, net                                                                                                                                                                                                    |                                                                        |                           
|                                     | Restricted investments in U.S. Treasury bondsavailable for sale, at fair value (amortized cost of $942,021 in 2007 and $889,953 in 2006)                                                                                              |                                                                        |                           
|                                     | Goodwill                                                                                                                                                                                                                               |                                                                        |                           
|                                     | Other assets                                                                                                                                                                                                                           |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        | Total other assets        
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        | $                                                                      | 440,505,591               
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                                                                        |                                                                        |                           
|Current Liabilities                  |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     | Current maturities of debentures and other long-term liabilities                                                                                                                                                                       |                                                                        | $                         
|                                     | Accounts payable and accrued expenses                                                                                                                                                                                                  |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        | Total current liabilities 
|Long-Term Liabilities                |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     | Debentures, less current portion                                                                                                                                                                                                       |                                                                        |                           
|                                     | Other long-term liabilities, less current portion                                                                                                                                                                                      |                                                                        |                           
|                                     | Line of credit                                                                                                                                                                                                                         |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        | 56,024,883                
|Commitments and contingencies        |                                                                                                                                                                                                                                        |                                                                        |                           
|Stockholders' Equity                 |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     | 8% convertible preferred stock$.0001 par value; authorized, 10,000,000 shares; issued and outstanding, 224,370 shares in 2007 and 272,000 shares in 2006 (aggregate liquidation preference $2,692,440 in
2007 and $3,264,000 in 2006) |                                                                        |                           
|                                     | Common stock$.0001 par value; authorized, 100,000,000 shares; issued, 58,191,901 shares in 2007 and 54,143,054 shares in 2006                                                                                                         |                                                                        |                           
|                                     | Additional paid-in capital                                                                                                                                                                                                             |                                                                        |                           
|                                     | Accumulated deficit                                                                                                                                                                                                                    |                                                                        |                           
|                                     | Accumulated other comprehensive income, net of applicable income taxes of $108,000 in 2007 and $92,000 in 2006                                                                                                                         |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        | 350,256,906               
|                                     |                                                                                                                                                                                                                                        | Less common stock in Treasuryat cost; 632,250 shares in 2007 and 2006 |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        |                                                                        | Total Stockholders' Equity
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           
|                                     |                                                                                                                                                                                                                                        | $                                                                      | 440,505,591               
|                                     |                                                                                                                                                                                                                                        |                                                                        |                           

The accompanying notes are an integral part of these statements.

F-4

---





Warren Resources, Inc. and Subsidiaries        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                      |                                                  | Year ended December 31, |           
|--------------------------------------------------------------------- | ------------------------------------------------ | ----------------------- | ----------
|
|
|Revenues                                                              |                                                  |                         |           
|                                                                      | Oil and gas sales                                |                         | $         
|                                                                      | Interest and other income                        |                         |           
|                                                                      | Net gain (loss) on investments                   |                         |           
|                                                                      |                                                  |                         |           
|                                                                      |                                                  |                         | 61,648,020
|Expenses                                                              |                                                  |                         |           
|                                                                      | Production and exploration                       |                         |           
|                                                                      | Depreciation, depletion and amortization         |                         |           
|                                                                      | General and administrative                       |                         |           
|                                                                      | Interest                                         |                         |           
|                                                                      | Retirement of debt                               |                         |           
|                                                                      |                                                  |                         |           
|                                                                      |                                                  |                         | 50,258,550
|                                                                      |                                                  |                         |           
|Income (loss) before provision for income taxes and minority interest |                                                  |                         | 11,389,470
|                                                                      | Deferred income tax expense (benefit)            |                         |           
|                                                                      |                                                  |                         |           
|Net income (loss) before minority interest                            |                                                  |                         | 11,405,470
|                                                                      | Minority interest                                |                         |           
|                                                                      |                                                  |                         |           
|Net income (loss)                                                     |                                                  |                         | 11,405,470
|                                                                      | Less dividends and accretion on preferred shares |                         |           
|                                                                      |                                                  |                         |           
|Net income (loss) applicable to common stockholders                   |                                                  | $                       | 11,138,273
|                                                                      |                                                  |                         |           
|Basic and diluted income (loss) per common shareBasic                |                                                  | $                       | 0.20      
|Basic and diluted income (loss) per common shareDiluted              |                                                  | $                       | 0.20      
|Weighted average common shares outstandingBasic                      |                                                  |                         | 55,892,536
|Weighted average common shares outstandingDiluted                    |                                                  |                         | 56,978,948

The
accompanying notes are an integral part of these statements.

F-5

---





Warren Resources, Inc. and Subsidiaries        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY        Years ended December 31, 2007, 2006 and 2005

|                                                 |            | Preferred stock                                                                                           |                            | Common stock |             |   |            |   |   | Accumulated
other
comprehensive
income |   |   |             |   |  
|------------------------------------------------ | ---------- | --------------------------------------------------------------------------------------------------------- | -------------------------- | ------------ | ----------- | - | ---------- | - | - | -------------------------------------- | - | - | ----------- | - | -
|
|
|Balance at January 1, 2005 (Restated)            |            | 6,560,809                                                                                                 |                            | $            | 77,270,413  |   | 34,347,854 |   | $ | 3,435                                  |   | $ | 157,847,314 |   | $
|Issuance of common stock, net of offering costs  |            |                                                                                                          |                            |              |            |   | 7,498,021  |   |   | 750                                    |   |   | 100,416,701 |   |  
|Shares issued from exercise of options           |            |                                                                                                          |                            |              |            |   | 942,985    |   |   | 94                                     |   |   | 4,173,350   |   |  
|Shares issued from exercise of warrants          |            |                                                                                                          |                            |              |            |   | 214,831    |   |   | 22                                     |   |   | 2,265,211   |   |  
|Conversion to common stock from debentures       |            |                                                                                                          |                            |              |            |   | 3,859,251  |   |   | 386                                    |   |   | 23,267,583  |   |  
|Conversion to common stock from preferred stock  |            | (5,908,473                                                                                                | )                          |              | (69,738,041 | ) | 5,890,895  |   |   | 589                                    |   |   | 69,737,452  |   |  
|Retirement of common stock                       |            |                                                                                                          |                            |              |            |   | (15,453    | ) |   | (2                                     | ) |   | (219,055    | ) |  
|Dividends declared on preferred stock            |            |                                                                                                          |                            |              |            |   |           |   |   |                                       |   |   | (3,677,145  | ) |  
|Accretion of preferred stock to redemption value |            |                                                                                                          |                            |              | 97,250      |   |           |   |   |                                       |   |   | (97,250     | ) |  
|Comprehensive loss                               |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  
|                                                 | Net loss   |                                                                                                           |                           |              |             |  |            |  |   |                                        |  |   |             |  |  
|                                                 |            | Net change in unrealized gain on investment securities available for sale, net of applicable income taxes |                            |             |             |   |           |   |  |                                        |   |  |             |   | 
|                                                 |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  
|                                                 |            |                                                                                                           | Total comprehensive loss   |              |             |   |            |   |   |                                        |   |   |             |   |  
|                                                 |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  
|Balance at December 31, 2005 (Restated)          |            | 652,336                                                                                                   |                            |              | 7,629,622   |   | 52,738,384 |   |   | 5,274                                  |   |   | 353,714,161 |   |  
|Issuance of common stock, net of offering costs  |            |                                                                                                          |                            |              |            |   | 479,006    |   |   | 48                                     |   |   | 6,807,697   |   |  
|Shares issued from exercise of options           |            |                                                                                                          |                            |              |            |   | 483,699    |   |   | 48                                     |   |   | 4,195,933   |   |  
|Shares issued from the exercise of warrants      |            |                                                                                                          |                            |              |            |   | 160,573    |   |   | 16                                     |   |   | 1,784,286   |   |  
|Conversion to common stock from debentures       |            |                                                                                                          |                            |              |            |   | 16,347     |   |   | 1                                      |   |   | 99,996      |   |  
|Conversion to common stock from preferred stock  |            | (380,336                                                                                                  | )                          |              | (4,389,024  | ) | 279,869    |   |   | 28                                     |   |   | 4,388,996   |   |  
|Retirement of common stock                       |            |                                                                                                          |                            |              |            |   | (24,358    | ) |   | (2                                     | ) |   | (360,046    | ) |  
|Repurchase of common stock                       |            |                                                                                                          |                            |              |            |   | 9,534      |   |   | 1                                      |   |   | 137,003     |   |  
|Dividends declared on preferred stock            |            |                                                                                                          |                            |              |            |   |           |   |   |                                       |   |   | (344,568    | ) |  
|Stock based compensation                         |            |                                                                                                          |                            |              |            |   |           |   |   |                                       |   |   | 623,992     |   |  
|Accretion of preferred stock to redemption value |            |                                                                                                          |                            |              | 12,299      |   |           |   |   |                                       |   |   | (12,299     | ) |  
|                                                 | Net income |                                                                                                           |                           |              |             |  |            |  |   |                                        |  |   |             |  |  
|                                                 |            | Net change in unrealized gain on investment securities available for sale, net of applicable income taxes |                            |             |             |   |           |   |  |                                        |   |  |             |   | 
|                                                 |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  
|                                                 |            |                                                                                                           | Total comprehensive income |              |             |   |            |   |   |                                        |   |   |             |   |  
|                                                 |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  
|Balance at December 31, 2006 (Restated)          |            | 272,000                                                                                                   |                            |              | 3,252,897   |   | 54,143,054 |   |   | 5,414                                  |   |   | 371,035,151 |   |  
|Issuance of common stock, net of offering costs  |            |                                                                                                          |                            |              |            |   | 3,812,262  |   |   | 381                                    |   |   | 51,255,051  |   |  
|Shares issued from exercise of options           |            |                                                                                                          |                            |              |            |   | 231,533    |   |   | 23                                     |   |   | 1,112,209   |   |  
|Shares issued from the exercise of warrants      |            |                                                                                                          |                            |              |            |   | 4,185      |   |   | 1                                      |   |   | 41,850      |   |  
|Conversion to common stock from preferred stock  |            | (1,734                                                                                                    | )                          |              | (20,808     | ) | 867        |   |   |                                       |   |   | 20,808      |   |  
|Repurchase of preferred stock                    |            | (45,896                                                                                                   | )                          |              | (550,752    | ) |           |   |   |                                       |   |   |            |   |  
|Dividends declared on preferred stock            |            |                                                                                                          |                            |              |            |   |           |   |   |                                       |   |   | (260,298    | ) |  
|Stock based compensation                         |            |                                                                                                          |                            |              |            |   |           |   |   |                                       |   |   | 1,524,657   |   |  
|Accretion of preferred stock to redemption value |            |                                                                                                          |                            |              | 6,899       |   |           |   |   |                                       |   |   | (6,899      | ) |  
|                                                 | Net income |                                                                                                           |                           |              |             |  |            |  |   |                                        |  |   |             |  |  
|                                                 |            | Net change in unrealized gain on investment securities available for sale, net of applicable income taxes |                            |             |             |   |           |   |  |                                        |   |  |             |   | 
|                                                 |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  
|                                                 |            |                                                                                                           | Total comprehensive income |              |             |   |            |   |   |                                        |   |   |             |   |  
|                                                 |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  
|Balance at December 31, 2007                     |            | 224,370                                                                                                   |                            | $            | 2,688,236   |   | 58,191,901 |   | $ | 5,819                                  |   | $ | 424,722,529 |   | $
|                                                 |            |                                                                                                           |                            |              |             |   |            |   |   |                                        |   |   |             |   |  

The accompanying notes are an integral part of these statements.

F-6

---





Warren Resources, Inc. and Subsidiaries        CONSOLIDATED STATEMENTS OF CASH FLOWS        Year ended December 31,

|                                                 |                                                                                          | 2007                                                         |                                                      | 2006         |            | 2005         |            
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------- | ------------ | ---------- | ------------ | -----------
|
|Cash flows from operating activities:            |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 | Net income (loss)                                                                        |                                                              | $                                                    | 11,405,470   |            | $            | 6,434,711  
|                                                 | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                              |                                                      |              |            |              |            
|                                                 |                                                                                          | Accretion of discount on available for sale debt securities  |                                                      |              | (64,260    | )            |            
|                                                 |                                                                                          | Amortization and write-off of deferred debt offering costs   |                                                      |              | 33,309     |              |            
|                                                 |                                                                                          | Gain on sale of U.S. Treasury bondsavailable for sale       |                                                      |              | (1,656     | )            |            
|                                                 |                                                                                          | Depreciation, depletion and amortization                     |                                                      |              | 11,393,388 |              |            
|                                                 |                                                                                          | Deferred tax expense (benefit)                               |                                                      |              | (16,000    | )            |            
|                                                 |                                                                                          | Stock option expense                                         |                                                      |              | 1,524,657  |              |            
|                                                 |                                                                                          | Expense on the issuance of warrants                          |                                                      |              |           |              |            
|                                                 |                                                                                          | Common stock surrendered in settlement of receivable         |                                                      |              |           |              |            
|                                                 | Change in assets and liabilities:                                                        |                                                              |                                                      |              |            |              |            
|                                                 |                                                                                          | Decrease in trading securities                               |                                                      |              |           |              |            
|                                                 |                                                                                          | Increase in accounts receivabletrade                        |                                                      |              | (612,375   | )            |            
|                                                 |                                                                                          | (Increase) decrease in other assets                          |                                                      |              | 2,379,119  |              |            
|                                                 |                                                                                          | Increase (decrease) in accounts payable and accrued expenses |                                                      |              | 1,777,827  |              |            
|                                                 |                                                                                          | Increase (decrease) in other long-term liabilities           |                                                      |              |           |              |            
|                                                 |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 |                                                                                          |                                                              | Net cash provided by operating activities            |              |            | 27,819,479   |            
|Cash flows from investing activities:            |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 | Purchase, exploration and development of oil and gas properties                          |                                                              |                                                      | (103,188,519 | )          |              | (89,228,505
|                                                 | Purchases of property and equipment                                                      |                                                              |                                                      | (1,380,810   | )          |              | (1,387,453 
|                                                 | Proceeds from sale of oil and gas properties, net of selling fees                        |                                                              |                                                      |             |            |              |           
|                                                 | Proceeds from U.S. Treasury bondsavailable for sale                                     |                                                              |                                                      | 8,064        |            |              | 727,826    
|                                                 |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 |                                                                                          |                                                              | Net cash used in investing activities                |              |            | (104,561,265 | )          
|Cash flows from financing activities:            |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 | Proceeds from line of credit                                                             |                                                              |                                                      | 45,491,444   |            |              |           
|                                                 | Payments on long-term debt                                                               |                                                              |                                                      | (110,218     | )          |              | (196,256   
|                                                 | Issuance of common stock, net                                                            |                                                              |                                                      | 1,154,082    |            |              | 5,947,052  
|                                                 | Dividends paid on preferred stock                                                        |                                                              |                                                      |             |            |              |           
|                                                 |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 |                                                                                          |                                                              | Net cash provided by financing activities            |              |            | 46,535,308   |            
|                                                 |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 |                                                                                          |                                                              | Net increase (decrease) in cash and cash equivalents |              |            | (30,206,478  | )          
|Cash and cash equivalents at beginning of year   |                                                                                          |                                                              | 43,021,884                                           |              |            | 114,632,099  |            
|                                                 |                                                                                          |                                                              |                                                      |              |            |              |            
|Cash and cash equivalents at end of year         |                                                                                          | $                                                            | 12,815,406                                           |              | $          | 43,021,884   |            
|                                                 |                                                                                          |                                                              |                                                      |              |            |              |            
|Supplemental disclosure of cash flow information |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 | Cash paid for interest, net of amount capitalized                                        |                                                              | $                                                    | 1,819,230    |            | $            | 380,147    
|                                                 | Cash paid for income taxes                                                               |                                                              |                                                      |             |            |              |           
|Noncash investing and financing activities:      |                                                                                          |                                                              |                                                      |              |            |              |            
|                                                 | Conversion to common stock from convertible debt                                         |                                                              | $                                                    |             |            | $            | 99,997     
|                                                 | Accrued preferred stock dividend                                                         |                                                              |                                                      | 396,582      |            |              | 136,284    
|                                                 | Common stock issued to pay dividends                                                     |                                                              |                                                      |             |            |              | 592,069    
|                                                 | Change in accounts payable relating to oil and gas property                              |                                                              |                                                      | 7,548,249    |            |              | 1,675,757  
|                                                 | Common stock issued for oil and gas properties                                           |                                                              |                                                      | 51,255,432   |            |              | 6,385,908  
|                                                 | Increase in asset retirement liability                                                   |                                                              |                                                      | 615,417      |            |              | 632,994    

The accompanying notes are an integral part of these statements.

F-7

---





Warren Resources, Inc. and Subsidiaries        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES



Warren Resources, Inc. (the "Company" or "Warren"), was originally formed on June 12, 1990 for the purpose of acquiring and developing oil and gas
properties. The Company is incorporated under the laws of the state of Maryland. The Company's properties are primarily located in Wyoming, California, New Mexico, North Dakota and Texas. In addition,
the Company serves as the managing general partner (the "MGP") to affiliated partnerships and joint ventures.



The consolidated financial statements include accounts of the Company, its wholly-owned subsidiaries, Warren Development Corp., Warren Drilling Corp., Warren
Management Corp., Warren Resources of California, Inc, Warren Energy Services LLC and Warren E & P, Inc. In 2005 and prior, the Company consolidated limited liability companies in
which the Company had a majority ownership interest. All significant intercompany accounts and transactions have been eliminated in consolidation.

During
2007 the Company acquired all remaining interests in its drilling partnerships. Historically, the Company entered into joint venture agreements with limited partnerships whereby
the Company assigned a 75% (before payout) working interest in an oil and gas lease to a limited partnership while retaining a 25% (before payout) working interest. This ownership interest was an
undivided interest in the mineral rights and each owner was responsible for its designated well expenditures. In exchange for the 75% working interest, the limited partners paid intangible drilling
costs and, if a well was successful, the Company paid completion costs, including lease and well equipment. Payout was achieved when the limited partners in a particular partnership received
distributions equal to 100% of their original investment. Distributions received by the participants were determined by the revenues generated from the wells in each of the various partnerships less
any applicable lease operating
expenses. Once payout was achieved, the Company had a total interest of 55% in the net revenue generated from all wells assigned to a particular partnership. The Company primarily incurred lease
acquisition costs and completion costs, including lease and well equipment, on wells developed in these partnerships and joint ventures. During 2005, the Company proportionately consolidated its share
of the costs incurred on undivided working interests in the post-1999 partnerships, in which it did not have majority control.



Effective April 1, 2007, the Company adopted the full cost method of accounting for its oil and gas properties. Previously, the Company followed the
successful efforts method of accounting for its oil and gas activities. The Company believes that the full cost method is preferable for a company that is actively involved in the exploration and
development of oil and gas reserves. Additionally, the full cost method is used by the majority of the Company's peers and the Company believes the change will improve the comparability of its
financial statements with its peer group. The Company's financial results have been retroactively restated to reflect the full cost method of accounting.

As
prescribed by full cost accounting rules, all costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs
include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development

F-8

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

activities
and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of oil and gas
properties as well as other internal costs that can be specifically identified with acquisition, exploration and development activities are also capitalized. Proceeds received from disposals are
credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future
development and dismantlement costs are depleted on the equivalent unit-of-production method, based on proved oil and gas reserves as determined by independent petroleum
engineers.

In
accordance with full cost accounting rules, the Company is subject to a limitation on capitalized costs. The capitalized cost of oil and gas properties, net of accumulated
depreciation, depletion and amortization, may not exceed the estimated future net cash flows from proved oil and gas reserves discounted at 10 percent, plus the lower of cost or fair market
value of unproved properties as adjusted for related tax effects. If capitalized costs exceed this limit (the "ceiling limitation"), the excess must be charged to expense. The Company did not have any
adjustment to earnings due to the ceiling limitation for the periods presented herein.

The
costs of certain unevaluated oil and gas properties and exploratory wells being drilled are not included in the costs subject to amortization. The Company assesses costs not being
amortized for possible impairments or reductions in value and if a reduction in value has occurred, the portion of the carrying cost in excess of the current value is transferred to costs subject to
amortization.

As
a result of the change in accounting principle, our accumulated deficit as of January 1, 2006 increased from $82,861,220 as originally reported using the successful efforts
method to $95,164,632 using the full cost method. There was no change in cash flows from operations during these periods presented below.

F-9

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

A
comparison of the Company's net income (loss), earnings (loss) per share, oil and gas properties and accumulated deficit under the successful efforts method and the full cost method as
disclosed herein as follows:

Income Statement
Year ended December 31, 2007

|                                                                      |  | As computed under Successful Efforts |             | As reported under
Full Cost |   | Effect of change |  
|--------------------------------------------------------------------- |  | ------------------------------------ | ----------- | --------------------------- | - | ---------------- | -
|Revenues                                                              |  |                                      |             |                             |   |                  |  
|Oil and gas sales                                                     |  | $                                    | 59,308,396  |                             | $ | 59,308,396       |  
|Oil and gas sales from marketing activities                           |  |                                      | 694,547     |                             |   |                 |  
|Well services                                                         |  |                                      | 1,110,630   |                             |   |                 |  
|Interest and other income                                             |  |                                      | 2,339,624   |                             |   | 2,339,624        |  
|                                                                      |  |                                      |             |                             |   |                  |  
|                                                                      |  |                                      | 63,453,197  |                             |   | 61,648,020       |  
|                                                                      |  |                                      |             |                             |   |                  |  
|Expenses                                                              |  |                                      |             |                             |   |                  |  
|Production and exploration                                            |  |                                      | 23,026,604  |                             |   | 22,923,354       |  
|Turnkey contracts                                                     |  |                                      | 354,355     |                             |   |                 |  
|Cost of marketed oil and gas                                          |  |                                      | 681,761     |                             |   |                 |  
|Well services                                                         |  |                                      | 630,975     |                             |   |                 |  
|Depreciation, depletion, amortization and impairment                  |  |                                      | 43,247,084  |                             |   | 11,393,388       |  
|General and administrative                                            |  |                                      | 13,869,581  |                             |   | 13,771,407       |  
|Interest                                                              |  |                                      | 2,170,401   |                             |   | 2,170,401        |  
|                                                                      |  |                                      |             |                             |   |                  |  
|                                                                      |  |                                      | 83,980,761  |                             |   | 50,258,550       |  
|                                                                      |  |                                      |             |                             |   |                  |  
|Income (loss) before provision for income taxes                       |  |                                      | (20,527,564 | )                           |   | 11,389,470       |  
|Deferred income tax expense (benefit)                                 |  |                                      | (16,000     | )                           |   | (16,000          | )
|                                                                      |  |                                      |             |                             |   |                  |  
|Net income (loss)                                                     |  |                                      | (20,511,564 | )                           |   | 11,405,470       |  
|Less dividends and accretion on preferred shares                      |  |                                      | 267,197     |                             |   | 267,197          |  
|                                                                      |  |                                      |             |                             |   |                  |  
|Net income (loss) applicable to common stockholders                   |  | $                                    | (20,778,761 | )                           | $ | 11,138,273       |  
|                                                                      |  |                                      |             |                             |   |                  |  
|Earnings (loss) per sharebasic                                       |  | $                                    | (0.37       | )                           | $ | 0.20             |  
|Earnings (loss) per sharediluted                                     |  | $                                    | (0.36       | )                           | $ | 0.20             |  
|Depreciation, depletion, amortization and impairment expense per Mcfe |  | $                                    | 6.97        |                             | $ | 1.84             |  

F-10

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

Income Statement
Year ended December 31, 2006

|                                                                      |  | As originally reported under Successful Efforts |            | As restated under
Full Cost |   | Effect of change | 
|--------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | --------------------------- | - | ---------------- | 
|Revenues                                                              |  |                                                 |            |                             |   |                  | 
|Oil and gas sales                                                     |  | $                                               | 31,264,379 |                             | $ | 31,264,379       | 
|Turnkey contracts with affiliated partnerships                        |  |                                                 | 1,621,462  |                             |   |                 | 
|Oil and gas sales from marketing activities                           |  |                                                 | 2,329,945  |                             |   |                 | 
|Well services                                                         |  |                                                 | 1,029,442  |                             |   |                 | 
|Interest and other income                                             |  |                                                 | 4,857,494  |                             |   | 4,857,494        | 
|                                                                      |  |                                                 |            |                             |   |                  | 
|                                                                      |  |                                                 | 41,102,722 |                             |   | 36,121,873       | 
|                                                                      |  |                                                 |            |                             |   |                  | 
|Expenses                                                              |  |                                                 |            |                             |   |                  | 
|Production and exploration                                            |  |                                                 | 13,709,966 |                             |   | 13,034,962       | 
|Turnkey contracts                                                     |  |                                                 | 1,001,397  |                             |   |                 | 
|Cost of marketed oil and gas                                          |  |                                                 | 2,254,820  |                             |   |                 | 
|Well services                                                         |  |                                                 | 990,033    |                             |   |                 | 
|Depreciation, depletion, amortization and impairment                  |  |                                                 | 11,711,640 |                             |   | 6,256,543        | 
|General and administrative                                            |  |                                                 | 9,903,193  |                             |   | 9,903,193        | 
|Interest                                                              |  |                                                 | 399,464    |                             |   | 399,464          | 
|                                                                      |  |                                                 |            |                             |   |                  | 
|                                                                      |  |                                                 | 39,970,513 |                             |   | 29,594,162       | 
|                                                                      |  |                                                 |            |                             |   |                  | 
|Income before provision for income taxes                              |  |                                                 | 1,132,209  |                             |   | 6,527,711        | 
|Deferred income tax expense                                           |  |                                                 | 93,000     |                             |   | 93,000           | 
|                                                                      |  |                                                 |            |                             |   |                  | 
|Net income                                                            |  |                                                 | 1,039,209  |                             |   | 6,434,711        | 
|Less dividends and accretion on preferred shares                      |  |                                                 | 356,867    |                             |   | 356,867          | 
|                                                                      |  |                                                 |            |                             |   |                  | 
|Net income applicable to common stockholders                          |  | $                                               | 682,342    |                             | $ | 6,077,844        | 
|                                                                      |  |                                                 |            |                             |   |                  | 
|Earnings per sharebasic                                              |  | $                                               | 0.01       |                             | $ | 0.11             | 
|Earnings per sharediluted                                            |  | $                                               | 0.01       |                             | $ | 0.11             | 
|Depreciation, depletion, amortization and impairment expense per Mcfe |  | $                                               | 3.09       |                             | $ | 1.65             | 

F-11

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

Income Statement
Year ended December 31, 2005

|                                                                      |  | As originally reported under Successful Efforts |            | As restated under
Full Cost |   | Effect of change |  
|--------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | --------------------------- | - | ---------------- | -
|Revenues                                                              |  |                                                 |            |                             |   |                  |  
|Oil and gas sales                                                     |  | $                                               | 13,959,097 |                             | $ | 13,959,097       |  
|Turnkey contracts with affiliated partnerships                        |  |                                                 | 9,756,209  |                             |   |                 |  
|Oil and gas sales from marketing activities                           |  |                                                 | 10,210,681 |                             |   |                 |  
|Well services                                                         |  |                                                 | 1,554,760  |                             |   |                 |  
|Gain on sale of oil and gas properties                                |  |                                                 | 203,487    |                             |   |                 |  
|Interest and other income                                             |  |                                                 | 4,263,029  |                             |   | 4,263,029        |  
|                                                                      |  |                                                 |            |                             |   |                  |  
|                                                                      |  |                                                 | 39,947,263 |                             |   | 18,222,126       |  
|                                                                      |  |                                                 |            |                             |   |                  |  
|Expenses                                                              |  |                                                 |            |                             |   |                  |  
|Production and exploration                                            |  |                                                 | 7,295,520  |                             |   | 7,119,363        |  
|Turnkey contracts                                                     |  |                                                 | 11,275,348 |                             |   |                 |  
|Cost of marketed oil and gas                                          |  |                                                 | 10,078,848 |                             |   |                 |  
|Well services                                                         |  |                                                 | 1,146,590  |                             |   |                 |  
|Depreciation, depletion, amortization and impairment                  |  |                                                 | 3,628,610  |                             |   | 2,807,298        |  
|General and administrative                                            |  |                                                 | 7,475,919  |                             |   | 7,475,919        |  
|Retirement of debt                                                    |  |                                                 | 1,862,164  |                             |   | 1,862,164        |  
|Interest                                                              |  |                                                 | 1,685,694  |                             |   | 1,685,694        |  
|                                                                      |  |                                                 |            |                             |   |                  |  
|                                                                      |  |                                                 | 44,448,693 |                             |   | 20,950,438       |  
|                                                                      |  |                                                 |            |                             |   |                  |  
|Income (loss) before provision for income taxes                       |  |                                                 | (4,501,430 | )                           |   | (2,728,312       | )
|Deferred income tax expense                                           |  |                                                 | 391,000    |                             |   | 391,000          |  
|                                                                      |  |                                                 |            |                             |   |                  |  
|Net income (loss)                                                     |  |                                                 | (4,892,430 | )                           |   | (3,119,312       | )
|Minority interest                                                     |  |                                                 | (279,314   | )                           |   | (279,314         | )
|                                                                      |  |                                                 |            |                             |   |                  |  
|                                                                      |  |                                                 | (5,171,744 | )                           |   | (3,398,626       | )
|Less dividends and accretion on preferred shares                      |  |                                                 | 3,774,395  |                             |   | 3,774,395        |  
|                                                                      |  |                                                 |            |                             |   |                  |  
|Net income (loss) applicable to common stockholders                   |  | $                                               | (8,946,139 | )                           | $ | (7,173,021       | )
|                                                                      |  |                                                 |            |                             |   |                  |  
|Earnings (loss) per sharebasic                                       |  | $                                               | (0.23      | )                           | $ | (0.18            | )
|Earnings (loss) per sharediluted                                     |  | $                                               | (0.23      | )                           | $ | (0.18            | )
|Depreciation, depletion, amortization and impairment expense per Mcfe |  | $                                               | 1.85       |                             | $ | 1.43             |  

F-12

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

Balance Sheet
December 31, 2007

|                                                                                            |  | As computed under Successful Efforts |              | As reported under
Full Cost |   | Effect of change
|------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------------ | --------------------------- | - | ----------------
|Total current assets                                                                        |  | $                                    | 22,838,056   |                             | $ | 22,838,056      
|Oil and gas properties, at cost net of accumulated depreciation, depletion and amortization |  |                                      | 381,054,186  |                             |   | 406,063,309     
|Property and equipment                                                                      |  |                                      | 2,422,702    |                             |   | 2,422,702       
|Other assets                                                                                |  |                                      | 9,181,524    |                             |   | 9,181,524       
|                                                                                            |  |                                      |              |                             |   |                 
|                                                                                            |  | $                                    | 415,496,468  |                             | $ | 440,505,591     
|                                                                                            |  |                                      |              |                             |   |                 
|Current liabilities                                                                         |  | $                                    | 34,951,858   |                             | $ | 34,951,857      
|Long term liabilities                                                                       |  |                                      | 56,024,883   |                             |   | 56,024,883      
|Preferred stock                                                                             |  |                                      | 2,688,236    |                             |   | 2,688,236       
|Common stock                                                                                |  |                                      | 5,819        |                             |   | 5,819           
|Additional paid in capital                                                                  |  |                                      | 424,722,529  |                             |   | 424,722,529     
|Accumulated deficit                                                                         |  |                                      | (102,333,575 | )                           |   | (77,324,452     
|Accumulated other comprehensive income                                                      |  |                                      | 164,773      |                             |   | 164,773         
|Common stock in Treasury                                                                    |  |                                      | (728,055     | )                           |   | (728,055        
|                                                                                            |  |                                      |              |                             |   |                 
|                                                                                            |  | $                                    | 415,496,468  |                             | $ | 440,505,591     
|                                                                                            |  |                                      |              |                             |   |                 

F-13

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

|
|

Balance Sheet
December 31, 2006

|                                                                                            |  | As originally reported under Successful Efforts |             | As restated under
Full Cost |   | Effect of change |  
|------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----------- | --------------------------- | - | ---------------- | -
|Total current assets                                                                        |  | $                                               | 54,289,342  |                             | $ | 54,289,342       |  
|Oil and gas properties, at cost net of accumulated depreciation, depletion and amortization |  |                                                 | 260,500,325 |                             |   | 253,592,415      |  
|Property and equipment                                                                      |  |                                                 | 1,751,146   |                             |   | 1,751,146        |  
|Other assets                                                                                |  |                                                 | 9,170,096   |                             |   | 9,170,096        |  
|                                                                                            |  |                                                 |             |                             |   |                  |  
|                                                                                            |  | $                                               | 325,710,909 |                             | $ | 318,802,999      |  
|                                                                                            |  |                                                 |             |                             |   |                  |  
|Current liabilities                                                                         |  | $                                               | 24,813,323  |                             | $ | 24,813,323       |  
|Long term liabilities                                                                       |  |                                                 | 9,013,268   |                             |   | 9,013,268        |  
|Preferred stock                                                                             |  |                                                 | 3,252,897   |                             |   | 3,252,897        |  
|Common stock                                                                                |  |                                                 | 5,414       |                             |   | 5,414            |  
|Additional paid in capital                                                                  |  |                                                 | 371,035,151 |                             |   | 371,035,151      |  
|Accumulated deficit                                                                         |  |                                                 | (81,822,011 | )                           |   | (88,729,921      | )
|Accumulated other comprehensive income                                                      |  |                                                 | 140,922     |                             |   | 140,922          |  
|Common stock in Treasury                                                                    |  |                                                 | (728,055    | )                           |   | (728,055         | )
|                                                                                            |  |                                                 |             |                             |   |                  |  
|                                                                                            |  | $                                               | 325,710,909 |                             | $ | 318,802,999      |  
|                                                                                            |  |                                                 |             |                             |   |                  |  

Historically,
affiliated partnerships entered into agreements with the Company to drill wells to completion for a fixed price. The Company, in turn, entered into drilling contracts
primarily with unrelated parties to drill wells on a day work basis. Therefore, if problems were encountered on a well, the cost of that well would increase and could result in a loss on the well.
Under the full cost method, amounts received and costs incurred from these turnkey contracts are included in oil and gas properties. During 2006, the Company completed its remaining obligations under
the drilling contracts with affiliated partnerships.



Oil and gas sales result from undivided interests held by the Company in various oil and gas properties. Sales of natural gas and oil produced are recognized when
delivered to, or picked up, by the purchaser.



The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents. The Company maintains its cash
and cash equivalents in bank deposit accounts that exceed federally insured limits. At December 31, 2007, the Company had approximately 74%, 13% and 13% of its cash and cash equivalents with
three financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

F-14

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)



Accounts receivable include trade receivables from joint interest owners and oil and gas purchasers. Credit is extended based on evaluation of a customer's
financial condition and, generally, collateral is not required. Accounts receivable under joint operating agreements generally have a right of offset against future oil and gas revenues if a producing
well is completed. Accounts receivable are due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts when the Company believes collection is
doubtful. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time
trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for
doubtful accounts.



The Company classifies its investment in debt securities into two categories: trading securities and available-for-sale securities.
Trading securities, classified as current assets, are recorded at fair value with net unrealized gains or losses included in the determination of net earnings.
Available-for-sale securities are recorded at fair value, with net unrealized gains and losses excluded from net earnings and reported as other comprehensive income (loss).
Current available-for-sale securities represent the par value of zero coupon Treasury Bonds associated with our current redeemable debt. Realized gains and losses are
determined on the basis of specific identification of the securities.



Costs incurred in connection with the issuance of debt are capitalized and amortized over the term of the related debt using the effective interest rate method.
The Company has $1,192,288 and $531,236, net of accumulated amortization of $306,159 and $272,853, included in other assets at December 31, 2007 and 2006, respectively. Costs associated with
the issuance of preferred and common stock are reflected as a reduction of proceeds. Preferred stock is accreted to its liquidation value over seven years from the date of issuance.



Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory rates applicable to the period in which the differences are expected to affect taxable income. Valuation allowances are established when, in
management's opinion, it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company's policy is to classify accrued penalties and interest related to
unrecognized tax benefits in the Company's income tax provision. As of the date of adoption of FIN No. 48, the Company did not have any accrued interest or penalties associated with any
unrecognized tax benefits, nor was any interest expense recognized during the year.

F-15

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)



In preparing financial statements, accounting principles generally accepted in the United States of America require management to make estimates and assumptions
in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.



The Company follows the sales method of accounting for gas imbalances. A liability is recorded when the Company's excess takes of natural gas volumes exceed its
estimated remaining recoverable reserves. No receivables are recorded for those wells where the Company has taken less than its ownership share of gas production. The Company has no significant gas
imbalances.



The Company capitalized interest relating to its California and Wyoming properties in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 34,Capitalization of Interest Costs. Assets qualifying for interest capitalization represent lease costs associated with undeveloped acreage
on which exploration activities are in progress. Interest capitalization commences when activities necessary to ready the asset for its intended use have been incurred and continues as long as
activities necessary to get the lease ready for its intended use are in progress. If the Company suspends these activities, interest capitalization shall cease until activities are resumed. However,
brief interruptions and interruptions that are externally imposed do not result in cessation. Interest of approximately $1,700,000 was capitalized during the year ended December 31, 2005
relating to California and Wyoming properties on which exploration activities were in progress during 2005.



Prior to January 1, 2006, the Company accounted for nonqualified stock options using the intrinsic value method under Accounting Principles Board Opinion
No. 25,Accounting for Stock Issued to Employees("APB 25"). Under APB 25, if the exercise price of employee stock options equaled
the market price of the underlying stock on the grant date, no compensation expense was recorded. The Company had adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123,Accounting for Stock-Based Compensation("SFAS 123"). No stock-based compensation cost for nonqualified
stock options was recognized in the Consolidated Statement of Operations for the year ended December 31, 2005. Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123(R),Accounting for Stock-Based Compensation("SFAS 123(R)"), using the
modified-prospective-transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006 and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006. The compensation cost is based on the
grant-date fair value calculated using a Black-Scholes-Merton option-pricing formula and is amortized using the straight-line method over the vesting period in accordance with
provisions of SFAS 123(R).

F-16

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

For
the years ended December 31, 2007 and 2006, the Company recognized approximately $1,500,000 and $600,000 in compensation expense respectively, related to non-qualified stock
option plans.

The
following table is presented to illustrate the proforma effect on loss before provision for income taxes, net loss and loss per common share as if the Company had applied the
provisions of SFAS 123(R) during 2005.

2005(Restated)Loss before provision for income taxesAs reported

$
(2,728,312
)Deduct: Stock-based employee compensation expense under SFAS 123(R)


(2,645,396
)Pro forma

$
(5,373,708
)Net loss applicable to common stockholdersAs reported

$
(7,173,021
)Deduct: Stock-based employee compensation expense under SFAS 123(R)


(2,645,396
)Pro forma

$
(9,818,417
)Basic and diluted loss per common share:As reported

$
(0.18
)Pro forma

$
(0.25
)


The
fair value of each grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 2007, 2006
and 2005, respectively: No expected dividends, weighted average volatility of 44%, 47% and 29%, risk-free interest rates of 4.52%, 4.67% and 3.69% and expected lives of 3.5 years
for incentive options issued in 2007 and 2006 and expected lives of 5 years for incentive options issued in 2005. The volatility assumptions were developed using a peer group of similar energy
companies and our stock price. The weighted average fair value of the options issued in 2007, 2006 and 2005 was $4.07, $5.46 and $3.14, respectively.



The Company reviews property and equipment for impairment whenever indicators of impairment are present to determine if the carrying amounts exceed the estimated
future net cash flows to be realized. Impairment losses are recognized based on the estimated fair value of the asset.



Derivative financial instruments, utilized to manage or reduce commodity price risk related to the Company's production, are accounted for under the provisions of
SFAS No. 133,Accounting for Derivative Instruments and for Hedging Activities, and related interpretations and amendments. Under this Statement,
derivatives are carried on the balance sheet at fair value. If the derivative is designated

F-17

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

as
a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income ("OCI") and are recognized in the statement of operations when the hedged item
affects earnings. If the derivative is not designated as a hedge, changes in the fair value are recognized in earnings. Ineffective portions of changes in the fair value of cash flow hedges are also
recognized in earnings.

In
2007 we entered into a financial derivative put contract to hedge our exposure to commodity price risk associated with anticipated future crude oil production. Currently, we have used
floor price put agreements to hedge approximately 700 barrels per day of crude oil. We believe we will have more predictability of our crude oil revenues as a result of these financial derivative
contracts.

The
following table summarizes our open financial derivative positions as of December 31, 2007 related to natural gas and crude oil production.

|Product |       | Type |  | Remaining
Contract Period |  | Volume   |  | Price per Mcf or Bbl |       | Fair Value
|------- | ----- | ---- |  | ------------------------- |  | -------- |  | -------------------- | ----- | ----------
|Oil     |       | Put  |  | March 2008-Dec 2008       |  | 700 Bbld |  | $                    | 70.00 |           
|        | Total |      |  |                           |  |          |  |                      |       |           
|        |       |      |  |                           |  |          |  |                      |       |           

The
Company has not elected to designate the aforementioned derivative as a hedge. The change in fair value resulted in $300,767 of net losses recorded to oil and gas revenue for 2007.
Our remaining anticipated production for 2008 and beyond is subject to commodity price fluctuations.



Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging
from three through 25 years. Major classes of property and equipment consisted of the following at December 31:

2007

2006Equipment

$
1,542,473

$
957,913Automobiles and trucks


561,687


561,687Furniture and fixtures


334,579


333,100Land and buildings


863,479


817,367Office equipment


1,152,627


503,9674,454,845


3,174,034Less accumulated depreciation and amortization


2,032,143


1,422,888$
2,422,702

$
1,751,146


F-18

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)



Basic earnings (loss) per common share is computed by dividing the net earnings (loss) applicable to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share is based on the assumption that stock options and warrants are converted into common shares using the treasury stock method and
convertible debentures and preferred stock are converted using the if-converted method. Conversion or exercise is not assumed if the results are antidilutive.

For
the years ended December 31, 2007 and 2006, diluted weighted average common shares outstanding includes in the money employee stock options of 778,368 and 1,015,192
respectively, and in the money warrants of 308,044 and 530,271, respectively.

Potential
common shares relating to options, warrants, preferred stock, restricted stock and convertible debentures excluded from the computations of diluted earnings (loss) per share
because they are antidilutive are as follows:

Year ended December 31,2007

2006

2005Employee stock options

1,026,000

475,500

2,510,721Convertible debentures

70,886

71,314

104,240Preferred stock

224,370

272,000

489,252Warrants





2,968,109Restricted Stock

58,330






Preferred
stock is convertible from the date of issuance until redemption at 100% of the redemption price amount into common stock of the Company at a conversion rate between 1 to 1 and
1 to 0.5 (Note D).

At
December 31, 2007, the Convertible Debentures may be converted until maturity at 100% of principal amount into common stock of the Company at prices ranging from approximately
$35.00 to $50.00 (Note C).



The Company applies SFAS 142,Goodwill and Other Intangible Assets,which addresses financial accounting
and reporting for acquired goodwill and other intangible assets and requires that goodwill
and intangibles with indefinite lives no longer be amortized, but instead be periodically reviewed for impairment. As of December 31, 2007, there were no indicators that would indicate that the
carrying amount of goodwill was impaired.



The Company accounts for its asset retirement obligations in accordance with SFAS No. 143. The estimated fair value of the future costs associated with
dismantlement, abandonment and restoration of oil and gas properties is recorded generally upon acquisition or completion of a well. The net estimated costs are discounted to present values using a
risk adjusted rate over the estimated economic life of the

F-19

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

oil
and gas properties. Such costs are capitalized as part of the related asset. The asset is depleted on the units-of-production method. The associated liability is classified
in other long-term liabilities, net of current portion, in the accompanying Consolidated Balance Sheets. The liability is periodically adjusted to reflect (1) new liabilities
incurred, (2) liabilities settled during the period, (3) accretion expense, and (4) revisions to estimated future cash flow requirements. The accretion expense is recorded as a
component of depreciation, depletion and amortization. The Company has cash held in escrow with a fair market value of $3,050,000 that are legally restricted for potential plugging and abandonment
liability in the Wilmington field which are recorded in other assets in the Consolidated Balance Sheets. A reconciliation of the Company's asset retirement obligations is as follows:

December 31,2007

2006Balance at beginning of year

$
4,510,735

$
3,701,076Liabilities incurred in current year


640,417


646,989Liabilities settled in current year


(25,000
)

(193,401
)Accretion expense


455,329


356,071Carrying amount

$
5,581,481

$
4,510,735




Certain reclassification has been made in the prior year financial statements to conform with the current year presentation. Prior year financials have been
conformed to reflect full cost accounting.



In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes("FIN 48"). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement of Financial Accounting
Standards No. 109,Accounting for Income Taxes. The interpretation is effective for fiscal years beginning after December 15, 2006. The
adoption of FIN 48 did not have a material impact on the Company's consolidated financial position or results of operations.

In
September 2006, the FASB finalized SFAS No. 157,Fair Value Measurementswhich will become effective in 2008. This Statement
defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The
provisions of SFAS No. 157 will be applied prospectively to fair value measurements and disclosures in the Company's Consolidated Financial Statements beginning in the first quarter of 2008.
The adoption of SFAS No. 157 is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In
February 2007, the FASB issued SFAS No. 159,the Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for us January 1, 2008.

F-20

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE AORGANIZATION AND ACCOUNTING POLICIES (Continued)

The
adoption of SFAS No. 159 will not have a material impact on the Company's consolidated financial position or results of operations.

In
December 2007, the FASB issued SFAS No. 141R,Business Combinations("SFAS 141R"). SFAS 141R replaces
SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. This standard is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect, if any, that SFAS No. 141R will have
on the financial statements.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements("SFAS 160").
SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.
This standard is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect, if any, that SFAS No. 160 will have on the financial
statements.

NOTE BINVESTMENTS

The amortized cost, unrealized gains and estimated fair values of the Company's available-for-sale securities held are summarized as
follows:

December 31,2007

2006U.S. Treasury Bonds, stripped of interest, maturing 2020 and 2022, aggregate par value of $2,481,000 and $2,496,000, respectivelyAmortized cost

$
1,046,690

$
988,837Gross unrealized gains


269,564


229,713Estimated fair value

$
1,316,254

$
1,218,550


During
2007, 2006 and 2005, the Company recognized approximately $(47,000), $(64,000) and $(156,000), respectively, of unrealized gains (losses) on its trading securities and $2,000,
$156,000 and $1,117,000, respectively, of realized gains from its investments in trading and available-for-sale securities.

The
realized gains for each year results from the release of such securities due to cash distributions to investors of affiliated partnerships made from proceeds from sales of oil and
gas and the release of the Company's obligation related to securing its commitment under certain repurchase agreements and debentures (Notes C & F).

F-21

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE BINVESTMENTS (Continued)

The amortized cost and estimated fair values of available-for-sale securities, by contractual maturity at December 31, 2007 are
shown below.

Amortized cost

Estimated
fair valueDue within one year

$


$
Due after one year through five years





Due after five years through ten years





Due after ten years


1,046,690


1,316,254Total

$
1,046,690

$
1,316,254


NOTE CLONG-TERM LIABILITIES

Debentures consist of the following at December 31:

2007

2006Secured Convertible Debentures, due December 31, 2020, bearing interest at 12%, due in monthly payments. As of December 31, 2007 and 2006, principal collateralized by $1,375,000 and $1,390,000, respectively,
principal amount of zero coupon U.S. Treasury Bonds due November 15, 2020(1)

$
1,375,000

$
1,390,000Secured Convertible Debentures, due December 31, 2022, bearing interest at 12%, due in monthly payments. As of December 31, 2007 and 2006, principal collateralized by $1,106,000 and $1,106,000 respectively,
principal amount of zero coupon U.S. Treasury Bonds due November 15, 2022(1)


1,106,000


1,106,0002,481,000


2,496,000Less current maturities


248,100


249,600Long-term portion

$
2,232,900

$
2,246,400


---



The
Convertible Debentures may be converted from the date of issuance until maturity at 100% of principal amount into common stock of the Company at prices which generally increase over
the term

F-22

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE CLONG-TERM LIABILITIES (Continued)

of
the Debentures and range from approximately $35.00 to $50.00. Conversion of the Debentures would increase the number of shares outstanding at December 31 as follows:

|2007                               |  | Maturity date     |  | Outstanding principal amount |           | Per share conversion price |       | Common shares if converted
|---------------------------------- |  | ----------------- |  | ---------------------------- | --------- | -------------------------- | ----- | --------------------------
|Secured Convertible 12% Debentures |  | December 31, 2020 |  | $                            | 1,375,000 |                            | $     | 35.00                     
|Secured Convertible 12% Debentures |  | December 31, 2022 |  | 1,106,000                    |           |                            | 35.00 |                           
|                                   |  |                   |  | 2,481,000                    |           |                            |       |                           

During
2005, the Company retired certain debentures under the original terms of the agreement which resulted in retirement of debt expense of $1.9 million. Due to this retirement,
the Company no longer has annual sinking fund requirements to purchase zero coupon U.S. Treasury Bonds as collateral for its outstanding debentures. Each year, holders of the Secured Convertible
Debentures may tender to the
Company up to 10% of the aggregate amount outstanding. As of December 31, 2007, the estimated principal that can be tendered by the secured holders is as follows:

Fiscal year ending December 312008

$
248,1002009


223,2902010


200,9612011


180,8652012


162,778Thereafter


1,465,006$
2,481,000


Long-term
liabilities consist of the following at December 31:

2007

2006Line of Credit

$
46,152,498

$
Debentures


2,481,000


2,496,000Debt collateralized by treasury stock


594,786


690,005Asset retirement obligations


5,581,481


4,510,735Litigation provision


1,823,156


1,823,15656,632,921


9,519,896Less current maturities


608,038


506,628Long-term portion

$
56,024,883

$
9,013,268


During
2002, the Company entered into an agreement to purchase 702,500 shares of common stock from a shareholder through the issuance of a noninterest-bearing note. The Company
discounted the non-interest bearing note at 10% and the outstanding balance at December 31, 2007 and 2006 was approximately $595,000 and $690,000, respectively, net of discount of
approximately $152,000 and $217,000, which is included in other long-term liabilities. The note requires monthly payments of

F-23

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE CLONG-TERM LIABILITIES (Continued)

$13,333
until August 2012 and is collateralized by the treasury stock. In the event of default as defined by the agreement, the only remedy by the note holder will be the issuance of the common stock.

On
November 16, 2006, the Company entered into a five year, $150 million credit agreement with JPMorgan Chase Bank. On November 19, 2007, the Company entered into an
Amended and Restated Credit Agreement with Merrill Lynch Capital ("the Lender"). The Merrill Lynch Credit Agreement replaced the existing agreement entered into with JPMorgan Chase Bank. The Credit
Facility provides for a revolving credit line up to the lesser of (i) the Borrowing Base, plus a $15 million over-advance amount, (ii) $250 million, and
(iii) the Draw Limit requested by the Company. The Credit Facility matures on November 19, 2012. It is secured by substantially all of our assets and is guaranteed by two of our
wholly-owned subsidiaries.

The
Borrowing Base will be determined by the Lender at least semi-annually on each April 1 and October 1, beginning April 1, 2008. The initial Borrowing
Base is $110 million and the over-advance is $15 million, representing an immediate availability of $125 million. We may request one unscheduled borrowing base
determination subsequent to each scheduled determination, and the Lenders may request unscheduled determinations at any time.

Depending
on the current level of Borrowing Base usage, the annual interest rate on each base rate borrowing will be at the Borrower's option: (1) Alternate Base Rate plus an
applicable margin that
ranges from 0.25% to 1.0%, or (2) Eurodollar Rate plus an applicable margin that ranges from 1.25% to 2.0%. As of December 31, 2007, the interest rate on the credit line was 5.77%.

The
Company is subject to certain covenants under the terms of the Credit Facility. These covenants include, but are not limited to, the maintenance of the following financial covenants:
(1) a minimum current ratio (including unused borrowing base in current assets as defined in the Credit Facility), of 1.0 to 1.0; and (2) a maximum interest coverage ratio (Consolidated
EBITDAX to interest expense, as defined in the Credit Facility) of not more than 2.5 to 1.0.

The
Credit Facility also places restrictions on certain additional indebtedness, dividends to shareholders, liens, investments, mergers, acquisitions, asset dispositions, repurchase or
redemption of our common stock, speculative commodity transactions, transactions with affiliates and other matters. The Credit Facility is subject to customary events of default. If an event of
default occurs and is continuing, the Agent may, or at the request of the Lenders shall, accelerate amounts due under the Credit Facility (except for a bankruptcy event of default, in which case such
amounts will automatically become due and payable).

The
Credit Facility will be used primarily for capital expenditures, permitted acquisitions, repayment of outstanding indebtedness, the exploration and development of oil and gas
properties and other general corporate purposes. The interest in payable quarterly in arrears and the principal repayment is due November 19, 2012.

NOTE DSTOCKHOLDERS' EQUITY

During 2007 and 2006, the Company issued 3,812,262 and 387,492 shares, respectively, to partners in drilling partnerships in exchange for the oil and gas assets
in that partnership. These shares had a value of approximately $51.3 million and $5.6 million, respectively, based on the closing price of our

F-24

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE DSTOCKHOLDERS' EQUITY (Continued)

stock
on the day of issuance. Also during 2006, the Company issued 54,225 shares to individuals in exchange for their interest in drilling partnerships. These shares were valued at approximately
$818,000 based on the price of our stock on the date of issuance.

On
December 27, 2005, the Company sold 6,900,000 shares of common stock to the public in a secondary offering at a price of $14.50 per share which included the underwriter's
over-allotment option. After deducting the underwriters' commission and offering expenses, the Company received total net proceeds of approximately $94,700,000.

During
2005, the Company called for full redemption the following convertible debentures: 2009 Secured Debentures; 2010 Secured Bonds; 2010 Sinking Fund Debentures; 2015 Sinking Fund
Debentures and 2016 Secured Convertible Debentures. Debenture holders were given the option to redeem for cash or receive common stock of the Company. Accordingly, the Company issued 3,859,251 shares
of its common stock to certain debenture holders.

During
2006, the Company issued 46,823 shares of common stock with a value of approximately $592,000, in lieu of Preferred Stock dividend payments for the fourth quarter of 2005 and the
first, second and third quarters of 2006. During 2005, the Company issued 323,847 shares of common stock with a value of approximately $3,300,000, in lieu of the second and third quarter Preferred
Stock dividend payment.

During
2007, 2006 and 2005, the Company issued 231,533, 483,699 and 942,985 shares of common stock to individuals who exercised options at exercise prices ranging from $4 to $9.05 per
share. Also during 2007, 2006 and 2005, the Company issued 4,185, 160,573 and 214,831 shares of common stock to investors who exercised Class A warrants at $10 per share and Class B
warrants at $12.50 per share.

The
preferred stock has an 8% cumulative dividend, payable quarterly. Preferred dividends of approximately $397,000 ($1.44 per share) and $136,000 ($0.48 per share) were accrued at
December 31, 2007 and 2006, respectively. The holders of the preferred stock are not entitled to vote except as defined by the agreement or as provided by applicable law. The preferred stock
may be voluntarily converted into common stock at the election of the holder based on the table below. The conversion rate is subject to adjustment as defined by the agreement.

Preferred to commonPeriodPrior to June 30, 2005

1 to 1July 1, 2005 through June 30, 2006

1 to .75July 1, 2006 through redemption

1 to .50


Additionally,
commencing seven years after the date of issuance, holders of the preferred stock may elect to require the Company to redeem their preferred stock at a redemption price
equal to the liquidation value of $12 per share, plus accrued but unpaid dividends, if any ("Redemption Price"). Upon the receipt of a redemption election, the Company, at its option, shall either:
(1) pay the holder cash in the amount equal to the Redemption Price or (2) issue to holder shares of common stock as defined by the agreement. The Company is accreting the carrying value
of its preferred stock to its redemption price using the effective interest method with accretion recorded to additional paid in

F-25

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE DSTOCKHOLDERS' EQUITY (Continued)

capital.
The accretion of preferred stock results in a reduction of earnings per share applicable to common stockholders.

During
2007, the Company issued 867 shares of common stock to preferred stock investors who exchanged on a 1 to 0.50 basis. During 2006, the Company issued 268,508 shares of common stock
to preferred stock investors who exchanged on a 1 to 0.75 basis and 11,361 shares of common stock to preferred stock investors who exchanged on a 1 to 0.50. During 2005, the Company issued 5,838,161
shares of common stock to preferred stock investors who exchanged on a 1 to 1 basis and 52,734 shares of common stock to preferred stock investors who exchanged on a 1 to 0.75 basis. At
December 31, 2007, there were 171,290 preferred shares outstanding that the Company may be required to redeem at the aggregate Redemption Price of $2,055,480 during the year ended
December 31, 2010, and 53,080 preferred shares outstanding that the Company may be required to redeem at the aggregate Redemption Price of $636,960 during the year ended December 31,
2011 and thereafter. As noted above, the Company could, at its option, settle the redemption requests in shares of common stock.

Securities Authorized for Issuance Under Compensation Plans

The table below includes information about our equity compensation plans as of December 31, 2007:

|                                       |       | Number of Shares Authorized for Issuance under plan |           | Number of securities to be issued upon exercise of outstanding options, warrants and restricted stock |           | Weighted-average exercise price of outstanding options, warrants and restricted stock |       | Number of securities remaining available for future issuance under equity compensation plans
|-------------------------------------- | ----- | --------------------------------------------------- | --------- | ----------------------------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------
|2000 Equity Incentive Plan             |       | 1,975,000                                           |           | 1,219,259                                                                                             |           | $                                                                                     | 10.80 |                                                                                             
|2001 Stock Incentive Plan              |       | 2,500,000                                           |           | 424,455                                                                                               |           |                                                                                       | 8.77  |                                                                                             
|2001 Key Employee Stock Incentive Plan |       | 2,500,000                                           |           | 1,190,366                                                                                             |           |                                                                                       | 7.02  |                                                                                             
|                                       |       |                                                     |           |                                                                                                       |           |                                                                                       |       |                                                                                             
|                                       | Total |                                                     | 6,975,000 |                                                                                                       | 2,834,080 |                                                                                       |       | 8.91                                                                                        
|                                       |       |                                                     |           |                                                                                                       |           |                                                                                       |       |                                                                                             

During
2007, the Board of Directors approved and the Company issued 594,250 stock options to officers and employees of the Company exercisable at prices ranging from $10.51 to $14.40 per
share and 59,995 shares of restricted stock. During 2006, the Board of Directors approved and the Company issued 497,250 stock options to officers and employees of the Company exercisable at prices
ranging from $12.53 to $13.85 per share. During 2005, the Board of Directors approved and the Company issued 768,500 stock options to officers and employees of the Company exercisable at prices
ranging from $9.05 to $14.85 per share. The options are exercisable at a price not less than the fair market value of the stock at the date of grant, have an exercisable period of five years and
generally vest over time.

F-26

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE DSTOCKHOLDERS' EQUITY (Continued)

As a result of job performance, during 2005 the Compensation Committee elected to accelerate the vesting of certain unvested stock options previously awarded to
employees, officers and directors of the Company under various stock option plans. As a result of this action, options to purchase approximately 1.0 million shares of our common stock that
would otherwise have vested over the next two years became fully vested. A summary of the status of the Company's options issued to employees as of December 31, 2007, 2006 and 2005 and changes
during the years ended on those dates is presented below:

Incentive options

Weighted Average Exercise PriceOptions outstandingDecember 31, 2004

2,685,206

$
5.66Issued

768,500

$
9.38Exercised

(942,985
)
$
4.40Expired

Forfeited

Options outstandingDecember 31, 2005

2,510,721

$
7.23Issued

497,250

$
13.71Exercised

(483,699
)
$
8.67Expired

Forfeited

(67,489
)
$
13.82Options outstandingDecember 31, 2006

2,456,783

$
8.07Issued

594,250

$
10.94Exercised

(231,533
)
$
4.80Expired

Forfeited

(43,750
)
$
13.37Options outstandingDecember 31, 2007

2,775,750

$
8.88


F-27

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE DSTOCKHOLDERS' EQUITY (Continued)

The
following table summarizes information about the Company's stock options outstanding at December 31, 2007:

Exercise Price

Options Outstanding at Year End

Weighted Average Remaining Life (In Years)

Options Exercisable at Year End$  4.00

496,450

0.41

496,450$  7.00

564,300

1.27

564,300$  9.05

679,000

2.11

679,000$10.51

501,750

4.19

0$11.00

10,000

2.72

10,000$12.53

50,000

3.87

0$12.62

15,000

4.47

0$12.99

20,000

4.38

0$13.51

30,000

4.27

16,665$13.85

374,250

3.22

124,750$14.40

15,000

4.78

0$14.85

20,000

2.87

20,000Total

2,775,750

2.27

1,911,165


|
|

|                                 |  | Number of Options |  | Weighted Average Exercise Price |      | Weighted Average Remaining Term
(in years) |      | Aggregate Intrinsic Value
(in thousands)
|-------------------------------- |  | ----------------- |  | ------------------------------- | ---- | ------------------------------------------ | ---- | ----------------------------------------
|Outstanding at December 31, 2007 |  | 2,775,750         |  | $                               | 8.88 |                                            | 2.27 |                                         
|                                 |  |                   |  |                                 |      |                                            |      |                                         
|Exercisable at December 31, 2007 |  | 1,911,165         |  | $                               | 7.55 |                                            | 1.52 |                                         
|                                 |  |                   |  |                                 |      |                                            |      |                                         

The
total intrinsic value of options exercised during the year ended December 31, 2007, 2006 and 2005 was $1.9 million, $2.0 million, and $2.0 million,
respectively.

As
of December 31, 2007 there was $3.3 million of total unrecognized compensation cost related to non-vested stock options granted under the Plans. This cost is
expected to be recognized over a weighted average period of 2.27 years.

Cash
received from option exercises under all stock-based payment arrangements for the twelve months ended December 31, 2007 and 2006 was $1.1 million and
$4.2 million, respectively. We issue new shares of common stock to settle option exercises.

F-28

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE DSTOCKHOLDERS' EQUITY (Continued)

Restricted
share activity as of December 31, 2007 was as follows:

Shares

Weighted Average Fair ValueOutstanding at December 31, 2006



$
Granted

59,995


10.51Vested




Forfeited

(1,665
)

10.51Outstanding at December 31, 2007

58,330

$
10.51


Restricted
stock awards for executive officers and employees vest ratably over three years. Fair value of our restricted shares is based on our closing stock price on the date of grant.
As of December 31, 2007, total unrecognized stock-based compensation expense related to non-vested restricted shares was $0.5 million, which is expected to be recognized over
a weighted average period of approximately 2 years.

A
summary of the status of the Company's warrants issued as of December 31, 2007, 2006 and 2005 and changes during the years ended on those dates is presented below:

Warrants

Weighted Average Exercise PriceWarrants outstandingDecember 31, 2004

3,109,643

$
11.18Issued

73,297

$
9.45Exercised

(214,831
)
$
10.79Expired

Forfeited

Warrants outstandingDecember 31, 2005

2,968,109

$
11.17Issued

Exercised

(160,573
)
$
11.11Expired

Forfeited

Warrants outstandingDecember 31, 2006

2,807,536

$
11.17Issued

Exercised

(4,185
)
$
10.00Expired

Forfeited

Warrants outstandingDecember 31, 2007

2,803,351

$
11.17


As
of December 31, 2007 the aggregate intrinsic value of warrants outstanding was $8.1 million. The weighted average remaining life was 1.38 years.

F-29

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE EINCOME TAXES

The Company and its subsidiaries file a consolidated federal income tax return.

The
Company's effective income tax rate differed from the federal statutory rate as follows:

2007

2006

2005(Restated)

(Restated)Income taxes at federal statutory rate (34%)

$
3,872,420

$
2,219,421

$
(927,626
)Change in valuation allowance


(3,988,736
)

(2,062,664
)

1,535,195Nondeductible expenses


148,720


44,926


49,682Deductions for the exercise of stock options


(644,263
)

(432,077
)

State income taxes net of federal benefit


393,307


213,406


(113,315
)Other


202,552


109,988


(152,936
)$
(16,000
)
$
93,000

$
391,000


Deferred
tax assets and liabilities are as follows as of December 31:

2007

2006(Restated)Deferred tax assets relating to:Net operating loss carryforward

$
43,537,133

$
37,777,329Stock option expense


869,337


249,597Other


314,400


314,40044,720,870


38,341,326Less valuation allowance


29,776,008


33,764,744Total deferred tax asset


14,944,862


4,576,582Deferred tax (assets) liabilities relating to:Oil and gas properties and tangible equipment


14,837,037


4,287,442Net unrealized gain on investments


107,825


289,140Total deferred tax liability


14,944,862


4,576,582Net deferred tax asset (liability)

$


$



A
valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of this deferred tax asset depends on the Company's ability to generate sufficient taxable income in the future. Management believes it is more likely than not that the net deferred tax
asset will not be realized by future operating results. The valuation allowance decreased by $3,988,736 and $2,062,664 for the years ended December 31, 2007 and 2006 respectively, and increased
by $1,535,195 for the year ended December 31, 2005.

At
December 31, 2007, the Company had net operating loss carryforwards for federal income tax purposes of approximately $108,800,000, which begin to expire in 2012.

F-30

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE FCOMMITMENTS AND CONTINGENCIES



The Company has entered into various commitments and operating agreements related to development and production of certain oil and gas properties. It is
management's belief that such commitments, as stated below, will be met without significant adverse impact to the Company's financial position or results of operations.

The
Company has entered into employment agreements with certain key executives. Under the terms of these agreements, the executive is entitled to termination compensation equal to at
least two years annual salary if terminated without cause or in the event of a change in control. At December 31, 2007, the maximum termination compensation for all executives is approximately
$2,300,000.

The
Company has a contract with Ensign United States Drilling California, Inc. for drilling wells in California that expires April 30, 2008. The contract provides for an
operating rate of $12,010 per day. In the event of early termination, the Company will incur early termination fees and expenses, demobilization costs in the amount of $23,000 and the actual costs
incurred by the contractor for removing and returning the rigs to the contractor's yard for a total amount of approximately $1.5 million.

The
Company has also entered into a contract with Voorhees Thomas, LLC for drilling wells in California. The contract provides for mobilization and assembly costs of approximately
$400,000 and an operating rate of $22,150 per day for two years. The Company expects delivery of the rig during April 2008. In the event of early termination, the Company will incur the mobilization
costs of $400,000, demobilization fees of $400,000, and the lesser of actual expenses to terminate the contract or the operating rate for five days, for a total amount of approximately $910,750.



Under certain Trust Indenture Agreements, the Company has purchased zero coupon U.S. Treasury Bonds to secure repayment of the outstanding principal amount of
debentures when due at maturity. At December 31, 2007 and 2006, the face amounts of U.S. Treasury Bonds securing the Company's obligation under the Trust Indenture Agreements were $2,481,000
and $2,496,000, respectively, and the market values of these U.S. Treasury Bonds were approximately $1,316,000 and $1,219,000, respectively (see Note C).



The Company leases corporate office space in New York City, which expires in March 2013. The Company's oil and gas administrative office in Casper, Wyoming
occupies 5,554 square feet under a lease which expires in July 2012. The Company leases office space in Roswell, New Mexico, which expires in May 2010. The Company leases office space in Long Beach,
California which expires in April 2015.

F-31

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE FCOMMITMENTS AND CONTINGENCIES (Continued)

Future
minimum annual rental payments, which are subject to escalation and include utility charges as of December 31, 2007, are as follows:

Year ending December 312008

$
686,6912009


647,7692010


641,1542011


636,4302012


605,188thereafter


574,625$
3,791,857


Rent
expense under these leases was approximately $417,000, $313,000 and $304,000 for the years ended December 31, 2007, 2006 and 2005, respectively.



On January 30, 2008, the Los Angeles city attorney filed a complaint against Warren E&P, Inc., a subsidiary of the Company, and six of its
individual employees and independent contractors in the Superior Court of California, County of Los Angeles. The complaint alleges eight misdemeanor violations concerning four alleged events in
Wilmington, California during 2007. The complaint asserts one count of failing to report the discharge or threatened discharge of oil into marine waters for an event occurring on or about
March 7, 2007; one count of failing to prepare and implement an oil spill contingency plan; four counts of violating the California Fish and Game Code by placing petroleum or its
by-products in or at a place where they can pass into waters of the state; and two similar violations of the California Clean Water Act. The complaint alleges all eight counts against
Warren E&P, Inc. and one to four counts against each of the individuals.

Warren
believes the actions by the city attorney are unwarranted. Contrary to the claims made in the complaint, Warren follows an existing regulatory-approved contingency plan, which is
maintained on site at the WTU and NWU. With respect to the alleged event on March 7, 2007 at the NWU, substantially all of the oil was captured within a surrounding concrete retainer wall and
pumped to a nearby NWU oil storage tank and sold in the ordinary course of business. None of the alleged events occurred at the WTU central facility.

Our
Company policy is to follow the law of the jurisdiction in which we operate and to comply with environmental protection principles. In connection with these alleged events, we
believe we have followed and complied with applicable laws and regulations. We believe that we are given an opportunity to present the facts regarding these alleged events, the outcome will be
favorable to our Company, our employees and our independent contractors. Conversely, we do not believe an unfavorable outcome will have a material adverse effect on our business, financial condition
or results of operation.

F-32

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE FCOMMITMENTS AND CONTINGENCIES (Continued)

In
2005, Warren recorded a provision for $1,800,000 relating to a contingent liability that it may face as a result of a lawsuit originally filed in 1998 by Gotham Insurance Company in
the 81st Judicial District Court of Frio County, Texas seeking a refund of approximately $1.8 million paid by Gotham and other insurers for a well blow-out policy that
occurred in 1997. After several appeals to the Texas Court of Appeals and the Texas Supreme Court, the case has been remanded to the trial court for further proceedings which are expected to occur in
2008.

The
Company is a party to various other matters of litigation arising in the normal course of business. Management believes that the ultimate outcome of the matters will not have a
material effect on the Company's financial condition or results of operations.



For partnerships formed from 1999 to 2001, investor partners previously had a right to have their interests repurchased by the Company at a formula price seven
years from the date of the original partnership formation.

During
2007, Warren acquired the respective oil and gas assets of all of the partnerships formed from 2000 to 2003. The acquisitions were accounted for as the purchase of a business. The
Company accounted for the transaction using the non-discounted closing price of its publicly traded common stock based upon the average closing price as defined in the referenced
acquisition agreements. As consideration for the oil and gas properties acquired, Warren issued an aggregate of 3,365,231 shares of our unregistered restricted common stock to the five separate
partnerships. The restricted shares of Common Stock were valued based upon a 20% discount from the weighted average sales price for Warren's publicly traded Common Stock for the sixty-one
(61) calendar days ended May 31, 2007. During that period, the weighted average sales price was $13.50 per share, and the 20% discounted price was $10.80 per share. The effective date of
those acquisitions was April 1, 2007 and their closing date was June 20, 2007. The reserves attributable to the oil and gas properties of the five drilling partnerships are approximately
9.9 Bcfe of proved developed producing reserves. Warren also attributed an estimated fair market value for related water injection wells and unproved dewatering wells that were in the partnerships. In
accordance with their five respective partnership agreements, the sale of substantially all of the oil and gas properties by the five partnerships formed from 2000 to 2003 terminated any repurchase
rights that their investor partners previously held.

Also,
during 2007, Warren acquired the respective oil and gas assets of the two partnerships formed in 1999. The acquisitions are accounted for as the purchase of a business. The Company
accounted for the transaction using the non-discounted closing price of its publicly traded common stock based upon the average closing price as defined in the referenced acquisition
agreements. As consideration, Warren paid an aggregate of $1.6 million in cash and the balance by issuing 447,031 shares of our unregistered restricted common stock to the two separate
partnerships. The restricted shares of Common Stock were valued based upon a 20% discount from the weighted average sales price for Warren's publicly traded Common Stock for the period
January 1, 2007 through March 31, 2007. During that period, the weighted average sales price was $11.22 per share, and the 20% discounted price was $8.98 per share. These redemptions
completed the acquisition of all of the outstanding interests in our drilling programs.

F-33

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE FCOMMITMENTS AND CONTINGENCIES (Continued)

The
effective date of those two acquisitions was April 1, 2007 and their closing date was June 30, 2007. In accordance with their respective partnership agreements, the
sale of substantially all of the oil and gas properties by the two partnerships formed in 1999 terminated any repurchase rights that their investor partners previously held.

CALCULATION OF PURCHASE PRICE (IN MILLIONS)Cash paid

$
1.6Common stock issued


51.3Current liabilities assumed:


0.3Total purchase price for assets acquired

$
53.2ALLOCATION OF PURCHASE PRICE (IN MILLIONS)Proved oil and gas properties

$
38.2Unproved oil and gas properties


15.0Total

$
53.2


The
following summary presents unaudited pro forma consolidated results of operations for years ended December 31, 2007 and 2006, as if the acquisition of the drilling
partnerships had occurred as of January 1, 2006. The pro forma results are for illustrative purposes only and include adjustments in addition to the pre-acquisition historical
results, such as increased depreciation, depletion and amortization expense resulting from the allocation of fair value to oil and gas properties acquired. The unaudited pro forma information
(presented in millions of dollars, except per share amounts) is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated at that date, nor is
it necessarily indicative of future operating results.

Pro Forma:

Year Ended December 31, 2007

Year Ended December 31, 2006Revenues

$
63.4

$
42.1Net income


11.5


6.7Earnings per share:Basic

$
0.21

$
0.13Diluted

$
0.20

$
0.12


NOTE GEMPLOYEE BENEFIT PLANS

The Company has a retirement plan covering substantially all qualified employees under section 401(k) of the Internal Revenue Code. On October 1,
2006, the Company changed its matching policy to contribute up to 100% of the participant's contribution. Prior to October 1, 2006, the Company contributed for each participant a required
matching contribution equal to 50% of the participant's contribution to a maximum of 6% of each employee's annual compensation. The Company's contributions vest over five years at 20% per year. The
Company may also make discretionary contributions. The Company's expenses under the plan were approximately $338,000, $127,000 and $85,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.

F-34

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE HRELATED PARTY TRANSACTIONS



During 2007, the Company acquired all remaining interests in affiliated partnerships. Prior to this acquisition, Warren E&P, Inc. was party to separate
joint venture agreements with the affiliated partnerships. The agreements formed a joint venture between Warren E&P and each partnership for the purpose of participating in the drilling and
re-completion of oil and gas wells. Under the terms of the agreements, property acquisition and capital equipment costs were borne by Warren E&P. Generally, intangible drilling and
development costs were borne by the partnerships.

NOTE IFAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments and do not purport to represent the aggregate
net fair value of the Company.

Cash and Cash Equivalents.The balance sheet carrying amounts of cash and cash equivalents approximate fair values of such
assets.

U.S Treasury BondsTrading and Available-For-Sale Securities.The fair values are based
upon quoted market prices for those or similar investments.

Convertible Debentures.Fair values of fixed rate convertible debentures were calculated using interest rates in effect as of
year end for similar instruments with the other terms unchanged.

Other Long-Term Liabilities.The carrying amount approximates fair value due the current rates offered to the
Company for long-term liabilities of the same remaining maturities.

Line of Credit.The carrying amount approximates fair value due the current rates offered to the Company for lines of credit.

|                      |                                        | 2007 |   | 2006      
|--------------------- | -------------------------------------- | ---- | - | ----------
|
|Financial assets      |                                        |      |   |           
|                      | Cash and cash equivalents              |      | $ | 12,815,406
|                      | U.S. Treasury bondsavailable-for-sale |      |   | 1,316,254 
|Financial liabilities |                                        |      |   |           
|                      | Fixed rate debentures                  |      | $ | 2,627,270 
|                      | Other long-term liabilities            |      |   | 5,816,329 
|                      | Line of credit                         |      |   | 46,152,498

F-35

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE JOIL AND GAS INFORMATION

Costs related to the oil and gas activities of the Company were incurred as follows for the years ended December 31:

2007

2006

2005Property acquisitionunproved

$
14,265,455

$
2,203,857

$
2,509,272Property acquisitionproved


39,924,129


3,555,851


41,347,474Exploration costs


5,268,576


4,810,660


9,927,037Development costs


103,160,545


76,951,903


17,807,650$
162,618,705

$
87,522,271

$
71,591,433


During
2007, the Company acquired all remaining interests in the 1999 thru 2003 drilling partnerships for approximately $1.6 million in cash and $51.3 million in common
stock. During the three months ended March 31, 2006, the Company acquired all minority interests in the 1994 thru 1998 drilling partnerships for approximately $1.6 million in cash. The
minority interest relating to these partnerships was recorded as a reduction in the cost basis of the assets acquired.

Effective
January 1, 2005, the Company acquired all of the right, title and interest in the Wilmington Townlot Unit for $14.8 million. Effective February 1, 2005,
Warren's wholly owned operating subsidiary, Warren E&P, Inc., was elected operator of the Wilmington Unit. Additionally on December 9, 2005, the Company acquired all of the right, title
and interest in the North Wilmington Unit for $23 million and Warren E&P was elected the new operator of the property.

Asset
retirement cost included in proved property acquisition costs increased by approximately $640,000, $647,000 and $2,910,000 for 2007, 2006 and 2005, respectively.

The
Company had the following aggregate capitalized costs relating to the Company's oil and gas activities at December 31:

2007

2006Unproved oil and gas properties

$
66,240,101

$
57,101,675Proved oil and gas properties


381,203,034


227,722,755447,443,135


284,824,430Less accumulated depreciation, depletion and amortization expense


41,379,826


31,232,015$
406,063,309

$
253,592,415


F-36

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE JOIL AND GAS INFORMATION (Continued)

The
following table sets forth the Company's results of operations from oil and natural gas producing activities for the years ended December 31:

2007

2006

2005Revenues

$
59,308,396

$
31,264,379

$
14,164,196Production costs


(22,923,354
)

(13,034,962
)

(7,119,363
)Accretion of asset retirement obligation


(455,329
)

(356,071
)

(75,771
)Depreciation, depletion, amortization


(10,147,811
)

(6,256,543
)

(2,807,298
)Gain from oil and gas producing activities

$
25,781,902

$
11,616,803

$
4,161,764


In
the presentation above, no deduction has been made for indirect costs such as corporate overhead or interest expense. No income taxes are reflected above due to the Company's tax loss
carryforwards.

The
following is a summary of Warren's oil and gas properties not subject to amortization as of December 31, 2007:

|                                                         |  | Costs incurred in
|-------------------------------------------------------- |  | -----------------
|
|Acquisition costs                                        |  | $                
|Exploration costs                                        |  |                  
|Development costs                                        |  |                  
|Capitalized interest                                     |  |                  
|                                                         |  |                  
|Total oil and gas properties not subject to amortization |  | $                
|                                                         |  |                  

NOTE KOIL AND GAS RESERVE DATA (UNAUDITED)

The following estimates of proved reserve quantities and related standardized measure of discounted future net cash flows are estimates only, and do not purport
to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company's reserves are located in the
United States.

Proved
reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells,
equipment and operating methods.

F-37

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE KOIL AND GAS RESERVE DATA (UNAUDITED) (Continued)

The
standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent
provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in
developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated)
to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then
discounted using a rate of 10%.

The
following summaries of changes in reserves and standardized measure of discounted future net cash flows were prepared from estimates of proved reserves developed by Williamson
Petroleum Consultants, Inc., our independent petroleum engineers, in accordance with SFAS No. 69Disclosures about Oil and Gas Producing
Activities.

Summary of Changes in Proved Reserves

|                          |                                 | Year ended December 31, |       
|------------------------- | ------------------------------- | ----------------------- | ------
|
|
|Proved reserves           |                                 |                         |       
|                          | Beginning of year               |                         | 54,077
|                          | Purchase of reserves in place   |                         | 62    
|                          | Discoveries and extensions      |                         | 2,583 
|                          | Revisions of previous estimates |                         | (2,787
|                          | Production                      |                         | (825  
|                          |                                 |                         |       
|                          | End of year                     |                         | 53,110
|                          |                                 |                         |       
|Proved developed reserves |                                 |                         |       
|                          | Beginning of year               |                         | 9,583 
|                          | End of year                     |                         | 11,202

---

F-38

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE KOIL AND GAS RESERVE DATA (UNAUDITED) (Continued)

Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves

|                                                         |  | December 31, |           
|-------------------------------------------------------- |  | ------------ | ----------
|
|
|Future cash inflows                                      |  | $            | 4,768,107 
|Future production costs and taxes                        |  |              | (1,326,656
|Future development costs                                 |  |              | (321,959  
|Future income tax expenses                               |  |              | (867,410  
|                                                         |  |              |           
|Net future cash flows                                    |  |              | 2,252,082 
|Discounted at 10% for estimated timing of cash flows     |  |              | (1,432,931
|                                                         |  |              |           
|Standardized measure of discounted future net cash flows |  | $            | 819,151   
|                                                         |  |              |           

---

Changes in Standardized Measure of Discounted Future Net Cash Flows
Related to Proved Oil and Gas Reserves

| |                                                | Year ended December 31, |                        
| | ---------------------------------------------- | ----------------------- | -----------------------
|
|
| | Sales, net of production costs and taxes       |                         | $                      
| | Discoveries and extensions                     |                         |                        
| | Purchases of reserves in place                 |                         |                        
| | Changes in prices and production costs         |                         |                        
| | Revisions of quantity estimates                |                         |                        
| | Net changes in development costs               |                         |                        
| | Interest factoraccretion of discount          |                         |                        
| | Net change in income taxes                     |                         |                        
| | Changes in production rates (timing) and other |                         |                        
| |                                                |                         |                        
| |                                                |                         | Net (decrease) increase
| | Balance at beginning of year                   |                         |                        
| |                                                |                         |                        
| | Balance at end of year                         |                         | $                      
| |                                                |                         |                        

Estimated
future net cash flows represent an estimate of future net revenues from the production of proved reserves using current sales prices, along with estimates of the operating
costs, production taxes and future development and abandonment costs (less salvage value) necessary to produce such reserves. The average prices used at December 31, 2007, 2006 and 2005 were
$86.21, $50.60 and $49.05

F-39

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE KOIL AND GAS RESERVE DATA (UNAUDITED) (Continued)

per
Bbl and $5.02, $4.35 and $9.92 per Mcf, respectively. No deduction has been made for depreciation, depletion or any indirect costs such as general corporate overhead or interest expense.

Operating
costs and production taxes are estimated based on current costs with respect to producing oil and natural gas properties. Future development costs are based on the best
estimate of such costs assuming current economic and operating conditions. The future cash flows estimated to be spent to develop the Company's portion of proved undeveloped properties in the years
ended December 31, 2008, 2009 and 2010 are $72,648,266, $57,945,316 and $53,467,387, respectively.

Income
tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax
basis of the properties involved, less applicable carryforwards, for both regular and alternative minimum tax.

The
future net revenue information assumes no escalation of costs or prices, except for oil and natural gas sales made under terms of contracts which include fixed and determinable
escalation. Future costs and prices could significantly vary from current amounts and, accordingly, revisions in the future could be significant.

NOTE LQUARTERLY INFORMATION (UNAUDITED)

Summarized quarterly financial data for the years ended December 31, 2007 and 2006 are as follows:

|                                             |                   | 2007
|-------------------------------------------- | ----------------- | ----
|
|
|Revenues                                     |                   | $   
|Gross profit                                 |                   |     
|Net income applicable to common stockholders |                   |     
|Earnings per share                           |                   |     
|                                             | Basic and diluted |     

|
|

|                                             |                   | 2006
|-------------------------------------------- | ----------------- | ----
|
|
|Revenues                                     |                   |     
|Gross profit                                 |                   |     
|Net income applicable to common stockholders |                   |     
|Earnings per share                           |                   |     
|                                             | Basic and diluted |     

Quarterly
and year-to-date computations of per share amounts are made independently. Therefore, the sum of quarterly per share amounts may not agree with per
share amounts for the year.

F-40

---



Warren Resources, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007, 2006 and 2005

NOTE MSEGMENT INFORMATION

The Company changed to the full cost method of accounting for its oil and gas properties in 2007. As a result of this change and the purchase of the remaining
drilling program interests, the Company will no longer have reporting segments for turnkey activities, oil and gas marketing activities and well services. The Company's operating activities will now
be reported under one segment, oil and gas activities. All comparative results of operations and selected information for historical reporting periods have been reclassified for this change.

F-41

---





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(11)     |  | Articles of Incorporation of Registrant filed May 20, 2004 (Maryland)                                                                                                                                                
|3.2(8)      |  | Bylaws of the Registrant, dated June 2, 2004                                                                                                                                                                         
|3.3(8)      |  | Articles Supplementary (Series A 8% Cumulative Convertible Preferred Stock ($.0001 Par Value) (Maryland)                                                                                                             
|3.4(8)      |  | Certificate of Correction to Articles Supplementary (Series A 8% Cumulative Convertible Preferred Stock) (Maryland)                                                                                                  
|3.5(8)      |  | Articles Supplementary (Series A Institutional 8% Cumulative Convertible Preferred Stock ($.0001 Par Value) (Maryland)                                                                                               
|3.6(8)      |  | Certificate of Correction to Articles Supplementary (Series A Institutional 8% Cumulative Convertible Preferred Stock) (Maryland)                                                                                    
|4.1(11)     |  | Specimen Stock Certificate for Common Stock (Maryland)                                                                                                                                                               
|4.2(6)      |  | Form of Class A Common Stock Warrant                                                                                                                                                                                 
|4.3(6)      |  | Form of Class B Common Stock Warrant                                                                                                                                                                                 
|4.4(2)      |  | 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.                                         
|4.5(4)      |  | 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
|4.6(8)      |  | 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       
|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(7)*    |  | Amendment to Employment Agreement dated January 1, 2004, between the Registrant and Norman F. Swanton                                                                                                                
|10.8(13)*   |  | Second Amendment to Employment Agreement dated June 17, 2005, between the Registrant and Norman F. Swanton                                                                                                           
|10.9(7)*    |  | Amendment to Employment Agreement dated January 1, 2004, between the Registrant and Timothy A. Larkin                                                                                                                
|10.10(13)*  |  | Second Amendment to Employment Agreement dated June 17, 2005, between the Registrant and Timothy A. Larkin                                                                                                           

---



|10.11(13)* |  | Employment Agreement dated as of July 1, 2005, between the Registrant and Lloyd Davies                                                                                                                                                                                                                                                                                           
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12(13)* |  | Employment Agreement executed on June 17, 2005, between the Registrant and David E. Fleming                                                                                                                                                                                                                                                                                      
|10.13(8)*  |  | Employment Agreement dated January 1, 2004, between the Registrant and Ellis G. Vickers                                                                                                                                                                                                                                                                                          
|10.14(1)*  |  | Form of Indemnification Agreement                                                                                                                                                                                                                                                                                                                                                
|10.15(1)   |  | Form of Partnership Production Marketing Agreement                                                                                                                                                                                                                                                                                                                               
|10.16(3)   |  | Exchange Agreement dated as of the 11th day of December, 2002, between Anadarko E&P Company LP, and Warren Resources, Inc.                                                                                                                                                                                                                                                       
|10.17(3)   |  | Joint Exploration Agreement, dated December 13, 2002 between Warren Resources, Inc., Anadarko E&P Company LP, and Anadarko Land Corp.                                                                                                                                                                                                                                            
|10.18(3)   |  | Form of Rocky Mountain Unit Operating Agreement Between Anadarko E&P Company, LP and Warren Resources, Inc.                                                                                                                                                                                                                                                                      
|10.19(9)   |  | Purchase and Sale Agreement dated November 24, 2004 by and among Warren Resources of California, Inc., Magness Petroleum Company and Next Generation Investments, LLC.                                                                                                                                                                                                           
|10.20(9)   |  | 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.                                                                                                                                                                    
|10.21(12)  |  | Asset Purchase Agreement dated December 9, 2005 by and among Warren Resources, Inc., Warren Resources of California, Inc., Warren E&P, Inc. and Global Oil Production, LLC and Wilmington Management, LLC                                                                                                                                                                        
|10.22(14)  |  | Form of Asset Purchase Agreement                                                                                                                                                                                                                                                                                                                                                 
|10.23(15)  |  | First Amendment to Credit Agreement dated as of August 9, 2007 among Warren Resources, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A.                                                                                                                                                                                                                             
|10.24(16)  |  | Amended and Restated Credit Agreement dated as of November 19, 2007 among Warren Resources, Inc., as Borrower, Certain Subsidiaries of Borrower, as Guarantors, Merrill Lynch Capital, a Division of Merrill Lynch Business Financial
Services Inc., as Administrative Agent, as a Lender and as Sole Bookrunner and Sole Lead Arranger, and the additional Lenders party thereto
|11        |  | Statements regarding Computation of Per Share Earnings (Included in the Financial Statement in Part 4)                                                                                                                                                                                                                                                                           
|14(5)      |  | Code of Ethics for Senior Financial Officers                                                                                                                                                                                                                                                                                                                                     
|21.1(10)   |  | Subsidiaries of the Registrant [confirm up-to-date]                                                                                                                                                                                                                                                                                                                              
|23.1      |  | Consent of Williamson Petroleum Consultants, Inc.                                                                                                                                                                                                                                                                                                                                
|23.2      |  | Consent of Grant Thornton LLP                                                                                                                                                                                                                                                                                                                                                    
|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.                                                                                                                                                                                                                                                                              

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|32 |  | Certification of CEO and CFO pursuant to Section 1350
|--- |  | -----------------------------------------------------

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